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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

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Utilities are facing the next wave of electric-power build out, and the question of what technology will be used is upon them. There’s no dispute that renewables are a fine thing to do, but the argument becomes how much can be built and how fast. Decisions have to be made soon, and if those decisions get deferred, the short-term answer will be to burn more gas.

In our last outlook we posited gas prices would trend downward through about 2014. A number of factors went into that, LNG being one and the expanding coal build being another. We try to look holistically and make the numbers add up. In the last six months, the outlook has been turning toward a more extended period of gas-market tightness.

 

Fortnightly: European utilities are involved in developing LNG terminals and securing long-term supply contracts. Should U.S. utilities be doing the same?

Dweck: U.S. utilities are not going upstream. They are going to be both volume-takers and price-takers for a whole variety of reasons. They see too many risks and not enough benefits to sign up for LNG capacity. The local distribution companies, for example, just pass along price increases in their rates. Why should they sign contracts that connect them to risks going all the way upstream to Nigeria?

Ineson: In Europe and Asia, you have national-champion utilities that are able to pass costs through. In the United States, utilities can also pass costs through, but we have ex-post facto prudency review, and that discourages long-term commitments. It effectively means other countries are entering long-term take-or-pay contracts and we are not, so they will get first cut at supply. If there are any hiccups in the system, the U.S. market will be the first to be left short of supply.

If you think about it from a regulator’s perspective, if what you are trying to do is ensure the lowest possible price for the consumer, the more LNG you can bring into the market, the looser the supply-demand balance will be. With LNG, the price in the market will be lower than it would be without LNG, so directionally it will be better for consumers.

Sypolt: In 2006 we saw cargoes drop off to Cove Point and most other U.S. terminals as LNG supplies cracked the highest-priced markets throughout the world. A steady flow of LNG based on long-term contracts would help reduce volatility in U.S. gas prices, and would be a benefit to the nation.

Felsinger: I think we will have utilities signing up for long-term contracts.

Buying gas on the spot market is a good approach when you have a surplus. But now that we are facing a shortage, what customers want going forward is secure supplies and stable prices. Like other areas of the world we are competing for the same limited supply, and the best way to secure supply is to sign a long-term contract.

Because these are long-term decisions, the way we buy energy tends to lag behind what is happening in the market by about three or four