Thursday, May 21, 2009

LNG in Retreat?

I noticed a couple of interesting pieces this week about LNG. LNG is supposed to be the Big Shale Killer in the next couple of years. Lots of analysts believe that the price of natural gas will remain very low because the U.S. will become a dumping ground for unwanted LNG. Several countries (i.e. Qatar), produce gas at such a low price and they need the money so badly (not Qatar) that they don't blink at paying to ship it across the ocean and sell into low U.S. gas prices. In the past couple of years there have been some technical difficulties with a couple of major exporters that has suppressed the LNG supply, but these problems supposedly have been remedied.

But I'm starting to wonder if LNG will in fact be the big killer after all. This week, Freeport LNG, operator of a major LNG port off Texas, asked the federal government for approval to convert the port into a re-exporter of LNG. In other words, the port would receive the gas then turn around and ship it back out to markets that pay more for gas. It sounds like a good way to get rid of a product that they will have trouble selling, but it seems odd and somewhat desperate. The port has not received an LNG shipment since last May, so it's not like they've got anything better to do.

But clearly not such a bad idea since Cheniere Energy, operator of a big LNG port at Sabine Pass (and a minority owner of Freeport LNG), has asked for similar approval. Sabine Pass has also gone many months without a shipment. Cheniere, which is entirely focused on the LNG import business, has lots of problems, as noted in a piece in Barron's that suggests the company might default on payments for its $3.1 billion of debt (Barron's article - requires subscription; commentary on article - no subscription).

As long as gas prices stay higher in Europe, I doubt we are going to see a bunch of ships filled with LNG plying ocean waters to get to our shores. The biggest concern is storage capacity overseas. If the gas can't be physically stored, the U.S. is the natural place to send it. Clearly there is lots of unused capacity at LNG ports.

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