OUR EMERGING DILEMMA IN LIQUEFIED NATURAL GAS

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OUR EMERGING DILEMMA IN LIQUEFIED NATURAL GAS

• Frank Clemente Ph.D.
• Senior Professor of Social Science Energy
  Policy
• Penn State University
• fac226_at_psu.edu
• 814-237-0787

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We were forewarned about the consequences of the
first Dash to Gas
1997 if Lower-48 proved gas reserves are
reported to EIA with reasonable accuracy, and
inferred reserves as assessed by the Department
of the Interior prove generally reliableby
early in the next century, natural gas will have
become more of an energy problem than an energy
solution (Joseph Riva, Colorado School of Mines)
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Concerns about LNG are not misplaced

1. U.S. gas productive capacity, like oil, is now
   in permanent decline. (Daniel Yergin, CERA,
   2005)
2. The North American markets are now dependent on
   the growth of liquefied natural gas. If we dont
   get LNG, we dont have a plan B. (Michael
   Zenker, CERA, 2005)
3. Six wildcard nations will ultimately determine
   the size of world LNG markets Russia, Iran,
   Nigeria, Venezuela, Algeria and Libya. (LNG
   Express , 2007)
4. pricing for LNG is being forced towards
   oil-price parityChinas recent decision to
   contract for long term LNG at market prices may
   be a turning point (UBS,2007)
5. the US is the market of last resort for LNGwe
   will get the gas Europe and Asia dont need
   (Goldman Sachs, 2008)

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Our Emerging LNG Dilemma

• Since 2000, the U.S. has built a vast fleet of
  natural gas (NG) power plants and over 5 million
  NG heated homes.
• Production in the lower 48 states provides almost
  85 of our NG but has declined since 2000.
• Increased demand amidst declining supply has
  dramatically escalated NG prices for all
  consumers, including families and industry.
• Thus, we have built a NG infrastructure where new
  demand must increasingly be met by sources of NG
  outside the lower 48.

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Our Emerging LNG Dilemma (cont)

1. Canada provides 13 of our NG but will be of
   little help. Canadian production peaked in 2004
   and demand for NG in oil sands development is
   rapidly growing.
2. The Alaskan Pipeline may or may not be built, but
   flow is not projected before 2020 and prices will
   be high.
3. By default, we have made a risky bet on our
   ability to import Liquefied Natural Gas (LNG) to
   meet growing demand.
4. There are huge reserves of NG in the world (over
   6,000 TCF) but much is stranded in remote areas
   away from existing infrastructure and will be
   expensive to extract and transport.

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Our Emerging LNG Dilemma (cont)

1. Further, much of the worlds NG is concentrated
   in risky or hostile nations Russia, Iran and
   Venezuela have over 45.
2. Actual LNG supply will fall short of optimistic
   expectations because liquefaction plants have
   been cancelled or delayed across the world.
3. And, since Europe and Asia are also increasingly
   dependent upon NG, the competition for the LNG
   that is available will be intense.

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Our Emerging LNG Dilemma (cont)

1. Prices will be higher than previously projected
   because major producers such as Qatar are linking
   new LNG contracts to the price of oil.
2. As the most distant market from virtually all
   major sources, the U.S. will be forced to pay the
   highest price.
3. In effect, for the first time in history, the
   reliability of our electric supply system will be
   dependent upon decisions made in foreign nations.

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Reserves of NG are Just As Concentrated As Oil
Oil
NG
Top 5 Countries Control 60 of the Resource
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Source BP
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The Steady Drumbeat of Global Natural Gas Demand
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• Source EIA 2007

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Competition for NG/LNG Will Intensify
Projected growth in NG consumption by region,
2004-2020
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The U.S. Bets On A Brave New World
Where new NG supply came from 1993 - 2006
Where new supply is projected to come from
2006-2019
North America is setting itself to import LNG in
large quantities (IEA, 2007)
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• Source EIA

