Analysis: The hot topic in oil and gas today involves something quite cold: literally, minus 260 degrees Fahrenheit.
It is liquid natural gas, the product that results from cooling and condensing natural gas into a liquid state, where it can be transported by truck, train, or tanker and stored until it is regasified, put in pipelines, and transported to endusers.
LNG is a technique that provides fungibility to natural gas, which traditionally is tethered to a pipeline network connecting the wellhead with the consumer.
Once an obscure and exotic addendum to the active oil and gas buzz as recently as six months ago, LNG has become the biggest persistent news item in energy outside the blip this past weekend over the power outage in the northeast.
Indeed, it is a challenge to keep pace with LNG announcements. Since Federal Reserve Chairman Alan Greenspan broached the topic during Congressional testimony in June, the trade newswires have been buzzing with a constant stream of LNG news. A recent Lehman Brothers report detailed 10 announcements regarding new or expanded projects in just the last 60 days.
Mr. Greenspan sees LNG as a way to internationalize the gas market and alleviate growing pressure on industrial users as North America succumbs to the decline curve in conventional natural gas. His comments focused attention on the LNG option as a viable contributor to the gas picture.
The industry consensus had been that LNG would become a partial contributor to U.S. gas consumption, rising from about two percent currently, or 1.4 Bcf/d, to a theoretical potential of 20 percent within a couple of decades.
But there are challenges, primarily because of cost and permitting obstacles involved in jumpstarting a sizeable LNG import infrastructure in the United States.
Nonetheless, the LNG thesis is gaining credibility as a partial solution for how the U.S. will find supplies to support a possible 50 percent increase in natural gas consumption to 30 Tcf within 10, 15, or 20 years.
Natural gas is the environmentally friendly fuel of choice for meeting electrical power plant expansion in this scenario. The 30 Tcf economy is a nice concept, though not proven, especially since the U.S. has been unable to demonstrate any meaningful supply response despite throwing drilling rigs and capital at domestic gas production over the last three years.
The paltry supply response has generated doubt about the long-term viability of a resource that is declining at rates of up to 29 percent annually. Canadian gas production appears to be going over the top as well. As a result, price volatility is destroying gas demand, particularly in the industrial sector, which had benefited historically from 15 years of relatively inexpensive and plentiful natural gas supplies.
While gas is getting tight in North America, it is abundant globally. There are an estimated 3,300 Tcf in gas reserves in places like Russia, Iran, Qatar, and elsewhere. The problem has been getting gas from remote wellheads to existing customers at the end of a pipeline.
Hence the expanding interest in LNG.
Recent news in the U.S. has focused primarily on capacity expansion at the four existing import terminals as well as construction of new facilities. More than a dozen LNG import facilities have been announced since 2001 for the U.S. market alone, though it is generally accepted that not all of these will be built.
A partial list of recent news events includes the Cove Point, Maryland facility, which will reopen this month after being idle for two decades. Cove Point will process up to 1 Bcf/d of Trinidad LNG to power generating plants, which will meet peak electrical demand requirements on the East Coast.
Similarly, an expansion of the Elba Island marine terminal at Savannah, Georgia will increase LNG import capacity 80 percent to 7.2 bcf/d. Additionally, existing LNG import terminals in Everett, Massachusetts and Lake Charles, Louisiana should be operating at full capacity within seven years.
There are more than 20 planned projects over the next decade for the U.S., which could import up to 5.6 Tcf of LNG if all were built. The U.S. Department of Energy Office of Oil and Gas issued a report detailing the particulars in January 2003. (In addition to the detailed report, highly extensive information regarding natural gas can be found at the following site Department of Energy.
A cursory summary of other announcements show ExxonMobil is studying entry into the U.S. market by importing LNG from Qatar at the rate of 1 Bcf/d to a facility on the U.S. Gulf Coast, though no site has yet been selected. ConocoPhillips is also looking at importing Qatari LNG to the U.S.
