Before we go about trying to value natural-gas storage, we should try and come up with a list of important considerations in any valuation process. Also, the data requirements should be modest,...
LNG: Desperately Seeking Supply
Several new LNG plants are under construction, but firm supplies remain scarce. Will empty terminals alleviate gas-price pressures?
Four years after Alan Greenspan sounded the alarm on the paucity of liquefied natural gas (LNG) regasification capacity in the United States, developers have responded with a fleet of new projects for importing LNG. Existing terminals have been expanded, an innovative offshore project has entered service, and ground has been broken for at least seven new facilities (see Table 1, “LNG Leaders”).
This robust response suggests U.S. gas customers can breathe a sigh of relief. Some 10 billion cubic feet per day (Bcf/d) of new LNG-import capacity will prevent the supply-demand dislocations that gas-market experts were predicting just a couple of years ago. Or will it?
Although a great deal of new LNG-regasification and storage capacity is planned, little of it actually has entered service, and many of the projects now under construction are moving ahead without having supplies committed for import. Likewise, dozens of gas-liquefaction facilities and LNG tankers are under construction, but few are tied to long-term off-take contracts in U.S. markets. In effect, LNG suppliers have acquired options on LNG capacity without committing to use it.
“The game is this, from an investor point of view: An LNG project can be justified on the basis of U.S. prices,” says Robert Ineson, head of the North American natural-gas team at Cambridge Energy Resource Associates (CERA) in Houston. “You can contract for it and finance it, but operationally what you try to do is sell gas to Japan at a higher price.”
Coal Wild Card
In addition to uncertainty from the supply side, the biggest gas customers—electric and gas utilities—have avoided long-term contracts for LNG because they fear the prospect of prudency reviews at state utility commissions. Public pressure over rising electricity and gas prices has exacerbated this anxiety. Even though long-term contracts would alleviate price volatility, utilities and regulators understandably are reluctant to commit ratepayers to gas-contract terms negotiated during a time of relative scarcity.
Thus the U.S. LNG game is evolving. While regasification capacity holders seem unlikely to let that capacity go unused, they also seem likely to sell their fuel to the highest bidders—historically in East Asia and Europe. The result may be a fleet of shiny-new LNG terminals that sit idle half of the time—at least until Henry Hub prices rise closer to levels familiar to customers in Korea and Spain.
Now, a further wild card has entered the game. Namely: King Coal, or more specifically, growing uncertainty about the construction of new coal-fired power plants.
In February, Texas energy company TXU announced it would cancel plans to build eight of its 11 proposed coal-fired power projects as part of a buyout deal with Texas Pacific Group, Kohlberg Kravis Roberts and Goldman Sachs (see “ A View on the TXU Leveraged Buyout ”). This announcement, combined with recent support for mandatory greenhouse-gas constraints among prominent power-industry groups, suggested the 150 coal-fired generating