No LNG Oregon First

Analysts: Most proposed LNG import projects will not survive!

By Sean Sullivan

Contrary to the optimism expressed by LNG developers in the face of economic and political challenges, experts said abundant natural gas supply and low prices mean it is not a good time to bet on LNG import terminals at the blueprint stage in North America.

“The pro-LNG import faction has a hard time arguing that we need to bring gas in to address a shortfall of supply,” BENTEK Energy LLC Managing Director E. Russell Braziel told SNL Energy on Aug. 26. “They don’t have much of a compelling case.”

“All the [planned] LNG import terminals were proposed when we were supposed to be running out of domestic supply,” said Kelly Bennett, a senior energy analyst at BENTEK. Bennett leads a team that is wrapping up a report on the world outlook for new LNG imports.

Their comments came after Netherlands-based LNG developer 4Gas decided to cancel its proposed MapleLNG facility in Nova Scotia, and as LNG projects in the United States face similar peril.

The BENTEK analysts pointed to low gas prices as the reason behind the lack of demand for LNG imports. Last week the U.S. Energy Information Administration reported that on Aug. 18 the Henry Hub gas spot price averaged $4.35/MMBtu; the price at the Opal, Wyo., trading point was $3.17/MMBtu; and for Zone 6 delivery into New York off the Transcontinental Gas Pipeline system, the price was $4.69/MMBtu.

BENTEK does not see the economic situation for LNG import terminals changing in the next five to 10 years as long as domestic gas production continues at current levels. BENTEK actually forecasts that production will increase, and Bennett pointed out that significant overseas markets offer a premium for gas, which means there is little reason to bring gas into the United States through new LNG import terminals.

“Nothing makes them economic,” Bennett said. The exception, he said, might be certain lower-cost offshore projects that could find a niche by letting their developers exploit seasonal markets.

Damien Gaul, an industry economist at the EIA, agreed with the bleak assessment for new LNG projects.

“Of course the U.S. is still receiving LNG, so terminal capacity is still needed,” Gaul said. “But current capacity is clearly enough to handle the volume of LNG imports coming to the United States. With domestic production increases over the past couple years, EIA expects the need for growth in capacity to receive LNG imports is lessening.”

“EIA has significantly changed its long-term forecasts for LNG” from positive to negative, Gaul added. “As a result, we don’t expect the situation to change anytime soon.”

Although new LNG proposals face an inhospitable environment, the BENTEK consultants said existing LNG terminals, and projects already under construction in regions that experience both seasonal peaks and constrained supply, should survive. Those successful terminals make it even more difficult for new LNG plans to materialize.

“An unconstrained environment like the Gulf Coast is not the most attractive place to be,” Braziel observed.

“I don’t think that the low-price, abundant-supply environment has eliminated the need for terminals,” Bennett said. “It has just changed where we need them.”

Florida and the Northeast, regions where there is significant seasonal demand and constrained supply, provide homes to a few thriving LNG terminals.

Excelerate Energy LLC’s Northeast Gateway LNG deepwater port in Massachusetts Bay entered service in May 2008, and SUEZ LNG North America LLC’s LNG facility was commissioned this year, Bennett said. “Both of those terminals will likely be used to serve the Boston market this winter,” he said.

Southern LNG Inc.’s Elba Island LNG import terminal near Savannah, Ga., is the only import terminal serving Florida. Bennett highlighted another LNG project aimed at the Florida market — the $150 million Gulf LNG Energy terminal under construction at the Port of Pascagoula, Miss. — as an example of an LNG project with a lot of things going for it. The terminal is owned by a subsidiary of El Paso Corp., GE Energy Financial Services and Angola’s state-owned national oil company Sonangol.

“It is a shining star among terminals in the U.S.,” Bennett said, pointing to its access to the interstate grid through Florida Gas Transmission Co. LLC, Gulfstream Natural Gas System LLC, Destin Pipeline Co. LLC and Transcontinental Gas Pipe Line Co. LLC. “That one could be very attractive.”

LNG projects in permitting stages face hostile environment

Canadian newspapers reported earlier this week that 4Gas decided to cancel its proposed MapleLNG import terminal because of low gas prices. The Nova Scotia project would have included three LNG storage tanks with a capacity of 5.65 Bcf, providing a total sendout capacity of almost 318 Bcf/year.

Projects in the United States also have faced questions about their future, including those being developed by Weaver’s Cove Energy LLC in Massachusetts, Calais LNG Project Co. LLC and Downeast LNG LLC in Maine, and Oregon LNG at the mouth of the Columbia River.

“Weaver’s Cove has some pretty serious political players moving against it,” Bennett said. Massachusetts and Rhode Island lawmakers have joined environmental groups and landowners in protesting the facility, and U.S. Reps. James McGovern and Barney Frank last week introduced appropriations language that would shut down the permitting process if the bill passes.

Much local opposition is also directed at the proposed Maine projects, and Bennett pointed out that the area is already supplied by the Canaport LNG terminal near Saint John, New Brunswick. Ian Emery, Calais LNG project manager, insisted that plans were moving forward, but the company is looking for a new financial partner after Goldman Sachs Group Inc. subsidiary GS Power Holdings LLC pulled out.

Oregon LNG has faced attacks from environmental and citizen groups similar to those that, along with financial problems, brought down the Bradwood Landing LNG terminal.

“It’s hard to justify a multibillion-dollar LNG project when there are already projects coming online to serve those areas,” Bennett concluded.

No way out through conversion to export services

The BENTEK analysts said they do not think any of the proposed U.S. import terminals would be converted into export terminals to keep them in business.

“It would take several billion dollars to do that, even if it made sense,” Braziel said.

Braziel and Bennett also thought it was unlikely that export capability would be granted to the Sabine Pass LNG plant, an existing import terminal owned by Cheniere Energy Inc. that is applying to FERC to also liquefy gas for export from the United States.

“I haven’t heard any proposals to make that attractive to U.S. producers,” Bennett said. Cheniere is offering take-or-pay liquefaction services, Bennett said, “putting all the risk on the producers, and they shouldn’t have to bear it because it’s not part of their business model.”

“The developer hasn’t fully appreciated the problem of convincing our government that LNG exports are a good idea,” Bennett added.

The planned Kitimat LNG Inc. export terminal in British Columbia seems to be the only viable export business in North America, Bennett said.

“Global gas prices will fall and converge much closer to a U.S. gas price than to an oil index price,” Bennett said. “The market is not as attractive as you might have expected.”

http://www.snl.com/Interactivex/article.aspx?CdId=A-11638061-10811