New LNG terminals deemed ‘critical’

Larry Persily

Petroleum News Government Affairs Editor

The United States could be burning up to 12 times as much liquefied natural gas in 2010 as it consumed in 2002, with several new regasification terminals joining the four existing plants by then, according to the latest report by a leading oil and gas consulting firm.

“The timing of the completion of these LNG projects is critical” to meet North America’s need for new gas supplies to fill in for declining production at home, said global consultant Wood Mackenzie Ltd.

“Despite intensive efforts to increase North American supply, increasing well decline rates mean that any slowdown in drilling is followed quickly by declining production,” said Bob Fleck, vice president of North American Gas Consulting for Wood Mackenzie. “With deepwater fields expected to reach peak in two to three years, the ability to stabilize, let alone grow U.S. production after 2005-2006, is very much in question.”

In addition to meeting market demand, the super-majors need imported LNG to protect their domestic market share, the report said. “Given the general production decline in deep offshore that we expect post-2006, the largest producers will need additional gas to continue to supply current customers.”

The nation’s first new LNG regas terminals in more than two decades will likely find homes on the Gulf of Mexico and Mexico’s Baja Peninsula south of San Diego, and should be ready by 2007. By then, the nation will be aggressively building new plants after having gone through expansion of the four existing U.S. terminals, said Wood Mackenzie’s report, “Falling Short? The Growing Challenge to Supply the North American Natural Gas Market.”

The North America total this decade could end up including two or three U.S. Gulf Coast terminals; one on Mexico’s Baja Peninsula to serve Southern California; two for Mexico, one each on the nation’s East and West coasts; and one somewhere in the Northeast, either New England or Canada. “We believe there is enough momentum and requirement for seven terminals across North America by 2010,” the report said.

Soon after 2010, a second terminal could come online for Southern California and maybe one in the Bahamas to feed Florida. Proposals for the Bahamas, however, face a couple of problems, the report said. Pipeline routes to get the gas to Florida could be trouble, and although the market has a heavy demand in the summer for electricity to power air conditioners there is less demand in the winter and limited access to move the gas to other markets.

And no doubt any project proposed for an urban area, such as Mitsubishi Corp.’s proposal for a regas terminal at Long Beach, Calif., will encounter permitting problems, the report added.

While developers are figuring out the details and building new terminals, supply shortages could keep prices hanging in the range of $4 to $5.50 (nominal terms) per thousand cubic feet through 2010, the consultants said.

Then sometime in the middle of the next decade, the large volume of Alaska gas moving through the proposed North Slope pipeline could knock down regional natural prices for several years and provide competition for further LNG expansion.

However, until large volumes of LNG come to shore, and until Alaska gas comes down the pipe, North America will continue to feel the price pinch of tight natural gas supplies, the report said.

Alaska gas line could come in 2015/2016

The major North Slope producers and Canadian pipeline company Enbridge Inc. have said an Alaska gas line is at least nine years away from coming online. But even as a possible future supply, the potential for a large volume of Alaska gas, perhaps as much as 4.5 billion cubic feet per day, is a factor in the market, Wood Mackenzie said.

“The threat of an Alaska gas pipeline poses significant risk for the (LNG) developments with the greatest exposure to spot or short-term contracts. The effects of 4 bcf per day will have a large impact on national prices, as well as altering the basis differential between regions. … The threat should be significant enough to threaten the development of some more speculative (LNG) projects.” Regardless if some of the speculative projects fail to get built — especially those that lack participation by major producers or strong enough balance sheets on their own to obtain financing — the nation is expected to import 7.2 billion cubic feet of LNG a day by 2010, the report said.

That would be almost a 12-fold jump from 2002 imports of 630 million cubic feet per day, and five times this year’s expected LNG flow of less than 1.5 bcf per day.

One short-term constraint on new gas coming into North America, the report said, is that most of the world’s new liquefaction terminal capacity coming online in 2005 is already contracted to European buyers. But after that, supplies will be more than sufficient to feed the new U.S. regas terminals.

The wait for new regas terminals will be cushioned somewhat as U.S. demand will take several years to climb back to its peak load of 23.5 tcf in 2000 (more than 64 bcf per day), Wood Mackenzie said. Domestic demand had dropped by 7 percent from that peak to 21.8 tcf last year (under 60 bcf per day), according to the U.S. Department of Energy.

“Overall gas demand in the U.S. is not likely to return to 2000 levels until 2009,” Wood Mackenzie said, citing the slow economy and high gas prices as the culprit for holding down industrial demand.

And when new LNG comes to town, the most attractive region for receiving terminals will be the Gulf Coast, near the heavy demand of the petrochemical industry and with easy pipeline access to multiple markets, the report said. The area also will need new supplies to fill in for declining production. But there are limits to how many new terminals the area can accommodate: “While entry through ports in the Gulf of Mexico allows for greater access to the pipeline grid and the associated gas treating infrastructure, there is not an unlimited number of potential sites for regas facilities,” the report said. “As such, we may see the merging of projects by the oil majors.”

Wood Mackenzie gives more credibility to regas terminals with major producers in the deal, citing their stronger balance sheets to help finance the investment and the companies’ need to lock in long-term sales contracts to develop their upstream resources. The successful contestants “looking to play the LNG and marketing game within North America” will be those companies with “financial staying power, substantial ability to accept price volatility,” the report said.

And, with many proposed sites, there will be problems, and more than just the community opposition to LNG tankers in front of town. “Downstream pipeline capacity limitations will also make it difficult for certain areas, including the Bahamas and Baja California, to support more than one or possibly two projects.”

Looking at the eight or so regas terminals proposed for the California and Baja coast, Wood Mackenzie gives the best odds to the joint venture by Sempra Energy and Royal Dutch/Shell Group for the Baja. Sempra’s domination of the residential and commercial market in Southern California is a big plus, the report said.

A similar argument is likely to win out in the race for the market’s second regas terminal. “With respect to the other terminal announcements in Southern California, we feel the venture would again have to be a joint venture of a dominant supplier matched with a company controlling a substantial customer base.”