Experience Suggests LNG Won’t Lower Gas Prices

By Published On: July 10, 2004

California’s liquefied natural gas developers have promised that new terminals wll provide increased supplies to the state at lower prices. But as LNG contracts in other areas suggest, LNG will flow to the highest price and not necessarily create more competitive markets. “Nobody wants to leave money on the table,” observed George Baker of Mexico Energy Intelligence. Given the experience on the East and Gulf coasts, he predicts that LNG may come in a bit below market rate at first in California to establish market share, but then will drift toward market rates. Last month the average price in California was $5.71/MMBtu. However, Sempra Energy is singing a different tune. “Increased natural gas supply, through the importation of LNG, will help lower the price of natural gas?which can help the economy,” it proclaims. Sempra has secured needed approvals for a terminal in Baja California, Mexico, that would send LNG to California. In a claim that surprises many, Sempra predicts it will be able to land LNG in Baja at prices between $3 and $4/MMBtu. Over the past year, LNG imports at existing terminals have picked up with the reopening of two mothballed facilities. But the contracts between importers and utilities?while often long-term?peg the price of LNG deliveries to floating gas price indices, such as those of the Henry Hub or the New York Mercantile Exchange. The Henry Hub price averaged $5.96/MMBtu in June. “They probably price it at just below the New York Mercantile Exchange,” said George Yankos, gas division director of the Massachusetts Department of Telecommunications and Energy. Yankos examines LNG sales contracts between Distrigas, an LNG importer near Boston, and regulated utilities in the state to make sure they serve the public interest. He predicts LNG will sell for at least $5/MMBtu in California because most importers cannot make a profit below that level. In the mid-Atlantic region, reopening of the Cove Point LNG import terminal by Dominion Resources last fall has not reduced gas prices in the nearby Washington, D.C., or Norfolk, Virginia, areas. Instead, the Energy Information Administration is projecting a 13 percent increase in gas prices in the region this year, despite average daily imports of 571 MMcf at the terminal, according to an industry observer. For instance, a pipeline that until last fall brought gas into the Washington, D.C., area from Pennsylvania has been turned around to transport LNG north to the New York area, where residents traditionally pay the highest prices for gas during the winter heating months, said Dan Donovan, Dominion spokesperson. Dominion operates the terminal for importers such as BP and Royal Dutch Shell that sell LNG directly to utilities and industries. Moreover, the increased supply of gas from LNG terminals has enabled power generators to open new plants that run on natural gas instead of other fuels in the region, increasing the demand for natural gas, Yankos said. Glass and steel manufacturers also are using the new gas to expand operations, observed Donovan. To the south, LNG shipped to the recently reopened Elbe Island terminal near Savannah, Georgia, has had no noticeable effect on gas prices in the state, said Bill Edge, public information officer for the Georgia Public Service Commission. On the Gulf Coast, Marathon Oil recently entered a long-term contract to supply LNG from its Equatorial Guinea field to British Gas, which will ship it to the Lake Charles, Lousiana, terminal and price it based on the Henry Hub index, said Paul Weeditz, chief spokesperson for the oil company. Marathon’s shipments are slated to begin in 2007, he said. A contract for LNG delivered to the Altimira terminal on the Gulf Coast of Mexico is structured to ensure that gas deliveries are kept at the current market rate. In an agreement with Mexico’s Federal Electricity Commission, Royal Dutch Shell is to begin delivering gas for use at a nearby generating plant at the Henry Hub price, plus 18 cents, according to Baker. <b>CPUC to Take LNG Battle to Court</b> In a closed session on the evening of July 8, the California Public Utilities Commission agreed to petition the U.S. Court of Appeals for the D.C. District to hear its dispute with the Federal Energy Regulatory Commission over the authority to site Sound Energy Systems’ proposed Long Beach liquefied natural gas terminal. “We will soon file a petition for review challenging FERC’s orders,” said Harvey Morris, CPUC principal counsel. He could not give an exact date but said it would be well before the 60-day clock runs. FERC has claimed it has exclusive authority over LNG permitting that involves “foreign commerce,” and the CPUC insists it have a say over health and safety aspects of a project in California that will involve intrastate transport and sales of gas (<i>Circuit</i>, July 2, 2004).

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