By Dan Piller

02-02-04

With remarkably little public debate in Congress or in the current political campaigns, the United States is drifting toward a future where up to 25 % of natural gas supplies will come from foreign sources.
Long blessed with an abundant and inexpensive supply of natural gas for heating, industry and electrical power generation, consumers and the gas industry have watched as demand overtook supply in the past three years and prices have moved inevitably upward.

With no reversal in sight, producers are turning to LNG, which would be imported from the Middle East, Asia and Africa. It will require a gargantuan capital investment for large receiving ports along the US coast, including the Gulf of Mexico. The energy industry, environmentalists and neighbours to those proposed ports are expected to clash.
"A tsunami of LNG tankers is headed toward US ports," Hillard Huntington, director of the Energy Modelling Forum at Stanford University, told a LNG conference in Houston.

LNG describes a process where gas is pumped from wells, converted to a liquid by chilling it to 250 degrees below zero Fahrenheit and then shipped overseas in much the same way that crude oil is transported in tankers. At the import terminals, the gas is warmed back to a vapour and sent via pipelines to users such as utilities, factories and residences. LNG breaks a long-standing tradition of transporting natural gas only within North America via pipelines. Other countries, most notably gas-poor Japan, South Korea and Taiwan, rely on LNG for most of their natural gas needs.
In the United States, about 85 % of the natural gas supply comes from domestic production, and most of the rest from Canada. A scant 1 % comes from offshore wells near Trinidad for conversion at four LNG terminals.

But that may change in the next decade as the United States goes on a building binge of LNG conversion terminals. Up to 40 are proposed, including five along the Texas Gulf Coast, with most planned along the eastern and western seaboards.
The first priority of the new LNG terminals would be the giant petrochemical industry in South Texas. Another target market would be pipelines that serve the Upper Midwest from Chicago eastward, a big market during the winter. North Texas receives most of its gas from more local sources, from East Texas and the Permian Basin to the Mid-Continent fields in Oklahoma and Kansas.

Despite the ambitious plans being laid out, LNG isn't a part of the energy bill being debated in Congress, and no presidential candidate has made imported LNG -- either for or against -- a campaign issue. But Federal Reserve Chairman Alan Greenspan got attention last summer when he addressed the issue of increasingly tight natural gas supplies and rising prices.
"Our limited capacity to import LNG effectively restricts our access to the world's abundant supplies of natural gas," he said.

In December, Energy Secretary Spencer Abraham presided over a summit in Washington, DC, of 24 nations interested inproducing or buying LNG. Abraham made it clear that the United States would be an eager participant in the developing international LNG market. LNG doesn't require technological breakthroughs. Don Torkelson of Cheniere LNG in Houston, which has proposed three LNG terminals along the Texas Gulf Coast, says that "LNG is a very low-tech business."
Texas will be a major linchpin in the new LNG industry. Irving-based ExxonMobil, the world's largest energy producer, has announced a planned investment of $ 12 bn to $ 15 bn for an LNG conversion facility in the Middle Eastern kingdom of Qatar. That LNG would be received at two terminals ExxonMobil has proposed for the Texas Gulf Coast, at Ingleside in San Patricio County, and at Sabine Pass at the Louisiana border.

Qatar holds what is believed to be the world's largest offshore natural gas field. The little kingdom is upgrading its energy expertise with a branch of Texas A&M University's engineering college that opened in September. The Qatarese Aggies received their initiation last fall when the Texas A&M marching band spelled out "TAMQ" during a football halftime show in College Station that was beamed by satellite TV back to the campus in Doha, Qatar.
In addition to the ExxonMobil terminals, Cheniere has proposed three terminals on the Texas Gulf Coast. Two other offshore terminals are being proposed on the Gulf, using existing drilling platform technologies.

LNG isn't new. As early as the 1950s, converting natural gas to liquid for shipment was proposed as a way to boost supplies. Three of the country's four LNG terminals are on the East Coast, with the fourth at Lake Charles, Louisiana. They date from the 1960s.
But LNG languished through the 1970s, '80s and '90s while a natural gas glut and an expanding pipeline system kept prices low and made the US market self-sufficient, a stark contrast to its situation with crude oil. The sudden scarcity of natural gas, and the rise in average price per thousand cf from below $ 3 before 2002 to the $ 5-to-$ 7 range today, have suddenly made LNG economical.

