Six Key Conclusions Drawn From North American LNG Conference

PR Newswire. HOUSTON, Jul 11, 2001

The scenarios being drawn by participants in the LNG industry -- both old and new -- paint a rosy picture for the importation of liquefied natural gas into the United States. www.lngexpress.com <http://www.lngexpress.com>

From its conference on "LNG's Role in North American and Caribbean Gas Supply" held in Arlington, Va., June 27-29, Zeus Development Corp. management drew six broad conclusions:

Ample reserves. First, North America has ample gas in "frontier" regions without importing additional quantities of liquefied natural gas (LNG).

Speakers from the DOE, Ziff Energy and the Canadian Energy Board identified as much as 1,300 trillion cubic feet (tcf) of probable and possible gas reserves located in deepwater in the Gulf of Mexico, northwestern Canada, the North Slope of Alaska, offshore eastern Canada, coal seams in the Rockies and Appalachians and other locations.

This number might balloon to more than 3,000 tcf if economical technologies can be used to recover gas from deep-ocean hydrates (ice crystals), tight sands and other non-conventional sources.

Assuming North America consumes 25 to 30 tcf of gas per year, these reserves will supply U.S. markets for decades.
However, the cost of developing and bringing frontier gas to market is likely to be more expensive than imported LNG from such locations as Trinidad, South America, western and northern Africa and even the Middle East and Australia. For this reason, LNG is expected to play a key role in North American gas supply.

Mary Hutzler, director of integrated analysis and forecasting at the U.S. Energy Department's Energy Information Administration, estimated the full costs of delivering gas from the North Slope of Alaska, for example, where seven to eight billion cubic feet is produced daily with oil production, to the northern border of the United States will significantly exceed $3 per million Btu (MMBtu) and require about 10 years to construct pipelines.

Similar estimates were given for natural gas from the McKenzie Delta of Canada or offshore Nova Scotia. Only deep Gulf reserves, where costs can be shared with oil exploration, and large coal basins, such as the San Juan, Appalachia or Powder River Basins will offer gas that can be delivered for less than $3 per MMBtu.

On the other hand, shiploads of LNG can be delivered from two existing plants in Trinidad and Nigeria for less than $2 per MMBtu, according to estimates from Poten & Partners and Merlin Associates. For this reason, these two plants are undergoing significant expansions.

Regasification terminals. Speakers at the conference were unanimous in their belief that all four of the existing U.S.-mainland LNG terminals would be fully utilized and de-bottlenecked to receive ever-greater quantities of LNG.

Opinions differed, however, on the number of new North American LNG receiving terminals. New terminals and the liquefaction plants to supply them will be expensive.

Much will be dependent on how aggressive exporting nations wish to be in pricing their gas.
According to Gabriel Avgerinos from Poten & Partners, the current sovereign takes from host governments, such as Trinidad, Nigeria, Egypt, Norway and Qatar, range widely from $0.25 to $1. Those governments that wish to price their gas aggressively might sway the economics of new plants over expansions of existing ones. New liquefaction plants were discussed in Venezuela, Angola, Nigeria, Egypt, Peru, Chile, Norway and Alaska.

Three scenarios for North American receiving and regasification terminals were considered in detail: terminals on the U.S. shoreline; terminals located floating offshore or built on manmade islands; and terminals located in neighboring countries, like Mexico or the Bahamas, with pipelines connected to U.S. gas-distribution grids.

Rob Bryngelson, managing director of business development at El Paso Corp., explained that his company strongly believes three, possibly four, new terminals will be built: one each on the Atlantic and Pacific coasts of Mexico; one in the Bahamas with pipeline access to the United States and possibly one on the North Carolina coast.

Bryngelson said El Paso was most committed to developing a 0.5 to 1.0 billion-cubic-feet-per-day terminal on the east coast of Mexico near the town of Altamira, Tamaulipas.

By selecting Kellogg Brown and Root as their engineering and construction company, El Paso is reported to be shortcutting the front-end engineering and design step, thereby shortening the typical terminal construction lead-time.

Bryngelson expects the Altamira terminal to be online by the first quarter of 2004. El Paso is just as committed to serving Mexico's growing gas demand as the United States, he said.

The second terminal El Paso is working fervently to develop will be in the Bahamas. This terminal will supply most of its gas to Florida via undersea pipeline.

"We're a small country of about 300,000 people," noted Bahamian Deputy Prime Minister Frank Watson when asked if the Bahamas would require much of the natural gas from the LNG terminal.

