LNG Imports Into North America and Implications

Abstract The need for LNG to fill the natural gas supply gap in North America may increase dramatically to 2015 and beyond as natural gas demand increases at rates higher than most observers expect. Developing CO2 legislation, increasingly advantaged gas-fired generation, oil sands demand, and biofuels demand could drive a greater than expected demand for natural gas domestically, with LNG imports expected to fill the gap. However, LNG liquefaction is expected to continue to be short to 2015 and beyond. These shortages are driven by increasing liquefaction costs, contractor/crew shortages, reserve access issues, project delays, and the often overlooked increasing domestic demand in the LNG exporting counties. Increasingly, LNG contracts will include flexible diversion clauses allowing movement of LNG supplies to markets other than originally contracted markets. Although there is some baseloaded North American LNG, significant LNG is attracted to North American regas based on price/producer-net-backs when other regions have adequate supplies to meet needs. The trend toward greater LNG flexibility could strengthen the linkage in North American natural gas pricing to alternate fuels through competition with Europe for LNG volumes priced at residual fuel oil and eventually with Asian crude-linked LNG. North America will compete with Europe and Asia for marginal LNG supplies unless European end users have over-contracted for LNG, which may well be the case. European and Asian end users, with based-loaded LNG, will retain LNG supplies, when needed, to fill supply needs irrespective of price. Over-contracted European LNG, if it were to flow to North America, would represent approximately 10 percent or more of U.S. and Canadian demand in 2010 and would go a long way in meeting a potential supply short-fall. With LNG at the margin, mechanisms impacting the level of North American LNG imports influence natural gas pricing, which in turn impacts gas producer and power generator profitability and company valuations. Introduction North American natural gas demand, domestic supply, natural gas price setting mechanisms, Atlantic Basin pricing dynamics, and contracting regulations and practices for electric and natural gas utilities all impact the level of LNG imported into North America. The resulting flows of LNG, especially into the U.S., have very significant implications for the global LNG trade, as well as substantial and far-reaching implications for producers, LNG developers, end users, and policy-makers.