The first regulatory changes following the passage of the Energy Policy Act of 2005 (EPACT) are starting to pick up steam—and encountering multi-faceted criticism—as the gas industry reacts.
Getting the Gas
The search for supply goes global, for better or worse.
Over the past few years, natural-gas prices have skyrocketed, causing concern across many industries over supply shortages and the long-term viability of this important fuel. Record prices also have fueled interest in new coal, nuclear, and renewable power generation projects, just as the gas-fired merchant building frenzy has subsided, leaving many power markets with excess capacity.
On the natural-gas supply side, analysts and consumers are worried that conventional sources are tapped out. Furthermore, Canadian exports have decreased from their peak, despite the high prices.
All of these factors point to a fundamental change that is now underway, with only a few possible solutions to today’s high prices: Conserve, drill more, build new liquefied natural-gas (LNG) terminals, bring in new frontier sources, or get used to high prices.
Global Competition for LNG
During the 1990s, when prices and volatility were low, growth in U.S. demand was matched by increases in natural-gas imports from Canada. Figure 1 shows how the growth trend stalled and then reversed sharply in 2003. This was due in part to growing exports to Mexico, but also from blowing off the natural-gas supply bubble that existed for many years in Canada. The figure also shows how LNG has made up much of the shortfall in net pipeline supply. Since 1995, U.S. annual LNG imports have grown from 18 Bcf to an all-time high of 652 Bcf in 2004. In 2005, LNG imports declined by 93 Bcf, due in part to higher natural-gas prices in Europe relative to the United States and in part to the unavailability of cryogenic storage for spot cargoes. This caused some redirection of LNG cargoes originally intended for the United States.
The expected increase in gas consumption for electric generation and high commodity prices has fueled a renewed interest in developing more LNG and other non-conventional resources (coal-bed methane, tight sands and shales, Arctic gas). According to Global Energy’s long-term gas price forecast, all of these supply sources are likely to be economical on a full-cycle basis (including recovery of total project costs) at current market prices. But developing billion-dollar projects with long lead times will require some faith that project economics will remain favorable once the project is complete.
Over the next several years, including the existing LNG re-gas terminals, expansion projects, and greenfield projects under construction, total regasification capacity is expected to increase to well over 12 Bcf/d at maximum send-out rate. Although these numbers sound impressive, there is no certainty that LNG projects will operate at full capacity. By comparison, in 2005, LNG plants operated below 50 percent of their maximum rate.
Furthermore, during the winter season of 2005-2006, several LNG cargoes were priced away from the North American receiving terminals to Europe. The new international competition, as anticipated by Global Energy, led to a slight decline of LNG imports in 2005. Whether prices will be high enough to attract more