Dow Chemical has signed a 20-year contract to use 480 Mmcf/d of LNG for cogeneration after 2007 at Freeport, Texas. Marathon has announced plans for an offshore LNG facility near Tijuana, Mexico that would import Indonesian LNG to supply a 1,200 megawatt power plant and export surplus gas either to Tijuana or U.S. markets. McMoRan Exploration is discussing creation of a $500 million one Bcf/d offshore LNG terminal--the first offshore import facility in the U.S. McMoRan estimates operating costs at $3 per Mcf.
These are just a few of the projects in the pipeline, most of which would come online in the 2005 to 2008 timeframe.
Actually, LNG is an established $50 billion global business now. But it is primarily located overseas, particularly in Asia, where LNG flows north from Indonesia or Malaysia to Japan and Korea under long-term contracts. Major players include Shell, which provides an estimated 40 percent share of global LNG, ExxonMobil, and BP.
Certainly, the resource base is out there. Qatar released a study earlier this year claiming 900 Tcf in proved reserves for the country's offshore North Field, making it the largest single natural gas field in the world. Qatar will invest $16 billion to expand its LNG infrastructure, which it is doing in a series of consortia with Western and Asian multinationals.
At the moment, most Qatari gas is exported to Japan. However, capacity additions will be directed to Korea, India, Europe, and possibly the United States if the market improves. Meanwhile, the transportation infrastructure exists to connect the resource base with consumers. There are an estimated 150 tankers ferrying LNG globally, with another four dozen or so proposed. Tanker construction has dropped in price from a quarter billion dollars per unit in the early 1990s to about $160 million currently, while capacity for the newest tankers has increased, making it more viable economically to transport LNG long distances to markets in North America or Asia.
Still, LNG faces hurdles. Some of these are geopolitical. While LNG is not as deeply tied to the Middle East as future oil reserves, global gas reserves are still located in politically challenging regions such as Iran, Venezuela, or Indonesia.
Other hurdles are local. No one wants the large complex of industrial LNG terminals in their backyard for a host of environmental and security reasons. Additionally, if all announced LNG projects globally were to come online, the industry would collapse in an LNG bubble.
This last item is of interest. The U.S. market for LNG currently resides in a narrow price band. To compete, Middle Eastern LNG needs gas prices above $3. But prices near $5 tend to destroy gas demand.
There is currently no spot market for LNG, which has traditionally followed a model of using long-term supply contracts with endusers to finance the enormous costs for LNG facilities. That's why several of the most recently announced proposals are of interest. A few of these are following Shell's lead in the Sakhalin Islands where it is building facilities that are only partially contracted under long-term arrangements. However, speculative facilities are part and parcel of several of the projects announced for the U.S. The most intriguing development in LNG has to do with a proposal to store LNG in a pressurized vapor state at approximately 40 degrees Fahrenheit within salt caverns offshore along the U.S. Gulf Coast. Doing so decreases the cost for terminal facilities, increases safety and security, and can be accomplished at less cost than the existing methodology. These storage facilities can be created for roughly half to two-thirds the cost of conventional facilities and developed more quickly--within a couple years instead of half a decade.
The U.S. Department of Energy this month awarded $1 million to Conversion Gas Imports, LP (CGI) of Houston to finance a pilot program in which LNG is unloaded, partially regasified, and injected under pressure directly into underground salt caverns. The technique, known as the Bishop Process, uses a seawater-jacketed pipe as a means for warming LNG to temperatures that will not harm salt caverns. The grant will fund study of the Bishop Process on a small scale as a prerequisite for demonstrating the project's ultimate feasibility.
The storage caverns can be created by injecting brine into salt formations. The net impact is a reduction in LNG handling costs, lowering the threshold for imported gas to compete in the U.S. market.
The CGI project remains in the pilot stage. In a sense, so do most of the current proposals that have been discussed in the trade media. It is worth remembering that LNG has a history in the United States. The import terminals that now are being expanded were built in the 1970s. However the evolution toward natural gas deregulation made many of these facilities uneconomic by the mid-1980s, and they were mothballed or operated at reduced capacity.
If natural gas prices remain strong, and volatile, LNG will move from theory to practicality sooner than expected.
One could even say that LNG is now the cool solution to the natural gas challenge.
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