US LNG a viable bridge to arctic supplies?

April 28, 2003
Much of the buzz about the future of the North American natural gas market centers on how much of a role LNG will play as a supply "bridge" to the arctic gas pipelines envisioned to come on line later in the decade.

Much of the buzz about the future of the North American natural gas market centers on how much of a role LNG will play as a supply "bridge" to the arctic gas pipelines envisioned to come on line later in the decade.

The popular wisdom today is that there will be a persistent shortfall in US gas wellhead deliverability for the foreseeable future. This in turn will sustain the kind of moderately high gas prices that would support a sharp hike in LNG imports.

LNG projects proliferate

The slide in US gas deliverability, coupled with projections of robust increases in gas demand, has not only boosted LNG imports today but also spawned a flurry of new LNG projects.

Lehman Bros. estimates that US LNG imports this year could average 1.5 bcfd, more than double 2002's level.

Lehman analyst Thomas Driscoll projects that US LNG baseload capacity will jump to 3.8 bcfd by 2005 from 1.2 bcfd in 2001. This baseload increase will entail an expansion at the Everett, Mass., terminal and the reopening of the Cove Point, Md., and Elba Island, Ga., terminals to boost capacity to 2.8 bcfd later this year, followed by expansions at Elba Island and Lake Charles, La., to add another 1 bcfd by late 2004.

Beyond 2003, Driscoll forecasts that US LNG imports will rise steadily, reaching 2.5 bcfd by 2005.

It is that sort of outlook that has contributed to the boom in new LNG project proposals. At least 15-20 new LNG facilities have been proposed, an aggregate increment that would push total US LNG import capacity to 20 bcfd in the next 5-10 years, notes Driscoll, who thinks that only a fourth to half of these projects will get flashed a green light.

"In the past, LNG has been unable to compete on a price basis with abundant and inexpensive domestic natural gas production," Driscoll said. "As a result, LNG has been used mainly for peaking purposes. The expanding use of natural gas in the power sector and declining domestic supply should allow LNG to play more of a year-round supply role and allow for fuller utilization of the four existing regasification facilities in the United States."

Price, supply concerns

What's interesting about Driscoll's projections is his estimate of future LNG import capacity utilization, which he pegs at a maximum of 66-75% in 2005-07.

It is difficult to think of a bull market in prices being sustained for a commodity that's supported by a utilization rate at only two thirds or three fourths of capacity.

Yet it's clear that there is a growing consensus of gas prices in the US being sustained at $3-4/MMbtu to allow construction of these new terminals to proceed (whether the consensus is right is another matter).

There must also be widespread belief that the US gas market will grow to a point where not only demand for LNG could be sustained until the Alaskan North Slope and Canadian arctic gas pipelines come on stream at the end of the decade, but beyond that point to accommodate both supply sources. It must be recalled that sponsors of the Alaskan gas pipeline have been seeking government support for their project in the event gas prices slide.

Will gas demand and pricing in North America be so strong as to require supply from the arctic lines as well as a handful of new LNG terminals? And will those prices still be reasonable enough to prevent widespread fuel-switching or demand destruction?

Or will prices remain buoyed long enough to reverse the deliverability slump with conventional and nonconventional Lower 48 gas, without the need for new grassroots transportation infrastructure?

Nobody's predicting a 2,000 gas rig count here. But what if gas deliverability starts to emulate US refining capacity "creep?"

Remember the gas bubble? We now have the inverse of that. Remember what happened to the gas bubble? It didn't burst. It became a "sausage." It will take the inverse of that transformation to occur as well, if new LNG facilities and, later, new arctic pipelines are to become viable. That means the Lower 48 production response to high gas prices will have to fall short of demand growth year after year for the rest of the decade. It also means equivalent oil prices will have to remain as high. And, somehow, one presumes these higher prices won't squash energy demand.

Stranger things have happened, one supposes.

(Online Apr. 21; author's e-mail: [email protected])