Our emerging dilemma in liquefied natural gas
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OUR EMERGING DILEMMA IN LIQUEFIED NATURAL GAS. Frank Clemente Ph.D. Senior Professor of Social Science & Energy Policy Penn State University [email protected] 814-237-0787. 1. We were forewarned about the consequences of the first “Dash to Gas”.

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OUR EMERGING DILEMMA IN LIQUEFIED NATURAL GAS

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Our emerging dilemma in liquefied natural gas

OUR EMERGING DILEMMA IN LIQUEFIED NATURAL GAS

Frank Clemente Ph.D.

Senior Professor of Social Science & Energy Policy

Penn State University

[email protected]

814-237-0787

1


We were forewarned about the consequences of the first dash to gas

We were forewarned about the consequences of the first “Dash to Gas”

1997: “if Lower-48 proved gas reserves are reported to EIA with reasonable accuracy, and inferred reserves as assessed by the Department of the Interior prove generally reliable…by early in the next century, natural gas will have become more of an energy problem than an energy solution” (Joseph Riva, Colorado School of Mines)


Concerns about lng are not misplaced

Concerns about LNG are not misplaced

“U.S. gas productive capacity, like oil, is now in permanent decline”. (Daniel Yergin, CERA, 2005)

“The North American markets are now dependent on the growth of liquefied natural gas. If we don’t get LNG, we don’t have a plan B”. (Michael Zenker, CERA, 2005)

“Six wildcard nations will ultimately determine the size of world LNG markets – Russia, Iran, Nigeria, Venezuela, Algeria and Libya”. (LNG Express , 2007)

“pricing for LNG is being forced towards oil-price parity…China’s recent decision to contract for long term LNG at market prices… may be a turning point” (UBS,2007)

“the US is the market of last resort for LNG…we will get the gas Europe and Asia don’t need” (Goldman Sachs, 2008)


Our emerging lng dilemma

Our Emerging LNG Dilemma

Since 2000, the U.S. has built a vast fleet of natural gas (NG) power plants and over 5 million NG heated homes.

Production in the lower 48 states provides almost 85% of our NG but has declined since 2000.

Increased demand amidst declining supply has dramatically escalated NG prices for all consumers, including families and industry.

Thus, we have built a NG infrastructure where new demand must increasingly be met by sources of NG outside the lower 48.


Our emerging lng dilemma cont

Our Emerging LNG Dilemma (cont’)

Canada provides 13% of our NG but will be of little help. Canadian production peaked in 2004 and demand for NG in oil sands development is rapidly growing.

The Alaskan Pipeline may or may not be built, but flow is not projected before 2020 and prices will be high.

By default, we have made a risky bet on our ability to import Liquefied Natural Gas (LNG) to meet growing demand.

There are huge reserves of NG in the world (over 6,000 TCF) but much is “stranded” in remote areas away from existing infrastructure and will be expensive to extract and transport.


Our emerging lng dilemma cont1

Our Emerging LNG Dilemma (cont’)

Further, much of the world’s NG is concentrated in risky or hostile nations – Russia, Iran and Venezuela have over 45%.

Actual LNG supply will fall short of optimistic expectations because liquefaction plants have been cancelled or delayed across the world.

And, since Europe and Asia are also increasingly dependent upon NG, the competition for the LNG that is available will be intense.


Our emerging lng dilemma cont2

Our Emerging LNG Dilemma (cont’)

Prices will be higher than previously projected because major producers such as Qatar are linking new LNG contracts to the price of oil.

As the most distant market from virtually all major sources, the U.S. will be forced to pay the highest price.

In effect, for the first time in history, the reliability of our electric supply system will be dependent upon decisions made in foreign nations.


Our emerging dilemma in liquefied natural gas

Reserves of NG are Just As Concentrated As Oil

Oil

NG

Top 5 Countries Control 60% of the Resource

8

Source: BP


Our emerging dilemma in liquefied natural gas

The Steady Drumbeat of Global Natural Gas Demand

9

  • Source: EIA 2007


Our emerging dilemma in liquefied natural gas

Competition for NG/LNG Will Intensify

Projected growth in NG consumption by region, 2004-2020

10


Our emerging dilemma in liquefied natural gas

The U.S. Bets On A Brave New World

Where new NG supply came from 1993 - 2006

Where new supply is projected to come from 2006-2019

“North America is setting itself to import LNG in large quantities” (IEA, 2007)

