Emerging energy supplies for North America: The LNG renaissance

For many years the liquefied natural gas (LNG) game was played in rarefied air by a select few who could afford a seat at a multibillion dollar table. While the stakes are still quite high, there are many new and potential members gladly seeking entry because of the enormous commercial opportunities that lie ahead. The global market for LNG is on the verge of unprecedented growth and expansion as demand for clean-burning, efficient and environmentally friendly natural gas continues to rise and as costs throughout the LNG value chain decline. With 70% of the earth’s surface covered with water, there is no shortage of potential coastal locations to support LNG trade. The group of importing nations is growing as they look to LNG to feed their expanding appetite for energy. Even for countries with a substantial natural gas resource base, such as the US, there is a need to supplement dwindling native production with imported supply. For exporting countries, the opportunity to monetise stranded natural resources is an attractive option for creating substantial revenue streams to finance other domestic priorities.

The confluence of these emerging trend lines – increased demand for natural gas, declining production from mature supply basins, and declining costs – has given rise to the renaissance of LNG, especially in both North America and Europe. We are witnessing the rebirth of an industry that not long ago was nonexistent or dormant in many parts of the world outside of Japan and Korea. Presently underway is a full-scale revolution in the way that the global economy is powered and how people around the world are inter-connected to clean and abundant energy supplies. Natural gas is no longer the fuel of the future, but rather the fuel of the present given the need for clean and efficient supplies to meet energy and environmental targets. LNG is the future for natural gas.

The great race for North America

The North American natural gas market is characterised by strong and growing demand, an extensive pipeline grid with numerous options for transportation and trading, and dwindling domestic supplies which are keeping pace with demand only through increased rates of drilling. Even though the process of producing natural gas, converting it into liquid form, shipping it across the seas, and then warming it so that it can be re-delivered in gaseous form once again is complex and capital intensive, there would not be this level of excitement and activity unless the market thought that energy prices would justify this investment for many years into the future. Some see the steep rise in energy prices as being driven by a fundamental and lasting shortfall in global energy supplies. There are predictions that world oil production will soon reach its peak and necessitate a shift to other fuels such as natural gas. David Goodstein writes in Out of Gas: “The world will soon run out of conventionally produced, cheap oil. If we manage somehow to overcome that shock by shifting the burden to coal and natural gas, the two other primary fossil fuels, life may go on more or less as it has been – until we start to run out of all fossil fuels by the end of this century.” Others, such as Kenneth S. Deffeyes in Beyond Oil, have placed the peak in oil production as arriving in a matter months, sometime late in 2005. Regardless of when the peak arrives, it would appear that the market is convinced that over the long-term energy prices will be high enough to maintain the viability of an investment in the LNG value chain.

A great deal of the current excitement centers around the numerous proposals for regas terminals in the US. With over 50 projects on the drawing board there is no shortage of ideas and concepts, including proposals for facilities onshore (using private lands, public lands and even sovereign Indian lands), offshore and floating. While many of these projects are backed by solid players and represent commercially viable options, the market is sure to weed out the fatal flaws of the weak and inferior business models. The current state of play looks like a classic horse race with numerous players jockeying for position and a shot at crossing the finish line and a place in the winner’s circle. While it is a crowded field and a risky race, the size of the North American natural gas market and potential payoff for a winner has proven to be a strong attraction.

The need for energy education

As a result of the hysteria generated by project opponents, LNG still faces an uphill battle on many fronts. A thoughtful educational effort that has the support of numerous public and private interest groups will prove to be the most effective way to neutralise the barrage of negativity. As seen from the research below, there is in fact a great deal of concern about our energy situation, a mass of people who have not yet made up their mind concerning LNG and the ability to persuade the undecided that LNG is a worthy option for the problems on the horizon.

The policy debate

In the U.S. the LNG renaissance was given a jump-start with some policy changes concerning the regulatory treatment of new terminals. In its Hackberry decision – December 22, 2002, the Federal Energy Regulatory Commission (FERC) took a bold step by removing the open access and open season requirements for new onshore LNG terminals and the need for regulated cost of service rates. While the regas terminal is still considered the weak link in the delivery chain, this policy shift gave the much needed assurance to project sponsors that their substantial investment would not be subject to unacceptable levels of regulatory risk.

 

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David M. Sweet, Executive Director, International LNG Alliance, Washington, DC, USA
Edition: Edition 27

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