To better understand the evolving outlook for LNG and its role in the U.S. gas market, Fortnightly assembled a group of LNG specialists with various perspectives on the issues.
LNG: Desperately Seeking Supply
Several new LNG plants are under construction, but firm supplies remain scarce. Will empty terminals alleviate gas-price pressures?
Our expansion project at Cove Point is fully subscribed by Statoil, and that is critical because LNG facilities are capital-intensive projects with a long lead time. The Hackberry policy is the only way to encourage these investments.
Zabriskie: I know for a fact that if you wanted capacity at a terminal, you could go to certain capacity holders and get it. You will have to negotiate and I don’t know what the clearing price will be, but it’s an open fact that much of the capacity does not have supply behind it right now. You could go to people like Cheniere who have about 2 Bcf/day of capacity you could get any day of the week. So there is capacity available if one wants it, and you should be able to make a deal.
But it’s not a precondition for a spot market because there are so many players—ConocoPhillips, Dow, ExxonMobil, Total, ChevronTexaco, BG, BP, Shell, SUEZ, Eni, Merrill Lynch, Sempra—all these people will be in a position to take the odd spot cargo, if not a lot of spot cargoes. I have no concerns there will be some sort of spot market here, nor am I concerned about not having access.
Fortnightly: So what’s the bottom line for U.S. electric and gas utilities? How should they approach the LNG market?
Zabriskie: Utilities need a lot of flexibility in their supply. Their consumption is flexible by the day and hour, and they need it at different locations on different days. No utility wants to go out and buy all their gas every day, so it’s a mix of monthly contracts, daily purchases, some storage, and some transportation on pipelines, but most utilities access supplies all over the grid.
That’s where the marketers play an important role. They have enough transportation and storage to deal with many more suppliers. They can merge all those options to come up with a somewhat more economically efficient solution. The marketer enjoys that efficiency in terms of profit, and the customer enjoys a lower price than he’d get by dealing directly with hundreds of suppliers.
Ineson: Right now it is a seller’s market, and you have customers in Europe and Asia that are more concerned about getting volumes. There is a large supply response underway to the high prices we are seeing globally, with very substantial investments. At the same time, our LNG terminals have been running at fairly low capacity. If you roll that picture forward far enough, the global picture will turn into surplus. If it shifts to a buyer’s market, that is a good position to be in from an end-user’s perspective.
But it is a double-edged sword and a question of timing. Utilities and regulators must answer the economic policy questions about whether waiting for the market to tip is a wise thing to do. Either way, it is a bet you are placing for the future.