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Liquefied Natural Gas: How It Affects the Energy Market

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After hearing the news that our parent company, Centrica plc, signed a 20-year agreement to purchase liquefied natural gas (LNG), I thought it would be a great time to explain what LNG is and how it works. So, here goes nothing.

LNG is the result of cooling natural gas to about -260F, turning it from a gas into a liquid, coined liquefaction. Why cool natural gas to the point where it liquefies? If you want to transport it long distances and a pipeline isn’t available, liquefying the gas is the only option. The process increases natural gas’ energy density greatly, allowing it to be economically shipped. Countries that have few natural resources but strong economies, such as Japan, South Korea and Great Britain, are large importers of LNG. They have little or no domestic production and building a pipeline across large bodies of water isn’t feasible. These and other countries rely on LNG cargo tankers to supply their natural gas needs. The tankers resemble oil tankers but are specially constructed and insulated to carry the super cool LNG. The tankers dock at a terminal in the receiving country and a process called regasification takes place, or turning the liquid back into a gas so it can be injected into the pipeline infrastructure.

The US exports no natural gas via LNG; however, it does export some gas to Mexico via a pipeline. Due to the U.S. shale boom, prices here have fallen far below the price for natural gas (NG) worldwide. U.S. producers of NG are eager to take advantage of the higher prices abroad - often four times higher than prices in the US - and are making plans to build export facilities to sell their gas around the world.

The ironic twist is that prior to the shale boom in 2006-2007, LNG import facilities were being built because it was thought there wouldn’t be enough domestic production to meet future demand. Times have changed. The process for liquefaction is different and more costly than regasification, or turning liquid into gas, so the LNG import facilities can’t be used to export without heavy modifications. With a few exceptions, many import facilities around the country are unused while permits are being filed to start construction of export facilities. Currently, one export facility is fully permitted and under construction - the Sabine Pass Liquefaction Project in Cameron Parish, Louisiana owned by Cheniere Energy and scheduled to begin operations in late 2015. There are several other proposed facilities at various stages undergoing an arduous permitting process.

One region that still relies on LNG imports is the Boston/northeast area.  As I mentioned in an earlier blog post, there’s a shortage of pipeline capacity to bring less expensive shale natural gas into the region leaving Boston to rely on LNG imports. Because LNG commands higher prices around the world versus the US, the Boston area is forced to pay more for LNG cargoes in order to meet its needs.

Some main LNG exporting countries include Qatar, Trinidad and Tobego, Nigeria, Algeria and Australia.  U.S. producers are hoping to expand their infrastructure to better compete with them. Development of shale resources in other countries such as China is another source of competition, but the US is far ahead in technology and infrastructure, and therefore, has a significant head start.

There’s an ongoing debate about the costs and benefits of exporting natural gas from the US. End-users led by large industrial consumers argue that exporting will increase demand, and thereby push prices harder, which could hurt the U.S. manufacturing sector. This argument has merit, but the energy industry argues that additional jobs and profits from growth to the natural gas sector far outweigh the impact of higher prices on energy consumers.

Most experts believe that at least two to three large export terminals will be built with the ability to export at least 5 Bcf per day later in this decade. Development beyond that is uncertain due to a combination of opposition from industry, possible government regulations and the high construction costs of the facilities.

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