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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

is to leave it in the ground. If you leave it in the ground, someone else will lock in a market for 10 to 20 years.

 

Fortnightly: What are the prospects for a spot-LNG market developing in the United States?

Dweck: Basically all these terminals and vessels coming online are like very flexible pipelines that can reach across the globe. We will see a spot market developing globally. It will go the way of crude oil.

We’re already seeing LNG cargoes redirected to higher-priced markets. Recently importers in Japan, India, and Korea have purchased Atlantic cargoes. It doesn’t matter where the cargoes come from; you have to compare the price to NBP or Henry Hub.

When supply is constrained, you won’t have a lot of loose LNG cargoes. When more liquefaction plants will get built, there could be lots of LNG out there driving prices down.

Ineson: The game is this, from an investor point of view: An LNG project can be justified on the basis of U.S. prices, you can contract for it and finance it, but operationally what you try to do is sell gas to Japan at a higher price.

Asian markets are growing, but the big growth potential for LNG is the U.S. market. The U.S. market is liquid, and there’s a lot of trading activity. At the end of the day some of the gas is going to come here, even though this market won’t pay a premium for the supply.

Zabriskie: If the rest of the world is awash in LNG, or even if there is a reasonable surplus, it will be coming to the United States. That can only help the supply situation and the prices you pay for gas here.

Once you bring an LNG train online you try to keep it at full capacity, and that means you find a home for your volumes even if you don’t like the price. Even if Asia and Europe offer a better seasonal price, at some point the market will be saturated and there is only one place for it to go: North America. We could even see LNG pushing the market down by 2011 or 2012.

Over time we will have more capacity holders looking forward and saying they’ll have uncommitted receiving capacity. Already people are offering spot cargoes of LNG from existing trains in operation, and finding extraordinary bidding competition. People are buying cargoes F.O.B. [“freight on board,” the equivalent of cash and carry] from Nigeria or the Middle East and taking it where they can get the best value. That is already happening, and it’s quite interesting.

Sypolt: Cove Point reopened to import LNG cargoes in August 2003. Since that time it has been the most active import terminal in the United States, with supplies being sold on the spot market by shippers. Storage is part of the equation. We have a fair amount of storage capacity at Cove Point, and we are building two additional tanks. And even if our tanks are full we can bring gas to underground storage facilities