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New gas projects help globalize the U.S. market.
increased the challenge for developers as costs of land, labor, and equipment have been increasing, while customers tend to be risk averse, and reluctant to sign multi-year firm service contracts in advance of construction and operation. This leads to pressure on projected returns.
With over 160 Bcf of recent project cancellations, gas storage clearly is a very competitive business. Out of the 600 Bcf of working gas that remains under development, only a portion is likely to reach commercial stage given this challenging history. However, the current high level of interest in the sector is resulting in new storage development projects or expansions being announced on a frequent basis. Therefore, while the competition is likely to result in only the best projects finding commercial support and moving forward, the construction of a massive and unprecedented amount of new storage appears very likely over the next five years.
Gas Storage Bubble?
Does this massive amount of Gulf Coast storage development resemble a speculative investment bubble that will burst? Several trends suggest not.
First, the role of imported LNG in the U.S. supply mix is changing the function of gas storage capacity. LNG will be a growing source of supply, but will arrive (or not) subject to the complex global market. Increasingly, Henry Hub prices will reflect a much larger set of price dynamics beyond North American supply and demand.
Last summer saw a dramatic increase in monthly LNG imports. Most of the increase from prior years was due to BG Group approximately doubling the amount of supply shipped through its capacity at the Lake Charles terminal in Louisiana.
BG Group is the leading player in the LNG spot market, and has strategic capacity positions in regasification terminals in Europe and the United States, allowing it to arbitrage Atlantic Basin LNG cargoes. Many other LNG players are working to obtain similar supply and terminal positions to execute similar strategies.
While a number of factors went into the increase in U.S. LNG imports in 2007, it appears to be a pattern that will continue due to two fundamental factors. First, most large European and Asian natural gas markets are even more seasonal than the U.S. market. Second, Europe and Asia have very little underground natural gas storage relative to demand. Therefore, European and Asian buyers make long-term commitments to LNG to ensure adequate supply during peak periods, but they have limited flexibility to take cargoes for future needs. As the global market for LNG expands, North America likely will take more off-season cargoes. Of course, this role as the world’s market of last resort is secondary in nature, and any tightness in global LNG supply rapidly will dry up U.S. imports, making projections for future imports highly uncertain.
The second driver is the role of natural gas in U.S. power generation. From 1999 through 2001, approximately 200 GW of new natural gas-fired generation was installed in the United States. While dispatch of these gas-fired power plants is highly variable and weather dependant, on average since 1999 summer-period natural gas demand has risen by about 6