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LNG as Price Taker

And its impact on power generation.

Fortnightly Magazine - November 2006

these facilities is forecast at approximately 50 percent of the maximum sendout rate. Our analysis delays adding LNG plants and expansion projects that are not already under construction (or operating) until 2012. This removes several proposed projects and one expansion plant with earlier announced online dates. LNG provided approximately 2.3 percent (1.35 Bcf/d) total domestic demand in 2005, and is projected to provide approximately 12.5 percent (8 Bcf/d) by 2025. Liquefaction capacity under contract for deliveries to the United States is reported to be approximately 8 Bcf/d by 2009, and indicates a continued low-utilization rate for regasification capacity.

LNG Competition With Conventional Gas Storage

Regasified LNG from cryogenic storage will compete with both salt-cavern and depleted reservoir storage for conventional supplies. LNG price structure and deliverability capacity will affect the value of existing conventional gas storage. LNG should improve the value of conventional depleted storage reservoirs by using them as restorage sites. Continuous regasification of LNG, which is controlled by limited cryogenic capacity and shipping schedules, will fill these storage sites to capture the intrinsic value related to seasonal-price spreads.

Existing gas storage facilities likely will face greater competition. The Energy Policy Act of 2005 gives FERC the right to grant market-based rate treatment for new natural-gas storage capacity. This will increase competition among storage facilities and lower the entry cost for new storage capacity owners to penetrate the market due to reduced levels of regulation and support for market-based rates. Most of these facilities will be located near or around existing pipeline header systems to take advantage of the pipeline connectivity. Most (55 percent) of them are also expected to be constructed from depleted oil and gas fields.

We also expect new LNG receiving terminals will include cryogenic storage tanks with 0.5 to 1 Bcf/d withdrawal rates for five to 10 consecutive days competing with existing on-shore storage. Underground storage facilities need certain geological formations and characteristics, but the LNG storage tanks sit above ground and do not require permissive geology. If situated in the same markets served by conventional storage, they directly will compete by causing the demand for existing storage to decrease due to more winter peak-day supplies and cryogenic storage.

Almost all presently planned LNG requires cryogenic storage. The amount is typically five to 10 consecutive days of maximum revaporization (withdrawal) rate and directly is tied to the vessel’s shipping schedule (generally 22 to 32 days depending on shipping distance from the liquefaction facility). Only offshore facilities that provide on-ship regasification and injection of gas into subsea salt caverns will have no cryogenic storage.

Most LNG supplies have been used for peak-shaving and load following, functions that compete directly with conventional storage, especially market-area storage. Current long-term LNG contracts have been focused on base-load supplies with moderate take-or-pay flexibility in order to follow seasonal load. Such base-load supply is likely to have some need for conventional storage (probably from depleted reservoirs after regasification). Such need could include blending/dilution of high-Btu gas if quality standards for transportation between cryogenic and conventional storage are maintained.

In addition, the Hackberry ruling