US LNG imports impacted in 2008 by world gas prices and demand

by Carol Freedenthal

LNG -- Liquefied Natural Gas -- boom or bust?
It is easy to understand why LNG was the hottest new source of energy, domestically and internationally, in the early 2000s. Cooling natural gas to around minus 260 degrees Fahrenheit and compressing it to a liquid to give it a 600-fold reduction in volume compared to the original gas to make transportation and storage economical was nothing new. In fact, the first commercial LNG plant was built in Cleveland, OH in 1941. Algeria built its first LNG facility for gas export in 1959 and the first US imports were received in 1971 with construction of the Everett, MA terminal.

The US began LNG production in Alaska in 1969 to supply Japan with much-needed energy. Liquefying natural gas so production in remote, isolated locations could be moved economically to where markets existed and growing was good business.
The period around 2000 saw world energy demand start to grow and expand. LNG from locations with an abundance of gas but no market was perfect for shipment to Asia, Europe and the Americas. It also satisfied environmentalists who were complaining of flaring "waste" gas from the production of crude oil.

Why LNG became important to meet US demand is also easy to understand. In 1999, the National Petroleum Council (NPC) forecast US natural gas demand in 2010 of 29 tcf and 31 tcf by 2013. US gas consumption in 2000 was 22.8 tcf. US natural gas production was declining. Expectations for Canadian imports, which were supplying 15 % of US consumption in 2000, were for declines in future years as more Canadian gas was used locally and new supplies became harder to find.
At the same time, significant technological advances in natural gas refrigeration and compression as well as in the transportation, storage and regasification of LNG to lower costs, made LNG more competitive as an energy source. Expanded LNG supplies for US consumption was a logical choice. But more receiving terminals for regasification and storage were necessary.

Beginning in 1971 through 1982 four LNG terminals to receive and store LNG were built in the US; the first at Everett, MA, then at Cove Point, MD and Elba Island off the coast of Georgia, and the last one in 1982 at Lake Charles, LA. Some of the US receiving facilities were idled during the 1980s and 1990s as domestic production and pipeline imports were sufficient to meet natural gas demand.
In addition, pricing of North American gas supplies was too low to meet competition from Asian and European LNG buyers.

Starting around 2000, higher gas prices and lower LNG costs provided incentive for all existing terminals to begin receiving LNG again. For the first time since 1981, LNG was received at all existing US terminals in 2003. Major LNG international suppliers to the US in 2003 were Algeria, Malaysia, Nigeria, Oman, Qatar, and Trinidad/Tobago. Other major LNG exporters to Asia and Europe included Australia, Brunei, Egypt, Indonesia, and United Arab Emirates.
Two new receiving terminals in the US were recently commissioned; one at Gulf Gateway, LA and the other at Sabine Pass, TX. Sempra LNG recently started a facility in Baja California, Mexico. Another was commissioned in Puerto Rico to supply gas for electric generation (imports to Puerto Rico are not counted in US statistics.)

LNG imports into the US began to rise significantly in 1999 going from 85.5 bn cf in 1998 to 163.4 bn cf in 1999. Peak LNG imports of 770 bn cf were received in 2007 although there were major declines starting in the third quarter.
Imports, including record shipments in 2007, are only the tip of the iceberg of LNG activity in the US In addition to existing facilities, since 2000, economic analysis, planning, and permitting for over 40 new receiving terminals was initiated. Expectations are LNG will supply 16 % of US demand by 2030. About a dozen planned LNG facilities will make the final cut to construction and operations.

So, why boom or bust?
Starting in September 2007 and continuing through today, US LNG imports have fallen significantly even though world markets are growing and expanding considerably. Today's import activities are very important in the short-term and equally impact longer-range activities for developing new import facilities. Current LNG activities affect regulatory approval, siting selection, and securing investment capital.

The acute decline in imports is due to two factors -- an increased demand for LNG in Asian and European countries and the pricing differential between these world sectors and American gas markets. Asian and European markets rely on pricing based on a basket of crude oil prices. American gas purchases are based on domestic natural gas prices.
American markets have become the dumping grounds for excess LNG only when the high-priced markets of Asia and Europe are satisfied. With current high demand, especially from Japan, there is little left for American markets. LNG imports into the US through June 2008 are estimated at just 255 bn cf, roughly 50 % of imports for the same period of 2007.

US natural gas prices made a significant jump to around $ 12-14/mm Btu in June from the $ 6-8/mm Btu range in 2005 through 2007. Japan and South Korea, the major Asian LNG buyers, were paying in the high teens last year and current prices will reflect the increased crude oil prices this year.
Japanese markets for LNG have jumped since last summer when an earthquake forced the closing of most of Japan's nuclear facilities. Easy to see why American imports are down. Between the increased prices paid in other markets and the growing demand from Japan and to a lesser extent, other countries, LNG supplies were short for US importers.

The major buyer of LNG in European markets is Spain. In Asia China is beginning to move. How long this imbalance will remain -- which will be strongly affected when Japan resumes nuclear generation -- is an important question to the boom-or-bust scenario of the US LNG business!
Some help has come to the US supply situation because domestic gas production increased to 19.3 tcf in 2007 and continued to rise about 9 % through the first four months of 2008. Consumption was up significantly in 2007 to 23.1 tcf but is up only 4 % in the first four months of 2008. Consumption is far from meeting the turn-of-the-century forecast of 30 tcf by 2009.

On the longer term, though initially over 40 potential receiving terminals were planned, only about a dozen have survived the daunting federal, state and local regulatory/approval process. Local resistance has increased substantially to having a LNG facility. The "not in my backyard" mentality hurts many energy projects regardless of local or regional needs!
The immediate problems of decreased availability of competitively priced LNG are having strong effects on the longer-term aspects of building new terminals. While the seven US terminals are continuing to receive LNG shipments -- though greatly reduced in volume -- the lower throughput is having an economic impact, especially on newer LNG companies.

Houston-based Cheniere Energy, with its Sabine Pass terminal that opened recently and with plans for two others, is a major victim of the current LNG shortfall. Cheniere incurred heavy debt to build the three terminals and pipelines to deliver gas from the terminals to interstate pipelines.
The necessary facilities of terminal and pipelines were built but LNG is not coming! Cheniere's stock started the year over $ 30/share but is now in the $ 5 range. A recent contract with a large Japanese energy firm may help the firm through this difficult period.

LNG still has big potential as an energy source as more and more gas is needed in the US for electric generation and other uses. How much the markets will change as domestic natural gas prices move to the $ 14/mm Btu and higher range is a big question in considering the future needs for new LNG terminals and increased imports.
An adjustment in international and domestic prices and the continued high demand by Asianmarkets are key questions as to whether LNG is in a boom-or-bust cycle.