CERA Reports LNG Availability for Heating Season Limited

With hurricane-related shut-ins damping down nearly 7% of the Gulf of Mexico's yearly natural gas production, liquefied natural gas (LNG) may be a "supply of last resort" for the coming winter heating season, according to an analysis by Cambridge Energy Research Associates (CERA). However, additional LNG imports may not be available because of global competition, the Massachusetts-based consultant reported.

"To attract LNG cargoes to U.S. shores, a U.S. buyer must pay a competitive price, including a premium to account for additional shipping distance," said CERA North American gas analyst Robert Ineson. "Increased U.S. demand for additional LNG cargoes comes during a period of limited extra supply availability. Globally, LNG supply has been tight for the past 18 months, leaving numerous ships idle and receiving terminals operating below full capacity."

The actual amount of incremental LNG imports will depend on cargo availability and the relative strength of U.S. gas prices as the winter season approaches, Ineson said. "Based on current forward prices, additional cargoes should be moving to the U.S. in the fourth quarter; for subsequent months, the jury is still out."

Shipping LNG to the United States from most Atlantic Basin sources costs in excess of $0.50/MMBtu more than shipping to Europe, according to CERA. However, because of the commercial and logistical complexities involved, companies do not automatically shift cargoes to the United States when the transatlantic spread exceeds this differential.CERA noted a premium of U.S. (Henry Hub) over European prices of between $0.75-1.00/MMBtu is "usually sufficient" to attract uncommitted cargoes to the U.S. Gulf Coast.

Based on mid-September New York Mercantile Exchange futures prices for October and November, the U.S. market was pricing at a strong premium to the European market of between $2.00-4.00, CERA noted. The United States was at a smaller premium for December, and at a slimmer premium over some markets for the first quarter of 2006, but at a discount relative to others. Following Hurricane Rita, U.S. futures prices rose with respect to European futures prices.

"If these price differentials prevail or are locked in by LNG shippers, the U.S. could experience rising LNG deliveries early in the winter but waning deliveries later in the winter -- if cargoes are available," Ineson said.

What LNG is made available on a spot basis is often contracted on a long-term firm basis to end users in countries other than the United States, and only becomes available to the U.S. market when those countries release it. Unwinding term LNG contracts to release spot cargoes is complex and involves additional costs, CERA noted, and the United States is competing for LNG supplies in an international spot LNG market that is tight and illiquid, primarily with buyers in Spain, France, the United Kingdom and Pacific markets.

The most likely destination for additional LNG cargoes heading to the U.S. is the Trunkline LNG terminal in Lake Charles, LA, CERA noted. However, there may be problems associated with those imports. "Reports indicate that the terminal received only minor damage from the storm.However, the Calcasieu Ship Channel is closed, preventing tankers from reaching the terminal. Prolonged closure of the channel would sharply reduce the potential for additional LNG to reach the U.S. this winter, despite winter futures prices that even more strongly favor the U.S. market as of late September."

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