Regional LNG: "LNG won't lead to sharply lower U.S. spot prices"

Don't count on a multitude of new liquefied natural gas (LNG) import terminals and a flood of LNG collapsing domestic gas prices, said James Trifon, Wood Mackenzie's managing consultant for North America LNG.

Most of the import terminals planned won't make it, and the underlying tight domestic supply situation will continue to support the market, he said in a preview of a presentation to be given at GasMart on March 18, 2005 in New Orleans.

"There are people who think that LNG will be cheap and plentiful, but they tend to forget that there are other countries that it is heading toward; it's not just a U.S. phenomena," said Trifon in an interview with NGI.

He said power generators and industrial companies often think they will command a discount price when dealing with an LNG supplier. "(But) LNG is going to be sold based on the market price in whatever area you are bringing it in."

A lot of it probably will be arriving along the Gulf Coast around the Henry Hub and that should put some downward pressure on gas prices, but before too long other factors will come into play and prices will quickly find support.

"There's also not enough LNG out there to crater the market," he said, noting that demand is growing in Europe and in Asia. Furthermore, if domestic gas prices begin to fall sharply, there will be an economic impact on unconventional gas production in the Lower 48 states.

"If prices go too low, you won't have unconventional gas production, so therefore you start having a supply gap again, and then bam prices have to go back up. If prices fall too far, you also may not have discretionary LNG cargoes coming in."

Most of the LNG will be arriving under long-term agreements. Trifon also said that LNG terminal developers that have designed their business models around an LNG spot market may be in for a rude awakening. Long-term agreements will continue to be the norm because terminals and liquefaction projects depend on them to financially support their construction.

Trifon expects most of the planned LNG terminals in the United States to end up gathering dust on the bookshelf. Unlike the power market, the LNG market can't be overbuilt, he said. Upstream and downstream infrastructure must be brought online in concert. "Upstream is not going to be developed without having an outlet, and downstream, no one is going to build without having supply." Those factors will keep the market closely in check.(alex)