Liquefied natural gas (LNG) has become a hot topic of discussion among many market observers in recent weeks. Most of this increased attention has been a result of US Fed Chairman Alan Greenspan’s testimony before Congress that increased imports of LNG will be needed to stave off a shortage of natural gas in the US. While it is true that LNG imports will likely increase 500% over the next few years, LNG imports are currently so small that even a five-fold increase will not have a meaningful impact on the imbalances that currently exist in the North American natural gas market.

For readers who are not familiar with LNG, a little background may be beneficial. The process of transporting LNG involves cooling natural gas at the port of origin to –260F to allow the gas to take on a liquid state and injecting it into a special tanker ship for transport. At the port of destination, the LNG is heated into a gaseous state and injected into a pipeline. The process of liquefaction, transport and gasification is a costly and energy intensive process. Approximately 6% of a LNG cargo is used during processing and transportation. While new technology has significantly reduced LNG transportation costs, it is still uneconomical to import LNG when the price of natural gas on the NYMEX drops below $3.50US.

The US currently has four LNG import terminals and one export terminal. The smallest and oldest LNG import facility in the US is located in Everett, MA. This facility is owned by Distrigas, a subsidiary of Belgium based Tractabel, and has storage capacity of 3.5 billion cubic feet (bcf) and sendout capacity of .44 bcf a day. (Sendout capacity is the amount of natural gas a facility can put into the pipeline system a day.) The Everett facility is being expanded to serve a merchant power plant located near the terminal. Plans have been announced to more than double the send out capacity of the facility.

The LNG receiving terminal in Cove Point, Maryland recently re-opened after being mothballed since 1980. The facility, which is owned and operated by Dominion Resources, is currently being expanded to increase its storage capacity to 7.8 bcf and send out capacity to 1.2 bcf.

The El Paso owned LNG receiving terminal at Elba Island, Georgia was re-opened in 2001 and is undergoing a significant capacity expansion. When complete, the terminal will have storage capacity of 7 bcf and send out capacity of nearly 1 bcf.

The largest LNG import terminal in the US is located in Lake Charles, Louisiana. This facility is also undergoing expansion to bring its storage capacity to 9.3 bcf and its sendout capacity to 1.3 bcf.

The only US LNG export facility is located in Kenai, Alaska. This facility, which exports 66 bcf of gas a year to Japan, has been in operation since 1969. The Kenai export terminal is operated by a joint venture between Marathon Oil and ConocoPhillips.

One of the largest misconceptions about LNG is its significance as a source of natural gas. While LNG imports have been growing rapidly, the volume remains insignificant when compared to total US consumption.

A closer look at the natural gas supply/demand numbers reveals the likely impact of LNG in coming years. The US currently consumes approximately 22 trillion cubic feet (tcf) of natural gas a year or about 60 bcf a day (bcf/d). In 2002, US LNG imports were approximately 620 million cubic feet a day (mmcfd) or a little over 1% of US consumption. More importantly, once expansion of the four US LNG import terminals is completed in 2005, total sendout capacity will still only total 4.3 bcf/d or approximately 7% of average US daily consumption.

It is unlikely that US terminal operators will be able to secure enough LNG cargoes to operate anywhere near capacity due to their limited availability. US terminal operators have been very slow to secure new LNG cargoes due to fear that low natural gas prices will return to the US, thus leaving them stuck with expensive LNG. Countries such as Japan, which imports 2.7 tcf of LNG a year, Korea and India have been very aggressive in securing new LNG cargoes. Competition for cargoes is likely to increase in coming years as China makes it presence felt in the world LNG marketplace.

The building of new LNG receiving terminals has received a great deal of attention by many market observers as a host of companies attempt to capitalize on increased LNG imports. Given the enormous capital costs of import terminals (over $1US billion in most cases) and the difficulty in obtaining permits, I would be surprised if more than a handful of terminals begin construction before the end of this decade. There have been over a dozen proposals to build new LNG receiving facilities in the US. Only one has been issued a permit and construction has not begun on any of them.

