LNG means more U.S. gas arriving by sea

Sara Banaszak, PFC Energy

Energy planners and project developers are looking to liquefied natural gas (LNG) to supply a growing share of U.S. gas needs, while recent history and known constraints provide clues as to the potential role LNG will play. LNG is natural gas that has been super-cooled to minus 260 F degrees so that it transforms into its liquid state, shrinking the volume to 1/600th of the gaseous state. LNG can then be economically shipped from remote locations to markets like the U.S. in heavily insulated tankers (only very slight pressure is maintained on LNG, while insulation is used to retain the very cold liquid state). As LNG, natural gas is a cryogenic liquid and has very different properties that contribute to its safe handling. LNG, for example, will not ignite until regasified back into natural gas and mixed with air at specific concentrations (between 5 and 15 percent volume concentration).

Until recently, the existing facilities for importing LNG into the continental U.S. were so heavily under-utilized, that skeptics questioned forecasts for rising LNG imports. Under-utilization of import terminals has meant that LNG accounted for less than 1 percent of U.S. gas consumption in recent years. The U.S. terminals–three along the East Coast, one on the Louisiana Gulf coast–now show every sign of moving toward full-capacity throughput. LNG imports into the U.S. from January thru June 2003 were 204 billion cubic feet (bcf) or nearly double the historical trend, in which 2002 imports during the same period (January-June) were 97 bcf and the three-year (2000-2002) first half average was 108 bcf (see graph).

The rise in imports reflects increased supply available from Trinidad; recent attractive prices in the U.S.; the re-opening of an import terminal at Cove Point, Md.; and the delivery of new LNG tankers to serve this market. For the next year or two, the lack of more LNG tankers will continue to limit the amount of LNG that enters the United States. Still, many new tankers have been ordered; so LNG supply to the U.S. can and will increase over the next two years.

By 2004, the real limit on LNG supply to the U.S. will be lack of capacity at the existing import terminals. If no new receiving terminals are constructed in North America, LNG’s role in the gas market will be limited to capacity at existing facilities, which represented 4 to 6 percent of gas consumption in 2002. Current import capacity is somewhere between 2.5 and 4.0 bcf/d depending on baseload or peak sendout from the terminals. Expansion projects will increase this capacity by a little more than 1 bcf/d by 2005, while some further expansion is also possible, but not yet approved.

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The ability to site and build new LNG terminals is one of two major constraints on the potential role LNG will play in North American gas and power markets. The permitting of new facilities can be slow and add costs to a project, but public acceptance is the critical issue around new terminals.

The general public has access to a number of effective tools for impeding the development of LNG terminals, including both public input during permitting and litigation. LNG in the U.S. faces some unique challenges on the public acceptance front partly because the LNG import industry is expanding after years of limited operations. LNG is certainly not a new fuel in the U.S., yet it is less familiar than other fuels including natural gas. Safety information and the physical properties of LNG are not well understood by the general public, so community acceptance of new import terminals will depend heavily on public relations and the communication of information.

The second major influence on the role of LNG in the future North American market involves project financing and risk management. In short, building LNG production facilitaies to supply the U.S. requires such a large investment–in the billion-dollar range and more for a greenfield facility–that financing for such projects has traditionally been obtained only by linking the production facilities to a downstream chain of shipping and eventual gas consumers, including power producers.

The cost of building LNG receiving terminals may seem like good business under most price outlooks, but LNG will not be available for new terminals without investments in supply. In some cases, this will happen only when U.S. gas users sign long-term LNG purchasing contracts, while in other cases the suppliers may take on more risk than previously seen in the LNG industry. The expansion of supply is complicated by the fact that many of today’s potential LNG resources are located in countries with less stable investment conditions (from Angola to Bolivia and Nigeria to Venezuela).

This summer, the Department of Energy announced its sponsorship of a summit on LNG, reflecting the importance placed on this source of gas supplies. By the time this summit convenes at the end of 2003, LNG imports for the year will probably have surpassed the previous peak of 253 bcf in 1979. Over the next couple years, LNG imports could even grow to 1.0 or 1.5 trillion cubic feet, but beyond 2005, LNG cannot supply more than 2.0 tcf to the U.S. without constructing new facilities. LNG is bound to have a role of growing importance in North America, but it is constrained in the short term by lack of import terminals and ships. In the long term, U.S. public acceptance of LNG terminals and issues relating to project financing will be the biggest obstacles to increased LNG imports.

Banaszak is the director of the gas & power group for PFC Energy. Formerly with the U.S. Department of Energy, Banaszak served as government co-chairman for the National Petroleum Council natural gas study that led to the recent natural gas summit in Washington, D.C.

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