On Careful Scrutiny...
 U.S. LNG TRADE IS EXPECTED TO ACCELERATE

According to the U.S. Energy Information Administration (EIA), the U.S. economy is expected to accelerate LNG imports over the coming two years, after two years of decline. The expansion of LNG imports this year and next will result from supply expansion, including up to three new countries joining the list of global exporters. The EIA forecasts year-on-year increases in U.S. imports of 34.5% and 38.5% for this year and 2008 respectively.

In the coming year, imports are expected to approximate 770 BCF as exports from Nigeria and Trinidad increase with the availability of more feedstock gas. “Additionally, a greater portion of current exports from Nigeria and Trinidad and Tobago are expected to come to the U.S. as world prices adjust to lower demand growth in LNG in Asian and western European countries,” the EIA said in a short-term energy outlook supplement.

By the end of 2008, exports from three new countries, Equatorial Guinea, Norway and Yemen, are also expected to begin. Equatorial Guinea is expected to become the world’s 14th LNG exporting country during the coming year. By the end of last year the Marathon Oil-led project on Bioko Island was 85% complete, the EIA said.

BG Group has contracted supplies from the one-train facility and focused on the U.S. as a market. The administration expects further growth in U.S. LNG imports in 2008, with the arrival of supplies from Norway’s Sn?hvit project. Statoil has contracted capacity at the Cove Point import terminal in Maryland.

New supplies are also expected to arrive from Yemen by late 2008, with the U.S. again expected to be one of the principal target markets. However, the Total-led project near Al Mukalla is not expecting full operations until early 2009.

Finally, the Sakhalin II project in Russia is scheduled to begin operations next year, although supplies from this project are not likely to enter the U.S. directly in the next two years. Mexico may import LNG from Sakhalin II through the Costa Azul terminal in Baja California. The terminal’s owners have chosen U.S. markets as a final destination for this gas through a pipeline.

With this increased availability of LNG, the EIA expects U.S. imports to reach 1.08 TCF in 2008.

This marks a sharp departure from the experience of the past two years when the U.S. had been priced out of the market. Recent competition for LNG cargoes from buyers in western Europe and Asia has resulted in prices exceeding the corresponding natural gas market price in the U.S.

“During periods of high global LNG demand and rising prices, LNG cargoes will continue to be diverted to countries that are more willing to pay the highest prices,” the EIA observes. “However, increasing global LNG supplies will ease price pressure in the world market over time, and as a result the U.S. is likely to attract a greater share of available LNG cargoes.”
 

The brighter outlook for supplies of LNG from traditional and newer sources is fortuitous in that the U.S. is facing potentially serious supply shortages of crude and refined products. Many energy observers believe that the world has either passed, or is about to enter, an inflection period of “peak oil” and that the major industrial economies of the world will have to scramble for limited supplies of energy at ever-higher prices.

Compounding the international stress is the emergence of China and India with their burgeoning economies that require massive, incremental inputs of energy to attain ambitious national goals. Despite all the talk of these two economies slowing from super-charged rates, the reality is that even if both slowed by half, they would still exert inordinate strain on a very fragile international equilibrium.

Over the coming 5-10 years, it is likely that LNG will occupy a more prominent role in balancing demand/supply equations in many of the industrialized countries of the world. The U.S., which has witnessed external pressure on LNG supply from unusual circumstances abroad, is virtually certain to enjoy a long period of rising activity, which may result in it becoming the largest global importer of LNG by 2015.

Receding Nuclear Demand Aids LNG

Nuclear power’s share of global power supply is likely to shrink over the next few decades as political indecision and public opposition limit its growth. Even industry optimists do not see a significant expansion in nuclear power’s share of electricity production over the next few decades, despite governments warming to it as fears over climate change and security of imported energy supply intensify.

“In relative shares, in most projections out to 2030 nuclear power is going to decline,” Hans-Holger Rogner, head of nuclear energy planning at the International Atomic Energy Agency, said.

The IAEA expects nuclear power to produce 12%-13% of global electricity by 2030, down from the current 16%, while the International Energy Agency forecasts 10%-14%. But Rogner said that long construction lead-times, planning complexities, shortages of trained nuclear engineers and residual public apprehension all mitigated against progress in the nuclear energy industry.

“Even if there is a momentum of rising expectations for nuclear power, it will take time to propagate to the system,” Rogner said. “Many countries, even nuclear countries, have lost the capability. They don’t have the licensing authorities in place any more, and they have to re-educate their people.”

The IAEA forecasts an increase in nuclear generation capacity of 20%-30% by 2030, but overall electricity generation capacity is going to double in that period. With most of that incremental demand met by coal, renewables and gas-fired plants, nuclear is likely to lose market share.

Beyond 2030 is extremely difficult to predict because of the uncertainty of whether fears over climate change will override the fear of nuclear power that still lingers 20 years after the Chernobyl nuclear disaster and the near-miss at Three Mile Island. The recent incident at Indian Point in New York state, with a large escape of radioactive water, will certainly not help the nuclear industry’s cause.

“One accident could set everything back,” Rogner said. “If we have a little bit more climate catastrophe it may just go the other direction.”

If there is a shift towards nuclear over the next few decades, amid accelerating climate change and diminishing fossil fuel reserves, nuclear may gain market share, but not until the middle of the century and beyond.

The global response to climate change, together with soaring oil and gas prices, has helped nuclear power emerge from the shadow cast by Chernobyl. But growing political discussion in the developed world about the benefits of the technology has yet to result in large-scale nuclear construction programs, while Europe’s aging, state-built reactors operate at the edge of life expectancy.

“Is it just lip service that our politicians pay or do they really mean it?” Rogner said. “That will make a difference over the next 20 to 30 years.”

Because of the costs involved in building new nuclear plants and disposing of the waste, private companies demand investment security from governments, particularly a long-term, global penalty on carbon emissions. There is no sign of that yet.

Even where there is a penalty for carbon emissions, potential investors in new European reactors are reluctant to commit to new nuclear construction, because Europe’s CO2 trading scheme currently ends in 2012.

“It’s hard to see private industry investing in nuclear power stations without guarantees from government, not only for carbon but also for waste disposal and decommissioning,” Andrew Nind of Poyry Energy Consulting said.

Nind said that increasingly liberalized markets of Europe discourage new nuclear construction, but that growing environmental concerns might force governments to assume enough of the risks involved to encourage private industry to build.

“A lot will depend on the weather and the political will to do something about global warming,” he said.

Obviously, LNG will become one of the most immediate beneficiaries of the receding share of supply that awaits the nuclear industry. A greater percentage of power is being generated by natural gas as a result of a growing groundswell of demand that was created by fears of noxious emissions and atmospheric warming from oil and coal. Natural gas is the least onerous of the traditional fuels supplying power plants and fuel for power generation is one of the fastest growing areas of the energy sector.