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Gas Supply:Too little, Too late?

Fortnightly Magazine - September 2004

to consider input from other regulatory bodies," says Katherine Yarbrough, a partner with Sutherland, Asbill & Brennan LLP in Washington, D.C. "But someone has to make the final decision, and that obligation is entrusted to FERC for onshore and offshore facilities."

Even so, LNG development must proceed quickly to relieve gas-price pressures. "Given the long lead times involved in frontier gas and LNG projects, it will be several years before rising prices get a supply response," Zenker says. "We need a few more LNG projects to go under construction this year in order for the 2009 online date to be met. That's the signpost we are looking for."

If and when LNG terminals are built, the North American gas market will undergo a transformation. "Eventually gas will become more like oil is today, where we are dependent on international markets for imports," Tokmakian says.

While such energy dependence may bring undesired geopolitical consequences, it also opens up the United States gas market to much deeper global gas reserves, which means a wider array of energy supply options and greater price stability in the long run.

"Getting from here to there is the challenge that everyone has to deal with," Tokmakian says.

Before the next generation of LNG terminals begins receiving fuel from abroad, the North American gas market is almost certain to go through a difficult period. The main questions now involve how long this period will be, and how to get through it as painlessly as possible.

The Trouble With LNG Contracts

Gas pipeline and LNG terminal projects both face a dilemma. Namely, gas purchasers are reluctant to enter long-term fuel-purchase agreements, especially from a facility that won't exist for several years. But at the same time, developers have a hard time securing financing for those facilities without having such contracts in place.

This dilemma is one of the barriers keeping big gas-infrastructure projects like the Alaska gas pipeline from being built.

"The biggest concern on the part of North Slope producers is the risk involved in the capital requirements for the pipeline," says Don Santa, president of the Interstate Natural Gas Association of America (INGAA). "What will make them comfortable is that the risk has been sufficiently mitigated, whether that's with the price floor that they'd like to see, or potentially a risk-sharing arrangement with others who may come in to develop the pipeline."

Second-Guessing by PUCs

Such a risk-sharing arrangement could entail equity investments in the project, or long-term contracts with gas purchasers, such as local distribution companies and generating utilities. The problem, however, is that utility ratemaking authorities are skittish about long-term gas contracts, and understandably so. The last time natural gas experienced a price run-up, in the 1980s, many utilities signed take-or-pay agreements to cover their exposure to rising prices. When gas prices came back down, those agreements didn't look like such a good deal anymore, and ratepayers got stuck with higher-than-market rates.

"If you're a utility buyer in a state where the regulators are telling you that you can't pass through the costs of a long-term