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 fac226@psu.edu 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

OUR EMERGING DILEMMA IN LIQUEFIED NATURAL GAS

Frank Clemente Ph.D.

Senior Professor of Social Science & Energy Policy

Penn State University

fac226@psu.edu

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 “Dash to Gas”

“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 “Dash to Gas”

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 “Dash to Gas”(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 “Dash to Gas”(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 “Dash to Gas”(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.


Reserves of NG are Just As Concentrated As Oil “Dash to Gas”

Oil

NG

Top 5 Countries Control 60% of the Resource

8

Source: BP


The Steady Drumbeat of Global Natural Gas Demand “Dash to Gas”

9

  • Source: EIA 2007


Competition for NG/LNG Will Intensify “Dash to Gas”

Projected growth in NG consumption by region, 2004-2020

10


The U.S. Bets On A Brave New World “Dash to Gas”

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


Draining Trinidad First “Dash to Gas”

12


We Will Look To Distant Sources and Pay a Premium “Dash to Gas”

, 2007

Data adopted from Drewry Shipping and University of Texas

13


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 Supply though 2015

“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 Supply though 2015

“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 Supply though 2015

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 Supply though 2015

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)



Optimistic Supply Projections to 2008 From as Recently as Supply though 2015Three Years Ago Never Materialized

- - - Latest EIA estimates for 2008 is 784 BCF

20


Optimism Still Persists: Supply though 2015

Projected Global Supply of LNG in 2015

All projections made in 2007

- - - Current LNG Supply

21


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 2015

“…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 2015

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

Year Forecast Made For 2008 Imports

24


The Sweep of Optimism Fades: 2015

EIA Forecasted Imports for 2015

25


Construction Costs of Liquefaction Plants are Rising Dramatically

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

26


South Pars (Iran) Dramatically

Sakhalin II (Russia)

Escalating Cost of Liquefaction Plants: Key Examples

27


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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