Analysis: West lines up for LNG imports

By HIL ANDERSON, UPI Chief Energy Correspondent  |  Sept. 22, 2003 at 12:41 PM
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LOS ANGELES, Sept. 22 (UPI) -- The idea of Mexico becoming a gateway for liquefied natural gas imports to the United States solidified further when potential shippers snappily saluted a planned expansion of a pipeline between the Baja Peninsula and the United States.

Sempra Energy and PG&E Gas Transmission announced last week that an impressive seven companies involved in liquefied natural gas transportation had responded when they put out the word that it was "open season" for space on the expanded pipeline that will run from the cluster of proposed LNG terminals along the west coast of Baja.

"The results from the open season reflect northern Baja's ideal location for serving the newly developed terminals and the level of shippers' interest in moving LNG to markets throughout Mexico and the United States," said Peter Lund, PG&E Gas Transmission's vice president for pipeline marketing. "We will continue working with potential shippers in the coming months to keep this project moving forward."

"Open season" refers to the period of time during which companies seeking to move natural gas through a pipeline indicate how much gas they'll want to ship on a regular basis. So, signing up is not something taken lightly and the signature on the dotted line offers a reliable look at just how much interest there is in a pipeline and in a new market.

According to PG&E and San Diego-based Sempra, seven companies involved in gas shipments and the development of LNG terminals sought space for 900 million cubic feet per day on the expanded line. They also expressed an interest in moving their gas through new interconnections in California and Arizona that are the gateway to major population centers such as Los Angeles and Phoenix.

The United States' current LNG pipeline system is relatively small, spreading from the sole pricing hub at Mount Belvieu, Texas, not far from Houston, and on up north to the Midwest; the West currently has no ties to LNG pipelines either in the United States or Canada.

"While the pipelines from Baja California are sufficient to transport natural gas to Southern California, getting access to pipelines within Southern California is a concern," the California Energy Commission said in its most recent look at the role LNG will likely play in the state during the coming years.

Once completed, the Sempra-PG&E project tying Baja into trading hubs at Blythe, Calif., and Topock, Ariz., would presumably allow LNG to be hauled in from far-off locations and become a permanent supply cushion for the West that will help keep gas prices under control as more homes are built and more gas-fired power plants go on line.

The potential of LNG as a fuel source is certainly rosy; however it remains a high-maintenance commodity that is at the mercy of the harsh economics of the marketplace.

The CEC noted that LNG has been around for decades, although it has never been competitive on a large scale with natural gas produced in the United States and Canada.

Natural gas produced in North American basically comes out of the ground and is sent on its way to market with a minimum of fuss. LNG, a touchy commodity, must be kept at minus-259 degrees Fahrenheit in order to remain in a liquid state and is transported thousands of miles aboard ships fitted with nickel-alloy tanks that are covered by as much as 2 feet of the best insulation money can buy. Once ashore, the LNG is warmed, converted back to a gaseous state and transported to its final destination by pipeline.

Analysts estimate that LNG is economical when natural gas prices rise above around $3.60 per million BTUs. According to the U.S. Energy Information Administration, current prices have been hovering at just less than $5 per million BTUs, but wary analysts caution that it was only in the 1990s that gas was trading barely more than $2 per million BTUs.

The recent higher prices have led to an increase in U.S. gas production; however the conventional wisdom is that no major increases in production should be expected unless protected areas such as the pristine Arctic National Wildlife Reserve and sacrosanct offshore areas of California are thrown open to development.

"Recent volatile natural gas prices do not foreshadow a long-term crisis in future natural gas supplies," said Hillard Huntington, co-author of a new study on natural gas at Stanford's Energy Modeling Forum. "Industry will respond with more investment, and demand will respond to higher prices -- provided that market participants are given the opportunity."

Spot LNG prices in the United States have consistently run below LNG prices in Europe and in Japan in recent years, but the size of the potential market and falling production costs have raised the chances that some producers will sign long-term supply agreements at a discount to the market price.

The thrust of the Stanford report was that energy companies need a friendly regulatory environment that will enable the quicker construction of natural gas and LNG infrastructure during times of favorable economics.

At the same time, analysts at the CEC believe many of the LNG terminals and plants proposed for Mexico and parts of the United States will be shelved or merged with competing projects due to the economics.

The response that PG&E and Sempra received during their pipeline open season, however, proves that LNG's future in the United States is solidly bullish.

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