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LNG as Price Taker

And its impact on power generation.

Fortnightly Magazine - November 2006

LNG.

The issue is not whether increased LNG imports into the United States will moderate gas prices. They obviously will as an incremental supply, but in net-back pricing, LNG is a “price taker,” and as such could establish a “floor” for pipeline gas, perhaps as a discount to NYMEX. How much lower will it be than the then-current cost for the next increment of indigenous gas, and when will that floor be effective?

After Elba Island shut down (because Sonatach’s long-term contract price at $2.00/MMBtu was greater than the current spot market for indigenous gas), most LNG sales have been short term (usually less than one year) and based on the spot market for indigenous gas (NYMEX Henry Hub and futures).

Never has a flood of LNG resulted in a ceiling or cap price for indigenous gas. Last year, LNG provided only 2 percent of total domestic demand, approximately half as downstream peak or swing supply. In North America, the distinction between net-back and cost-of-service pricing essentially has disappeared because of the highly competitive nature of its pipeline gas supply. North American gas supplies are priced as a competitive commodity; LNG supplies are not. The relatively low delivered and regasified cost of LNG—and more important, lower marginal cost as compared with GOM production—means that LNG sellers are likely to be price takers rather than price makers. Therefore, Global Energy’s forecast for imported LNG is infra-marginal; that is, LNG will be a price taker. LNG will be landed and regasified at or just below the marginal cost of incremental indigenous gas. Dedicated liquefaction and shipping capacity with contract prices linked to regionally competitive fuels will continue to set imported LNG prices.

Clarification: In the printed version of this article, Table 3 omitted Weaver’s Cove Energy. The table has been updated in this online version.

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