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Frontlines

The United States must turn overseas for natural gas supplies, in spite of worries about energy independence.
Fortnightly Magazine - July 1 2003

of liquefied natural gas (LNG) terminal import capacity. Without the flexibility such facilities will impart, imbalances in supply and demand must inevitably engender price volatility."

Europeans Corner the Market?

Even as the United States grapples with how it will meet natural gas demand (drill in wildlife preserves?), Europe already is bidding up the market for available supplies of imported LNG. Some experts wonder out loud whether Europeans might develop a pipeline system that would take the lion's share of worldwide gas. Of course, many experts say that pipeline development to the Middle East and other natural gas-rich countries is still in its infancy, and natural gas prices in the United States already divert to America resources that would otherwise go to Europe.

On June 9, the price of gas for delivery in July closed at $6.31 per million Btu. Not less than two years ago, at a European energy conference, analysts there were saying that projections of $4.00 per million Btu were enough to convince one firm to begin building 50 LNG ships to transport to the United States.

The economics of transporting natural gas to demand centers currently depend on market price, and the pricing of natural gas is not as straightforward as the pricing of oil. More than 50 percent of the world's oil consumption is traded internationally, whereas natural gas markets tend to be more regional in nature, and prices can vary considerably from country to country, according to the Energy Information Administration (EIA). In Asia and Europe, for example, LNG markets are strongly influenced by oil product markets rather than by natural gas prices. Naturally, the EIA says that as the use and trade of natural gas continue to grow, pricing mechanisms will continue to evolve, facilitating international trade and paving the way for a global gas market.

The State of LNG Investment

According to the EIA, the financial risk of building new LNG terminals in the United States has dropped a peg with the recent issuance of new policies by the Federal Energy Regulatory Commission. Yet other developments have impaired the financial circumstances of several LNG project sponsors. For example, consider four key companies involved in U.S. LNG projects.

The first company, Enron, filed for Chapter 11 protection in December 2001. The second, Dynegy, reported a $2.8 billion net loss for 2002. Similarly, AES Corp. reported a 2002 net loss of $3.5 billion. Finally, El Paso Corp.'s financial difficulties were reflected in its decision to sell $3.4 billion of assets during 2003. These four financially challenged companies are unlikely to build the LNG facilities they proposed, EIA says. The companies had previously proposed building approximately 1.6 trillion cubic feet of new LNG regasification capacity in the United States.

Furthermore, the EIA also point out that another casualty of the industry's financial problems is the El Paso "Energy Bridge" LNG concept, which was to build floating offshore docks that would allow LNG tankers to unload their cargoes out of sight of land. It was hoped that this approach would eliminate the political opposition associated with onshore facilities, EIA