11

  • Source: EIA


Our emerging dilemma in liquefied natural gas

Draining Trinidad First

12


Our emerging dilemma in liquefied natural gas

We Will Look To Distant Sources and Pay a Premium

, 2007

Data adopted from Drewry Shipping and University of Texas

13


Our emerging dilemma in liquefied natural gas

Three Nations Will Account for 62% of Global Incremental LNG Supply though 2015

14

Sources: Goldman Sachs; UBS


The risky realities of lng

The Risky Realities of LNG

“Once LNG cargoes hit the water, they’re going to the highest-price market regardless of the type of contract you have in place”. (Bruce Williamson, CEO, Dynergy, 2007)

“LNG importing countries in Asia and Europe rely on LNG imports…resulting in a willingness at times to pay prices exceeding those in the U.S. markets in order to have LNG cargoes diverted”. (EIA, 2008)

“Molecules flow to dollars. Spain paid the equivalent of $14 last summer and the molecule went there and did not come here”. (James Duncan, Director, Conoco Phillips, 2006)

“Turkey is paying record prices for liquefied natural gas cargoes after Iran slashed exports through a natural gas pipeline”. (Bloomberg News, 2008)


U s will pay the market price for lng

U.S. Will Pay the Market Price for LNG

“The U.S. will have to compete with oil linked markets long term and U.S. prices are now expected to climb with oil.” (WoodMac, 2007)

“U.S. prices will have to migrate to the top of the heating oil/resid band to keep USA netbacks competitive with western Europe”. (Tristone Capital, 2008)

“ Korea Gas Corp and Qatar’s Ras Gas…20 year deal was signed in November for LNG at around $11…The price varies as oil prices rise or fall”. (Gulf Times, 2007)

“if the North American market wants more LNG, prices will have to rise to closer to global levels” (First Energy Canada, 2008)


Our emerging dilemma in liquefied natural gas

EIA 2005 Outlook Set the Stage for Optimism

In 2005 EIA projected these increases through 2015.

* Actual was only 631 BCF in 2005 and in 2007 was 774

17

Source: EIA


Cavalier optimism is contagious and ongoing

Cavalier Optimism is Contagious and Ongoing

2004: “A tsunami of LNG tankers is headed toward U.S. ports”. (Hill Huntington, Stanford Energy Modeling Forum)

2005: “6 Tcf per year … of liquefied gas is pointed toward U.S. markets at delivered prices under $4.50”. (AGA/EEA 2006)

2006: “by 2010, U.S. imports [of LNG] will exceed the requirements of either Europe or Asia”. (EPRI)

2007: “Florida: LNG to the Rescue”. (CERA)


Our emerging dilemma in liquefied natural gas

Optimism All Around: LNG Prices Would be low and stable

19


Our emerging dilemma in liquefied natural gas

Optimistic Supply Projections to 2008 From as Recently as Three Years Ago Never Materialized

- - - Latest EIA estimates for 2008 is 784 BCF

20


Our emerging dilemma in liquefied natural gas

Optimism Still Persists:

Projected Global Supply of LNG in 2015

All projections made in 2007

- - - Current LNG Supply

21


Our emerging dilemma in liquefied natural gas

Optimism Dominates: Projected North American LNG Imports in 2015

- - - 2007 LNG Import Level = 784 bcf/d

22


Increasing recognition of supply constraints

Increasing recognition of supply constraints

“…the global LNG market points to a future where the supply demand balance becomes increasingly tight as new liquefaction projects suffer continuing delays”. (UBS, 2007)

“Unfortunately, the supply of LNG around the world is not as plentiful as one would have thought”. (Jim Mulva, Conoco Phillips, 2007)

Current bottlenecks in upstream production and liquefaction capacity are tightening”. (IEA, 2007)

Liquefaction capacity is not growing at the same rate as … regasification capacity or global natural gas demand growth”. (CIBC World Markets, 2008)


Our emerging dilemma in liquefied natural gas

Reality Sets In: The Steady Decline in

EIA Forecasts of U.S. Imports of LNG in 2008

Year Forecast Made For 2008 Imports

24


Our emerging dilemma in liquefied natural gas

The Sweep of Optimism Fades:

EIA Forecasted Imports for 2015

25


Our emerging dilemma in liquefied natural gas

Construction Costs of Liquefaction Plants are Rising Dramatically

Source: Jensen Associates, December 2007. Estimates by James Jensen

26


Our emerging dilemma in liquefied natural gas

South Pars (Iran)

Sakhalin II (Russia)

Escalating Cost of Liquefaction Plants: Key Examples

27


Our emerging dilemma in liquefied natural gas

Breakeven NG Prices for the Six of the Largest LNG Plants Under Construction or Proposed

* Source: estimated from UBS 2007

28


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