Imports from Canada play a far more important role than LNG in keeping the US natural gas market balanced. As mentioned in previous issues, imports from Canada will drop off significantly in coming years as Canadian consumption increases and production declines.

While LNG imports are certain to increase in the future, I believe they will not be enough to offset declining production in North America  Natural gas production in the US and Canada is likely to drop between 1-3% in 2003 and decline further in 2004. Given the significant imbalances in the North American natural gas market, expect prices to continue to spike to over $10US during the winter months for the foreseeable future.  

Gray Davis and Hugo Chavez

The connection between California Governor Gray Davis and President Hugo Chavez of Venezuela probably eludes most individuals.  Both gentlemen are about to face recall elections prior to completion of their terms as leaders of their respective states. On Wednesday August 20^th, opposition leaders in Venezuela organized a march that included the submission of 2.7 million signatures requesting that a new presidential election be held.  

The troubles at PDVSA, Venezuela’s state owned oil company, continue to mount.  In January, Chavez fired nearly all of the senior technical staff of PDVSA after labeling them “opposition sympathizers.”  This move has caused irreparable harm to the country’s oil industry. In recent weeks there have been several reports of increased water content in cargoes heading to the US and further declines in oil production from already significantly reduced levels.

While it is still too early to tell if opposition leaders will be able to unseat Chavez, one can rest assured that the continuing decline of PDVSA will be felt very soon in the world oil markets. Given the extremely low levels of both crude oil and refined products in the US, any disruption of Venezuela’s exports will have a dramatic effect on prices.

Long Live the King!

It is rare that I come across a book that I absolutely cannot put down for more than five minutes. But after reading the inside cover of former CIA operative Robert Baer’s latest book, “Sleeping With the Devil: How Washington Sold Our Soul for Saudi Crude,” I was hooked. 

Baer’s book contains many fascinating accounts of his experiences while gathering intelligence on the Muslim Brotherhood (commonly referred to as Al Queda by the Western press), as well as an insider’s guide to the true state of affairs in Saudi Arabia. (Many names and passages are covered in black ink courtesy of the CIA Publications Review Board.) More importantly, “Sleeping with the Devil” lays bare the likelihood of the overthrow of the House of Saud and what it means for Western economies. The below quote encapsulates several of the major topics covered in the book:

“If I had to pick a single day when the wheels started flying off Saudi Arabia, it would be November 29, 1995 when King Fahd suffered his near fatal troke. It was clear to those close to him that he would never again rule Saudi Arabia. But since he was clinically alive, Crown Prince ‘Abdallah couldn’t take over.

Without a king, Saudi Arabia drifted in chaos. The proof was everywhere. Royal corruption turned to theft on a scale never scene in Saudi history. Government finances went into a free fall. Wahabi militants, all adherents of Osama bin Laden’s violent interpretation of Islam, were off the reservation. The government in Riyadh stopped any meaningful cooperation with Washington on terrorism. And Washington did what it always did when it came to Saudi Arabia—pretended nothing was wrong. It even used the opportunity of Fahd’s stroke extort more money from the kingdom.”

- Page 169, “Sleeping with the Devil”

 Robert Baer, 2003

The picture Baer paints of even a partial disruption of the flow of Saudi oil is not pretty. He places the blame for our dependence on Saudi oil squarely on the shoulders of Washington power elites, Republicans and Democrats alike, who have profited so handsomely from the dysfunctional relationship between Riyadh and Washington.

I came away with mixed emotions after reading “Sleeping with the Devil.” I am very concerned about the likely world-wide depression that would ensue if the world were to be cut off from Saudi crude. At the same time, I feel a significant comfort in knowing that a considerable portion of my assets are tied up in oil and gas producing companies located in the politically stable province of Alberta. 

© 2003 Bill Powers, Editor
Canadian Energy Viewpoint
See Mr. Powers' Cover Page for Bio and Archived Editorials

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Bill Powers
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Information presented in this newsletter was obtained from sources believed to be reliable, but accuracy and completeness and opinions based on this information are not guaranteed. Under no circumstances is this an offer to sell or a solicitation to buy securities suggested herein. The editor may have an interest in the companies mentioned. All data and information and opinions expressed are subject to change without notice.