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
Frank Clemente Ph.D.
Senior Professor of Social Science & Energy Policy
Penn State University
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)
“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)
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.
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.
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.
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.
Reserves of NG are Just As Concentrated As Oil
Top 5 Countries Control 60% of the Resource
The Steady Drumbeat of Global Natural Gas Demand
Competition for NG/LNG Will Intensify
Projected growth in NG consumption by region, 2004-2020
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)
Draining Trinidad First
We Will Look To Distant Sources and Pay a Premium
Data adopted from Drewry Shipping and University of Texas
Three Nations Will Account for 62% of Global Incremental LNG Supply though 2015
Sources: Goldman Sachs; UBS
“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)
“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)
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
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)
Optimism All Around: LNG Prices Would be low and stable
Optimistic Supply Projections to 2008 From as Recently as Three Years Ago Never Materialized
- - - Latest EIA estimates for 2008 is 784 BCF
Optimism Still Persists:
Projected Global Supply of LNG in 2015
All projections made in 2007
- - - Current LNG Supply
Optimism Dominates: Projected North American LNG Imports in 2015
- - - 2007 LNG Import Level = 784 bcf/d
“…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)
Reality Sets In: The Steady Decline in
EIA Forecasts of U.S. Imports of LNG in 2008
Year Forecast Made For 2008 Imports
The Sweep of Optimism Fades:
EIA Forecasted Imports for 2015
Construction Costs of Liquefaction Plants are Rising Dramatically
Source: Jensen Associates, December 2007. Estimates by James Jensen
South Pars (Iran)
Sakhalin II (Russia)
Escalating Cost of Liquefaction Plants: Key Examples
Breakeven NG Prices for the Six of the Largest LNG Plants Under Construction or Proposed
* Source: estimated from UBS 2007