LNG becomes necessity

Catherine Elder, R. W. Beck

The Energy Information Administration’s 2004 Annual Energy Outlook and the 2003 National Petroleum Council studies both agree on one thing: the 30 Tcf (trillion cubic feet) of natural gas demand forecast by 2019 cannot be served from the lower-48 states and Canadian natural gas supply alone.

That’s a somewhat startling conclusion compared to a few years ago when the NPC said the industry faced some challenges, but increasing production to 25-26 Tcf and getting the difference from Canada was within reason. The bottom-line, now, is that we cannot serve all U.S. gas demand without LNG (liquefied natural gas).

In the meantime, the proposals to build expanded, new, off-shore, on-shore, ship-based, whatever-based LNG re-gas terminals for the U.S. increase at a seeming rate of several per day. And, while we debate and re-debate safety, harbor access, consumer confusion between LNG and LPG (liquefied petroleum gas) and whether exporting countries will combine to form the gas-equivalent of OPEC, one thing is clear: LNG is more economic than the alternatives.

BP, Exxon-Mobil and ConocoPhillips estimate a pipeline from the Alaska North Slope to cost $18 billion, with the line in-service by perhaps 2010-2012. The producers have asked for U.S. government loan guarantees on the construction debt should natural gas prices drop below $3.50 per MMBtu(one million British thermal units).

In contrast, none of the LNG project developers have asked for a subsidy or load guarantee. Some estimates put LNG competitive at less than $3 per MMBtu.

Mitsubishi puts the construction cost for its 1 Bcf (billion cubic feet) per day Long Beach, Calif., LNG terminal at $400 million. Cheniere puts construction of its 2.6 Bcf per day Sabine Pass, La., terminal at $450 million.

The reality is that, despite its obstacles, LNG is easier than $18 billion from the North Slope. It can be added in just-in-time tranches of bite-sized investments.

Technology is long the story of the natural gas industry. LNG is just one more manifestation of technology making a new supply/delivery mechanism cost-effective.

Elder is the head of the Fuel Markets Practice for R. W. Beck in Sacramento, Calif., and can be reached at celder@rwbeck.com.

Editor’s note: “Tranches” refers to building/buying/acquiring (or even selling) in units of defined sizes over time. It’s a term from the investment community.

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