U.S. looks to LNG as a supply option

www.petroleumnewsalaska.com Gary Park PNA Canadian Correspondent

Energy consultant says LNG could claim 15% share of North American market by 2020; FERC eases regulations for import, storage, regasification facilities

The emergence of liquefied natural gas as a supply source in the United States could slow the pace of conventional frontier projects, including the Arctic, an energy consultant told a Calgary conference.

Benjamin Schlesinger, founding president of Benjamin Schlesinger and Associates Inc. of Maryland, said two or three new terminals could proceed in the Lower 48 by 2010.

That in turn could mean development of Arctic gas “will have to wait a little bit longer,” while the brakes could also be applied to plans for delivering more gas from offshore Nova Scotia to New York.

Schlesinger forecast that LNG’s share of the overall North American market is expected to climb from 1.4 percent to 5 percent by 2020 and could reach as high as 15 percent, with at least 15 new LNG receiving terminals proposed for the United States, Canada and Mexico.

As trading of LNG intensifies in the Atlantic region, eastern U.S. and Canadian gas markets will experience improved gas supplies, he said.

TransCanada bullish on LNG Hal Kvisle, president and chief executive officer of TransCanada PipeLines Ltd., is one of the most bullish supporters of LNG, predicting its contribution to the North American market will grow to 5.9 billion cubic feet per day by 2015.

In recognition of LNG’s potential, the U.S. Energy Information Administration has now started listing LNG as a significant potential supply source, while in mid-December the U.S. Federal Energy Regulatory Commission gave added impetus to LNG by easing regulations to open the way for import, storage and regasification facilities.

“We want to encourage participation of LNG in U.S. markets,” FERC commissioner William Massey said at the time. He said the policy changes will be the catalyst for development of new terminals.

FERC will now treat LNG terminals on the same terms as gas production plants, with regulation applying to services starting at the tailgate as regasified LNG enters the interstate pipeline network.

In the case of the planned 1.5 billion cubic feet per day Hackberry, La., LNG terminal due to come on stream by January 2007, FERC will not require commission-approved cost-based rates, nor an open access tariff for the new terminal services because the project sponsors will carry the full risk of the project.

But FERC chairman Pat Wood III emphasized that his agency will assert its jurisdiction if it receives complaints of discrimination or anti-competitive behavior.

Flurry of applications in Mexico Propelled by the California power crisis two years ago, Mexico’s energy regulator is dealing with a flurry of applications to build LNG facilities on its Pacific coast to bolster U.S. supplies and reverse the flow of gas between the two countries.

Currently, Mexico is importing about 600 million cubic feet per day from the U.S., largely because production of its vast gas reserves is controlled by state-owned Petroleos Mexicanos (Pemex).

Although LNG developers on both coasts of Mexico are waiting for new regulations governing natural gas storage, Marathon Oil Corp., ChevronTexaco, Royal Dutch/Shell and Sempra Energy have decided to submit proposals for LNG terminal permits in Baja California. They could import gas from as far away as Indonesia for sale in Mexico and the United States.

Schlesinger told the Canadian Energy Research Institute conference May 3 that Venezuela’s proved gas reserves of 140 trillion cubic feet could also be a major supply source for the U.S. East Coast.

West Africa could also enter picture So long as gas prices hold steady in the range of US$3.50-$4.50 per million British thermal units they should be sufficient to attract LNG supply.

Bob Nimocks, president of Zeus Development Corp., a Houston energy consultant, told the Calgary conference that West Africa could also enter the supply picture as producers such as Royal Dutch/Shell and ChevronTexaco move towards their 2008 commitment to stop flaring associated gas, which currently consumes about 4 billion cubic feet per day.

He said it would cost C$2-$2.50 per million Btu to deliver West African LNG to the U.S. East Coast, but the abundance of gas available from that region will intensify pressures to find an outlet.

Reinforcing the belief that LNG will become a key source of future U.S. gas needs, a December report by Standard & Poor’s said the U.S. Atlantic Basin is poised to become the “next major growth market” in response to economic growth, environmental concerns about conventional energy sources and declining domestic production.

Noting the 6 percent decline in U.S. gas production in 2002, S&P said the annual rig count needs to leap to 1,000 from 720 just to keep gas supplies flat.

But the growth in gas-fired power generation capacity and higher gas prices have contributed to the emergence of a “respectable spot or short-term LNG market.”

The fundamentals for LNG are continuing to improve, with liquefaction costs in the Atlantic Basin dropping as low as $200 per ton from more than $500 in 1988, S&P said.

It said that expansion projects where ample supplies exist, such as Trinidad & Tobago, Nigeria, Algeria, Oman and Qatar, are also lowering their all-in costs of liquefaction, accompanied by a lowering of the netback price needed to justify new investments, the report said.