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LNG Rising

Despite development challenges, LNG capacity is destined to play a bigger role in the U.S. energy mix.
Fortnightly Magazine - April 2004

the LNG opportunity.

First is the 4.5 bcf/day pipeline being developed to bring Alaskan North Shelf gas to the lower 48 states. Theoretically, this pipeline would reduce the supply-demand gap in 2010 by about 40 percent. But some analysts see the pipeline stabilizing the long-term opportunity for LNG in the United States, and vice-versa.

"We don't see an exclusivity between LNG and the pipeline," says Robert Ineson, a director in CERA's North American natural gas practice. "There is a bit of irony here, but your downside risk is reduced if you have built a large LNG base, because your gas supply is easily transportable. You have a larger market and it's more efficient for everyone." In short, increasing U.S. access to global gas sources would tend to reduce price volatility in the market generally. This would protect prices in the United States from falling too far, because if they did then LNG tankers would be diverted to more lucrative markets. This might put pressure on some terminals in the short term, but in the long term it would allow greater stability in U.S. gas prices.

The second wild card is the phenomenon known as demand destruction. In other words, demand for gas is destroyed when consumers stop using gas for whatever reason. Industrial users that rely on natural gas as feedstock are particularly important.

"High gas prices could drive those industries offshore," says Darcel Hulse, president of Sempra Energy LNG Corp. "In the short term they can ride it out, but if prices stay high for a sustained period, those industries will move closer to gas sources, and they will ship finished products from overseas."

Industrial consumers are most vulnerable to gas price shocks, and in general the U.S. industrial sector has been shrinking. Indeed, demand destruction is more than a theory of what might happen. It already has happened, and to what degree it will continue remains uncertain.

"A lot of the industrial demand that would be sensitive to gas prices has already been affected," Ineson says. "We have seen significant reductions in industrial demand since it peaked in 1996, and although there are nuances in each industry, continued migration offshore would be consistent with what we've seen."

Third, demand among the other major industrial gas consumers-power generators-will depend in part on how regulators view long-term LNG supply contracts in their ratemaking decisions."We need the support of the regulatory commissions and distribution companies so that all parties can benefit," says Keith Meyer, president of Cheniere LNG in Houston. "There is an opportunity today for large utilities in this country, but that opportunity will disappear if we don't keep the gas industry healthy. If we don't address the shortfall on the supply side, the demand side will fix it for us."

For their part, regulators seem to perceive the problem and are moving to correct it. The NARUC Gas Committee expects to address the issue of long-term contracts for LNG during its proceedings this year, with a possible set of policy recommendations to follow.

"Regulators need to look at LNG as part