Analysis: More LNG terminals needed in U.S. to stabilize N.G. prices

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LNG's Prognosis
Liquefied natural gas could overflow with prosperity. But, real risks are present.
Ken Silverstein EnergyBiz Insider Editor-in-Chief

Stranded gas found in pockets around the world can be frozen, transported and then re-gasified in areas where natural gas shortfalls persist. Right now, that LNG provides about 2.8 percent of this nation's natural gas, a figure that the U.S. Department of Energy is predicting to increase to 16 percent by 2030.
"LNG allows the United States to meet the growing demand for natural gas in an environmentally sound and safe way," says Bill Cooper, executive director of the Center for LNG in Washington, D.C. "We currently produce 83 percent of our natural gas, domestically. We import between 12 percent and 14 percent from Canada, whose contributions will only fall. Demand will only rise and we have to fill the gap."
At present, five LNG import facilities exist in the United States and one in Puerto Rico. Roughly 40 new re-gasification plants have been approved by U.S. regulators, although no more than a dozen will be built. Most of those will get built in the south. Moreover, the additional plants planned for the region would be strategically placed near the Gulf of Mexico as well as key pipelines.
Sempra LNG, for instance, embarked on its first LNG endeavor in late 2000 in Baja California, Mexico. Sempra LNG's West Coast project, Energia Costa Azul will be completed in the first quarter of 2008, while Cameron LNG construction is slated for completion in Louisiana in late 2008. Sempra LNG's Texas project, Port Arthur LNG, is permitted but no construction start date has been set.
"Sempra's success is the result of understanding early market conditions and then correctly analyzing them," says Darcel Hulse, CEO of San Diego-based Sempra LNG. "We have selected sites that can get permitted and that are as near to the market as we get. We also have a solid approach to risk management. We do not go forward until we have the supply agreements in place."
The risks are plentiful and notably that expensive assets might not operate at capacity. But, the likes of Chevron, ExxonMobil and Shell have invested billions all over the world in liquefaction plants, ships and re-gasification facilities. And with the global demand for natural gas anticipated to be in the 2.6 percent range until 2030, those companies are expecting their LNG ventures to pay off.
LNG development, though, has run into problems. Overseas producers have been sabotaged while locally, environmentalists and communities alike have ecological and safety considerations. Meanwhile, the United States is competing with other nations for limited LNG resources while it is will also be relying on such nations as Libya and Algeria for supplies -- countries that are not exactly in tune with American ideals.
"On the sitting side, the NIMBY issues are so difficult," says Catherine Little, partner in the international law firm of Hunton & Williams in Atlanta. "We have increasing tensions in this area. I see these things as getting more and more heightened. To work out these issues, it will have to be done out on a site-by-site basis."
Risk Considerations
Domestically, the permitting process is rigorous and requires more than 40 approvals from both state and federal agencies. At the federal level, U.S. lawmakers have determined that more LNG projects are a must and as such, have directed the Federal Energy Regulatory Commission to streamline sitting protocol. Delays may be in the offing. But, FERC says that any interruptions are not because of it.
Consider the Northeast Gateway off the shores of Boston, which is expected to be operational by winter. Tankers serve to deliver and re-gasify the LNG, with no part of the process actually done onshore. The gas is then transported using a buoy system that is hooked into flexible pipes. Those lines will run under the ocean floor and across the Massachusetts Bay before they connect directly to the New England Grid.
Excelerate Energy, which owns the "midstream" project, has committed to using new technologies and procedures on its vessels that will minimize air emissions and improve water quality. As such, it was able to win relatively quickly federal and state permits.
"We have a technology we can apply quickly and to other natural gas markets that other LNG providers may not be able to serve," says Excelerate Energy CEO Rob Bryngelson. "We are offshore. Through our dockside technology, we can build a gas port in about a third of the time and at substantially less cost than a traditional facility. Each ship is a floating re-gasification terminal with the flexibility to move cargo around the world."
Bearish analysts are, in fact, warning that international competition is heightened and that LNG ships will head to where their product can attract the most money. "The LNG industry is not a 'field of dreams' whereby if you build it, they will come." says Jay Kelly, partner with Vinson & Elkins' energy practice in Houston.
Sempra LNG responds by saying that before it would build any receiving terminal, it makes sure that it has the underlying contracts in place to fill the facility to capacity. Its Baja plant in Mexico, for example, is taken up fully by Shell and BP of Indonesia, all under long-term contracts. After those oil companies deliver the LNG to the terminal, Sempra then sells it into the market.
Sempra also acknowledges the "short-term" incongruities between prices in the United States and Asia. But, it insists that as nations become more reliant on LNG, those differences will evaporate - just as they do with every other commodity. As the transition from a regional marketplace to a global one takes place, a universal price will emerge.
Global markets for LNG are escalating, necessitating more investment in production, transportation and re-gasification. The industry is attracting billions from top tier players that weigh their investment decisions. Risks abound. But, the overwhelming demand for new natural gas supplies appears to trump other considerations.