A race is on between Enron, Gaz de France, AES and El Paso to build one or more terminals in the Bahamas. "For any LNG terminal, we will be primarily a gas transshipment point," Watson noted.

Another hot spot for new terminals is Tijuana, Mexico, where gas can be transported via pipeline into California. At least six developers have announced plans to build terminals there.

Local opposition to terminals. One might ask why LNG terminals must be built in the Bahamas and Mexico when the primary market for the gas is the United States.

The third conclusion that could be drawn from the conference is that new terminals will be difficult to build in the United States primarily because of local citizen opposition.

"In California, we're hearing a new acronym for NIMBY [not in my backyard]; it's 'NOPE' for 'not on planet Earth,'" noted Steven Schneider, manager of business development at Chevron.

"Let me suggest you do a lot of local education before dropping a large stack of FERC filings on the table at a local library," said Bob Arvedlund, chief of environmental review and compliance at the Federal Energy Regulatory Commission (FERC) to a group of project developers.

Arvedlund noted that the greatest challenge to any U.S. onshore terminal will be winning local citizen support.
Rich Foley, regulatory gas utility specialist at the FERC, said that the Internet has greatly improved the speed of communication and coordination among opposition groups.

Groups opposed to new industrial development can organize and rally around websites in minutes.
Foley encouraged developers to get in front by providing forthright and complete information to concerned citizen groups, or else they'll be fighting skilled tacticians through the entire regulatory review process.

"All of the jobs and economic benefit you're going to create for the local community will buy you about one day of good press," said Mike Zagorac, managing director at Hill & Knowlton. "As soon as local politicians learn that there is controversy or hazards for their constituents, they'll become your adversaries."

Zagorac said that the principals of an industrial project with which he worked in Florida first painstakingly identified all of the key constituent organizations, from local environmental groups to trade unions, to schedule meetings to discuss and review the proposed project.

He urged developers to build local support early by providing an educational program with an objective assessment of the advantages and disadvantages on all dimensions.

"The old ways of pulling the wool over the public's eyes are dead," said Arvedlund. "The Internet has changed everything."

Average gas prices. The fourth conclusion that could be drawn from the conference is that, while short-term price spikes and troughs are hard to predict, the speakers believed that consumers would begin to curtail their consumption of natural gas as prices reached $4, forming a psychological ceiling.

At $4 per MMBtu, consumers begin to switch fuels, noted Tom Woods, principal at Ziff Energy.
Assuming $3 delivery costs for incremental supplies of natural gas and a $4 psychological ceiling, delegates could conclude that future long-term gas prices will average somewhere between $3 and $4 per MMBtu.

Point-to-point supply chain. The fifth conclusion from the conference is that the old model of building a dedicated point-to-point LNG supply chain is alive.

Both Texaco and Chevron have plans for new North American terminals: one offshore of Louisiana and one either on the west coast of Mexico or California that will take gas directly from West Africa and Australia reserves under their control.

Both companies are less concerned with market vagaries and more concerned about logistical challenges of moving their stranded gas into the North American marketplace.

"We're keeping our options open," said Schneider, when discussing whether Chevron's terminal would be located onshore or offshore or in Mexico or the United States.

He said that Chevron has found that pursuing multiple options is less costly in the long run. Chevron plans to bring gas that it has discovered offshore northwestern Australia to the West Coast. Likewise, Texaco hopes to bring gas it produces from West Africa.

Caribbean power generation. The sixth conclusion is that the Caribbean will require LNG for power generation, but the number of applications is dependent upon the industry's ability to downscale delivery to compete with the economics of petroleum-derived fuels for power plants less than 200 megawatts.

The last LNG terminal built in the United States was constructed in Puerto Rico in 1999. The entire cost of the terminal and 507-MW power plant is reported to be $670 million, or $1.3 million per megawatt of capacity.

Smaller scale petroleum-fired plants and receiving terminals can be built for as little as $1.1 million per megawatt of capacity, providing a challenge for LNG developers, unless LNG prices fall below petroleum-derived fuels.

About Zeus Development Corporation:
Celebrating its tenth year of incorporation, Zeus Development Corporation is a privately owned research consultancy offering strategic and business development information through reports, monthly periodicals, databases, consulting services and conferences to the energy industry in the areas of downstream natural gas and information technology. For more information, contact Ms. Whitney Casso, 832-200-3718 or wcasso@zeusdevelopment.com.