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LNG: Desperately Seeking Supply

Several new LNG plants are under construction, but firm supplies remain scarce. Will empty terminals alleviate gas-price pressures?

Fortnightly Magazine - April 2007

since we are already dependent on supply from the Gulf. We saw how Hurricanes Katrina and Rita affected supplies in 2005.

Robert Ineson: The availability of regasification capacity in the United States is the smallest of the problems in the LNG value chain. We have about 4.3 Bcf/d of regas capacity, and 9.6 Bcf/d under construction, including projects in Canada and Mexico that are targeting U.S. markets. Plus there are other credible projects floating around as well.

The big issue for the U.S. market with LNG is international competition for supply. The competitors, Japan, Korea and to a lesser degree Europe, are somewhat more motivated. When Americans talk about secure LNG supplies, they are talking about whether they got the market price. When Asians talk about secure supplies, they are talking about whether the molecules showed up. When they need it, they need it, and they are prepared to pay what it takes to get LNG.

Don Felsinger: The long-term perspective is that there is so much stranded gas around the world looking for a market, no matter which country it is in, LNG makes it possible to supply gas to North America on the margin and do it effectively. LNG will compete very well with any new supply we can develop in North America.

2006 was a watershed year, because for the first time proven reserves in natural gas exceeded proven oil reserves. That is a very good thing, because we are on a path to develop more sustainable energy resources, particularly renewables, driven by a growing focus on energy independence and greenhouse gases. Renewables need to be firmed up by conventional generation, and the cleanest source is natural gas. From that standpoint, the future of natural gas looks rosy in the United States and around the world.

 

Fortnightly: How is U.S. demand for LNG likely to be affected by the fate of planned coal-fired power plants?

Felsinger: We were in the coal business for a few years. We bought some power plants in Texas and we were developing two greenfield projects. Our management saw growing uncertainty about the risk of building new coal plants when you don’t know what the restrictions will be on carbon emissions. That’s why we decided to sell our coal-fired assets and invest in natural gas, renewables and utility infrastructure.

Now we are seeing greenhouse-gas regulation pick up momentum. There really isn’t any question any more about whether there will be carbon regulation, the question is how much and how fast. Anyone building a coal-fired plant today has to ask if it’s a risk they can afford to manage, and if so, how will they do it? If you are a prudent investor, you don’t want to take a risk you can’t hedge. That’s why we will see curtailment of coal-fired development.

Ineson: It looks like several coal plants have been taken off the table in Texas. We are still scratching our heads about what it means. If this signals a wholesale change in the coal outlook, it would translate into a bunch of gas