Glen Sweetnam of Lukens Energy Group in Houston says imported LNG can be profitable as long as prices stay north of $ 3 per thousand cf, which has been the case for the past two years. Most analysts expect natural gas prices to stay above $ 4.50 per thousand cf.
"We're at the same point with LNG that the world was in the late 1950s with crude oil," Sweetnam said. Of course, since the 1950s the United States has switched from having a net surplus of crude oil to being the world's largest importer of crude, with a host of political and geostrategic implications.

"Energy independence" has been a mantra for politicians for three decades -- ever since OPEC used its embargo power in 1973-74 to withhold crude oil from the US market. But a political consensus has yet to develop.
Democratic front-runner John Kerry notes in his energy position paper, that LNG is a potential source of imported natural gas. Kerry appears to favour offshore terminals, mounted on drilling platforms, that are remote from populated areas.

The Bush administration hasn't addressed LNG in the energy bill but did send Abraham to host the LNG summit in Washington last December. This month, Sen. John Cornyn, R-Texas, speaking to the Texas Independent Petroleum & Royalty Owners Association in Fort Worth, expressed fears about "becoming dependent on foreign sources of LNG."
But in an interview later, when asked what he or other congressmen might do to halt or slow down imported natural gas, Cornyn said, "I wouldn't do anything to stop it."

Part of Cornyn's hesitance stems from the huge need for natural gas by the petrochemical industry along the Texas Gulf Coast. Texas is the largest consumer of natural gas among the 50 states. Cornyn and other politicians understand that although a growing reliance on foreign natural gas may present some problems, the effort to increase US supplies by drilling in Alaska's Arctic National Wildlife Refuge, or on public lands in the Rocky Mountains or other protected areas, carries even more serious political risks.
Michelle Foss, director of the Institute for Energy, Law & Enterprise at the University of Houston, says that natural gas has become the fuel of choice for electricity generation and manufacturing because it is environmentally friendly.
"We have encouraged consumption of natural gas, but we haven't encouraged more production," Foss said.

The chief impediments to the development of LNG will be the expected widespread local opposition to the terminals and their huge storage tanks, and competition from expanded pipelines. The principal environmental threat of the LNG terminals is fire. The explosion at an Algerian LNG terminal, which killed 13 workers, has put LNG boosters on the defensive. They note that the technology at the Algerian plant is different from what would be used at the US plants. No major fire or explosion has occurred at the four LNG terminals in the United States.
"The most important thing to remember is that while the gas can burn, it is not pressurized and thus won't explode," Foss said. "In fact, the gas vapours will burn only with the proper mixture of air."

That hasn't stopped opponents from working hard to stop two proposed terminals, one at Long Beach, California, and the other in Mobile Bay, Alabama. LNG proponents are girding for not-in-my-backyard opposition to virtually every proposed terminal site.
Sara Banaszak, director of the gas and power group at the PFC Energy consulting firm in Washington, DC, acknowledged that "a great deal of education needs to be done to help the public understand that an LNG terminal isn't as dangerous as is thought."

Another wild card could be the expansion of domestic supplies. Mexico has long been considered a "ringer," in Foss' words, as a possible new natural gas supplier for the US market. Another source of gas to rival LNG could be a proposed $ 20 bn pipeline from Alaska's North Slope to the Midwest. Support for such a project is in the energy bill that is stalled in Congress. But one of the three proposed partners in the pipeline is ExxonMobil, which already has hammered its stake in natural gas in Qatar.
"Right now, we have concerns that the pipeline may not be economical," spokesman Bob Davis said. Huntington, of Stanford, cautions that the LNG industry might face a boom-bust cycle similar to what the deregulated electricity industry has suffered in the past two years, as a surplus of wholesale electricity has forced the shuttering of several generators and the bankruptcy of at least two major merchant generating companies.

Source: Fort Worth Star-Telegram