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Draining Trinidad First
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We Will Look To Distant Sources and Pay a Premium
, 2007
Data adopted from Drewry Shipping and University
of Texas
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Three Nations Will Account for 62 of Global
Incremental LNG Supply though 2015
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Sources Goldman Sachs UBS
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The Risky Realities of LNG

• Once LNG cargoes hit the water, theyre going to
  the highest-price market regardless of the type
  of contract you have in place. (Bruce
  Williamson, CEO, Dynergy, 2007)
• LNG importing countries in Asia and Europe rely
  on LNG importsresulting in a willingness at
  times to pay prices exceeding those in the U.S.
  markets in order to have LNG cargoes diverted.
  (EIA, 2008)
• Molecules flow to dollars. Spain paid the
  equivalent of 14 last summer and the molecule
  went there and did not come here. (James Duncan,
  Director, Conoco Phillips, 2006)
• Turkey is paying record prices for liquefied
  natural gas cargoes after Iran slashed exports
  through a natural gas pipeline. (Bloomberg News,
  2008)

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U.S. Will Pay the Market Price for LNG

• The U.S. will have to compete with oil linked
  markets long term and U.S. prices are now
  expected to climb with oil. (WoodMac, 2007)
• U.S. prices will have to migrate to the top of
  the heating oil/resid band to keep USA netbacks
  competitive with western Europe. (Tristone
  Capital, 2008)
• Korea Gas Corp and Qatars Ras Gas20 year deal
  was signed in November for LNG at around 11The
  price varies as oil prices rise or fall. (Gulf
  Times, 2007)
• if the North American market wants more LNG,
  prices will have to rise to closer to global
  levels (First Energy Canada, 2008)

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EIA 2005 Outlook Set the Stage for Optimism
In 2005 EIA projected these increases through
2015.
Actual was only 631 BCF in 2005 and in 2007 was
774
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Source EIA
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Cavalier Optimism is Contagious and Ongoing

• 2004 A tsunami of LNG tankers is headed toward
  U.S. ports. (Hill Huntington, Stanford Energy
  Modeling Forum)
• 2005 6 Tcf per year of liquefied gas is
  pointed toward U.S. markets at delivered prices
  under 4.50. (AGA/EEA 2006)
• 2006 by 2010, U.S. imports of LNG will exceed
  the requirements of either Europe or Asia.
  (EPRI)
• 2007 Florida LNG to the Rescue. (CERA)

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Optimism All Around LNG Prices Would be low and
stable
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Optimistic Supply Projections to 2008 From as
Recently as Three Years Ago Never Materialized
- - - Latest EIA estimates for 2008 is 784 BCF
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Optimism Still Persists Projected Global Supply
of LNG in 2015
All projections made in 2007
- - - Current LNG Supply
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Optimism Dominates Projected North American LNG
Imports in 2015
- - - 2007 LNG Import Level 784 bcf/d
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Increasing recognition of supply constraints

• the global LNG market points to a future where
  the supply demand balance becomes increasingly
  tight as new liquefaction projects suffer
  continuing delays. (UBS, 2007)
• Unfortunately, the supply of LNG around the
  world is not as plentiful as one would have
  thought. (Jim Mulva, Conoco Phillips, 2007)
• Current bottlenecks in upstream production and
  liquefaction capacity are tightening. (IEA,
  2007)
• Liquefaction capacity is not growing at the same
  rate as regasification capacity or global
  natural gas demand growth. (CIBC World Markets,
  2008)

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Reality Sets In The Steady Decline in EIA
Forecasts of U.S. Imports of LNG in 2008
Year Forecast Made For 2008 Imports
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The Sweep of Optimism Fades EIA Forecasted
Imports for 2015
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Construction Costs of Liquefaction Plants are
Rising Dramatically
Source Jensen Associates, December 2007.
Estimates by James Jensen
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Escalating Cost of Liquefaction Plants Key
Examples
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Breakeven NG Prices for the Six of the Largest
LNG Plants Under Construction or Proposed
Source estimated from UBS 2007
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