LNG Exports: The Newest Economic Engine, Or A Fad That Will Pass?

By Richard Nemec | April 2012, Vol. 239 No. 4

They expect the places where abundant infrastructure in terms of transmission pipelines, gathering systems, storage and marine facilities already exists to be the prime candidates for export projects.

Ziff Energy’s Bill Gwozd thinks the new sites may be as much as 70% more costly to develop, but he believes the location of new export terminals on the U.S. and Canadian West Coast have superior economics because of their proximity to the highest-priced global LNG markets, all found in Asia. GOM export facilities will be built, but they will probably stay largely under-used as the current U.S. import terminals are, Gwozd says.

In a career spanning nearly 40 years in the gas business worldwide, recently retired Sempra Energy LNG CEO Darcel Hulse has seen booms and busts and two different cycles of LNG-receiving terminal development around the U.S. coastal areas, but never has the conventional wisdom been upended as quickly as the last few years of revolution in shale plays.

“Shale formations and the technology to get at the gas changed the picture dramatically,” says Hulse who retired the end of 2011. “So now we see the three major [LNG] markets globally – Europe, Asia and the U.S. – just really disconnected in terms of prices,” he cautions, calling it a “unique market situation” unlike any other major commodity in the world. He also doesn’t make any long-range predictions on how long this trend will last.

Late last year, a report by Deloitte for would-be LNG exporter BG Group concluded that domestic natural gas prices would increase only by pennies as a result of a newly developed export market for U.S. supplies. The biggest impact would likely be in the GOM states, the report projected.

Ziff Energy’s pricing model estimates that for every 1 Bcf/d of exports, domestic prices would increase 22-23 cents/Mcf, says Gwozd, adding that new gas-fired power generation will have a bigger impact on domestic prices.

For the past two years, low gas prices obviously have supported the call for exports out of the United States, particularly with existing (brownfield) projects. These are the existing facilities where people like Hulse, who know firsthand, say adding a liquefaction train to a regasification facility is relatively easy.

“The liquefaction facility is nothing more than a giant refrigeration cycle,” Hulse says. “It is very large equipment, driven by gas turbines or electric motors depending on the power supply available. But the heart of this facility is just compressors and heat exchangers. Those are all offsite items produced in shops and factories capable of building all of that.”

The components are easily shipped, mounted on foundations and then interconnected at the site. Hulse thinks the GOM is today’s oil/gas global center for technology and workforce expertise to build these facilities.

“Those facilities, such as Sempra’s Cameron site in Louisiana, basically have the marine docking and storage tanks already developed. That is particularly attractive,” says the man who led the development of Cameron and Sempra’s LNG-receiving terminal along the Pacific Coast in North Baja California, Mexico.

In most cases, terminal operators like Sempra will look for a couple of things before they travel too far down the export road. One will be well-heeled, A-credit rated partners, and the second will be similarly strong shippers. In some cases, the partners and the shippers may be the same entities.