Tuesday, October 31, 2006

If we build it, will they come?

The "we" refers to North America. The "it" refers to liquified natural gas (LNG) ports. And, the "they" refers to LNG tankers from exporting countries. Unfortunately, the answer to the question is "probably not," at least not in the numbers we would like them to come, according the energy investment banker Matt Simmons and resource economist Douglas Reynolds, both of whom attended the recent Association for the Study of Peak Oil & Gas - USA conference in Boston.

Surprisingly, governments, industry and the public continue to behave as if they were members of a cargo cult confident that enough LNG ships will arrive to avert a disaster. Unfortunately, the facts don't support their optimism. Exactly one new LNG port has been completed in North America since the 1970s. That makes only five total. Some 17 are in the planning and approval stages; but perhaps more telling is the fact that at least 11 others have been cancelled. The completion dates for those that survive cancellation are in many cases years away. Given the rising demand for natural gas and the obvious plateauing of supply in North America, how can it be that more ports aren't being built (not just planned) and quickly?

Matt Simmons thinks he has part of the answer. Simmons, who has freed himself from the day-to-day chores of running his eponymous investment bank, said he spends most of his time poring over energy data and news. During an impromptu question and answer session between presentations at the Boston conference, he laid out the problem with LNG imports.

He explained that the exploration arms of oil and gas companies are not spending money on the needed appraisal wells in countries with large natural gas reserves such as Qatar. This is in part because such wells have become very costly as prices for everything related to drilling and exploration have gone through the roof. The result is that financing--which can reach into the hundreds of millions for a single LNG port--has been hard to line up. Investors want to know that there will be a reliable supply for decades for their LNG port. Simmons believes there simply isn't enough information to assure many potential investors.

In a separate conversation, Douglas Reynolds said that part of the problem is that national oil and gas companies which control huge gas reserves in places such as Iran, Qatar, and Saudi Arabia are really arms of their respective governments. These companies are risk-averse and tend to spend minimally on exploration while transferring much of their current profits to their governments for social and military spending. Unlike investor-owned oil and gas companies which want to get resources out of the ground as quickly as possible in order to maximize profits, national companies have little incentive to produce more than they need to in order to generate the profits required to fund government spending.

Add to that the fact that most of the natural gas available for export via LNG tanker is found in the Middle East, an area not particularly known for its stability. And, even though the world's largest gas reserves are found in Russia, this should provide little comfort to those living in North America. The Russians recently decided to scrap a project that would have sent LNG to the United States in favor of sending the gas through pipelines to Europe.

The increasing competition for natural gas worldwide may leave North Americans without reliable LNG supplies. Indonesia announced earlier this year that as of 2010, it would keep more of its own gas for domestic use and decrease the amount going to Japan. That means that Japan will be bidding on the remaining available export supplies of LNG after that date. This development also highlights the possibility that projections of what will be available for export in the next decade may not meet expectations since countries which currently export will use more of their own gas.

Beyond this there are questions about the adequacy of world supplies. The conventional wisdom among those who see a peak in oil production within the next decade or so is that a world peak in natural gas production could come sometime around 2030. The data is so elusive that no one is making very precise predictions.

Two worrisome developments, however, imply an earlier peak, perhaps much earlier. First, 80 percent of Russia's production comes from three giant fields, all of which are in decline, Simmons explained. Second, according to Reynolds, a peak in natural gas worldwide may be caused as much by political factors as geological ones. The low exploration budgets of the national oil and gas companies and their reluctance to produce all out will inevitably shift any peak forward. This path, however, would mean a smoother production arc for world natural gas and slower declines on the downside as gas production which had been held back by the national companies is finally brought to market.

Meanwhile, in North America Simmons said that a single cold winter could create an immediate crisis not only for home heating and industrial feedstocks, but also for electricity which is increasingly generated by natural gas fired plants.

But, perhaps even more disturbing, Reynolds believes that natural gas production declines in North America which have been gentle so far will ramp up to perhaps 5 percent annually starting in 2007 or 2008 and create a natural gas cliff. That in itself could cause a crisis even without a cold winter. But a combination of the two would be truly devastating.

Unfortunately for residents of North America, LNG imports will have little cushioning effect if a natural gas cliff arrives this coming winter or within the next several years. For that reason it is truly puzzling that no one in government is talking about the one option left: a massive conservation effort to buy us some time. The only thing that can explain such obliviousness is that cargo cult thinking continues to overpower all the warnings that are now in plain view.

1 comment:

Shane said...

I wondered about this from a slighlty different perspective when an Australian company (BHP or Woodside?) was lobbying in California for a LNG port to recieve LNG from the north west shelf of Western Australia.

My thinking was, why would a ship owner waste all that time crossing the Pacific when India, China and Japan are just around the corner? Any delivery to the US west cost would extract a large premium surely? Or is the time spent at sea a small fraction of the trip? How long does it take to load and unload the gas and how much more energy is involved in that?