S&P discusses challenges looming for natural gas industry

Pipeline & Gas Journal, April, 2005 by Royal F. Shepard, Yogeesh Wagle

The U.S. energy industry faces a significant challenge in satisfying the nation's growing demand for petroleum products, and natural gas in particular. There is little doubt that domestic natural gas production will continue to fall short of consumption. In its Annual Energy Outlook 2005, the Energy Information Administration (EIA) forecasts consumption of natural gas will increase at an average annual rate of 1.5% through 2025, while production is expected to increase by 0.6% annually. This incorporates the commencement in 2016 of a new natural gas pipeline delivering currently stranded reserves in Alaska.

Historically, Canada has been an important supplemental supplier of natural gas to the U.S. market and has accounted for most U.S. imports. The maturation and decline of production in the crucial (close to 98% of Canada's 2004 production) Western Canadian Sedimentary Basin, however, suggests Canada will have difficulty meeting our growing long-term needs. In 2003, pipeline imports from Canada fell about 8% and initial 2004 numbers show a modest (2%) increase. The Canadian National Energy Board has forecast that conventional production (excluding potential natural gas from coal) is likely to remain flat at least through 2006 (1).

We believe that the diversion of natural gas toward increasing production from Alberta oil sands will impact natural gas available for export to the U.S. in the future. In February, TransCanada Corp. proposed a new pipeline for transporting 400,000 barrels per day of heavy crude oil from Alberta to Illinois, which would require the conversion of 770 miles of its existing natural gas pipeline.

There is concern that a dispute between Canada's two biggest pipeline companies, TransCanada and Enbridge, over rights to build the Canadian portion of the Trans Alaska pipeline could end up in litigation and significantly delay completion of the project. The Alaskan Legislature in due to consider legislation in May authorizing the Alaska segment of the pipeline with a goal of starting operations in 2012.

Plans are continuing with regard to a new pipeline to the Mackenzie Delta and may yield significant supply from stranded fields in the Canadian north early in the next decade. Nonetheless, we would expect very little investment in additional import capacity between the U.S. and Canada. One possible exception is a link between new resource development in the Canadian Maritimes and the northeastern U.S., although local environmental concerns may stall significant progress.

Standard & Poor's believes imported liquefied natural gas (LNG) will become an important alternative in addressing the widening supply/demand imbalance. Natural gas needs to be liquefied in order to ship, but can be regasified and injected into existing pipeline infrastructure. In 2004, 652 Bcf of LNG was imported, a record high, and an increase of about 29% (2). To date. Trinidad and Algeria have been the principal exporters. We expect additional overseas suppliers to quickly emerge. Qatar, which holds large natural gas reserves, has indicated its intention to be the world leader in LNG. It has signed a string of agreements with major energy companies to develop and ship its resources to international markets, including North America. Essential to developing new sources is expanding the number of LNG import terminals.

The U.S. has had four existing import terminals in operation since August 2003 with estimated peak capacity expected to reach about 1.4 Tcf annually over the next two years (3). In September 2003, Sempra Energy's Cameron LNG terminal near Lake Charles, LA was the first new facility to gain FERC approval in 25 years. The facility, expected to be completed in 2008, will have an initial throughput of 1.5 Bcf/d. A second facility, in Freeport. TX was approved in June 2004. The EIA has tracked dozens of additional facilities currently before regulators, although it is uncertain how many of these will actually be built. Still, the EIA estimates LNG imports will increase by almost 13% per year from 2003 through 2025 (4).

Reflecting local environmental concerns, we think most new import terminals will end up along the Gulf Coast and in neighboring countries. New terminals in Baja California, Mexico, such as Sempra's Energia Costa Azul LNG project, are expected to meet local energy needs, while at the same time, providing significant supplies for the Southern California market. Energia Costa Azul, one of four projects proposed on Mexico's Pacific coast, is scheduled to start operations in early 2008. Another area of activity has been Eastern Canada.

In September 2004. TransCanada and Petro-Canada agreed to develop a LNG at Gros Cacouna. Quebec capable of receiving about 500 Mcf/d. Provided the necessary regulatory approvals are received, it is expected the facility will be in service toward the end of the decade and be able to supply natural gas to the northeastern U.S. via existing pipelines. With six proposed LNG projects in the eastern Canadian provinces of Quebec. New Brunswick and Nova Scotia, we believe LNG imports via Canada will be key to meeting growing natural gas demand in the Northeast.