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LNG Moves In On Western Markets
What are the potential market impacts of LNG importation in the Western United States?
Significant interest in the development of on-shore liquefied natural gas (LNG) import facilities in the Western United States has emerged in the past several years. This interest has been spurred by the dramatic increases forecast for new merchant generation in the Southwest, and particularly California.
An additional accelerant to this environment has been forecast trends of gas prices above the $3.50 to$4.00/mmBtu range which, if true, increase the economic viability of such facilities versus sustained prices in the $2 to $3 range. For environmental and permitting-based factors, Mexico is emerging as the site of choice for such facilities. Currently, five projects are vying for the rights to build an LNG terminal and vaporization facility in Northern Baja Mexico.
Ready or Not
The drivers for each of these projects are somewhat unique, but all share several common characteristics. Most important of these characteristics is the fact that the gas reserves for these projects are separated from ready markets. These "stranded" fields would require as much or more investment to build the infrastructure to transport to more local markets. Even if the local market can be reached with an equivalent capital investment, the quality of that market is not as desirable as the West Coast of the United States. Despite the uncertainties and risks discussed below, many developers believe the U.S. gas markets are a much more stable environment for investment.
In addition to these developing supply sources, the recent completion of the North Baja pipeline provides developed infrastructure for an LNG project to get the gas to some of the most liquid trading locations in North America. The available capacity and access to existing and growing markets makes a Northern Mexico terminal location uniquely attractive for a developer.
The recognition of the need for additional supply options has intensified with the events that led to the unprecedented situation in the California power and gas markets during the winter of 2000-2001, now referred to as the energy equivalent of a "perfect storm." While some of the enthusiasm for power development has subsided recently with the demise of the merchant generator/trading model, the long-term need for additional generation in the West remains.
LNG Drivers: Power Steps Behind the Wheel
Investments in the electric infrastructure will drive the need for future natural gas investments. As long as regulatory uncertainty remains in the electric industry, natural gas infrastructure to serve the California market will suffer. Figure 1 depicts the expected growth in natural gas consumption in the Southwest.
Power generation in the southwestern United States is expected to drive overall natural gas consumption growth of 5 percent annually through 2015, with its share of total U.S. consumption rising to 14 percent from 12 percent.
Increased power demand alone will not be sufficient to ensure new LNG facilities are constructed and operated. The economics of these facilities require gas prices to be above a certain level. While there is debate as to the exact price point required to make such investments economic, conventional