Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

LNG Moves In On Western Markets

What are the potential market impacts of LNG importation in the Western United States?
Fortnightly Magazine - April 15 2003

wisdom is that prices above $3.50 are desired.

Currently, near-term and long-term forecasts support the view that prices will be close to a level sufficient to support a Baja-based LNG import facility. As can be seen in the two charts on this page, NYMEX futures for 2003 are currently trading above the desired threshold, and long-term price forecasts are trending toward the desired level, which may encourage investment.

Assuming the gas price and electric driven demand factors support the long-term viability of these facilities, other significant issues may be created by their existence.

California, due to its "end of the pipe" status on the natural gas supply and transportation grid-with the commensurate shortage of options-has been prone to greater price and supply volatility. If one or more of the proposed LNG import projects come to fruition it may permanently alter the gas markets, not only for California, but also for the entire Southwest. Consider first the effect of a decrease in the market share of traditional sources of gas (western Canada, Wyoming, Southwest).

Penetration of the U.S. market by LNG shipped north from Baja California will alter the flow patterns in existing pipelines. Gas that had flowed into Mexico, or that had been expected to flow into Mexico, will be displaced. It, in turn, could displace Canadian or Rocky Mountain supplies. Alternatively, the displaced gas could become a buffering supply, used only in times of shortage, which would reduce the medium-term volatility of gas prices.

The introduction of re-gasified LNG into Western markets will diversify supplies and thus should both increase the reliability of supply and reduce the volatility of gas prices, at least in the medium to long term. Over short periods, gas price volatility may actually increase. That is because until it is re-gasified, LNG is a wasting asset. There is little or no incentive to delay unloading an LNG cargo. Therefore, over the time horizon of a single journey, LNG supply is inelastic. One way to mitigate the impact of this additional inelastic supply would be through the expansion of storage.

Effect of New Transportation Capacity

The LNG projects under consideration range in approximate size from 500 mmcf to 1 bcf of deliverability per day. At the high end this represents 33 percent of the Southern California market and 18 percent of the total California market. Based on past experience in California and the West, adding this amount of new supply with the corresponding increases in transportation capacity could have a significant price impact on traditional supply and transportation providers to these markets.

The traditional manner in the United States to meet this expected increasing demand would be to build pipelines that tie to existing production regions in the United States and Canada. And in fact, numerous pipelines have been proposed just for this reason. Some are progressing and others that would add significant amounts of capacity have been postponed or cancelled. Most of the proposed projects are to bring natural gas down from the Rocky Mountain region, where prices have been extremely favorable lately.

The largest expansion project