The Future of Natural Gas Markets Liquid Natural Gas

History of Natural Gas  First observed thousands of years ago  Chinese burned gas 2,500 years ago to make salt  1816: First lamps in Baltimore  1821: First well – only 27 feet deep  Currently produced in 32 states

Natural Gas Uses  Heating for homes and businesses  Generation of electricity  Manufacturing  Ingredient in fertilizer, glue, paint, and detergent  Transportation

Natural Gas Issues Price Volatility

Price Volatility  What Causes Price Fluctuations? –Inherent variation in demand –Supply interruptions –Weather  spikes in winter, small spike in summer –The fluctuations themselves!!  Contracts vs. spot pricing

Price Volatility Natural Gas Supplies

What Does This Mean?  Increased natural gas costs are passed along to consumers in… –Higher home heating bills –Higher electric bills –Higher cost of goods that use natural gas in production  In general, higher natural gas costs cause significant inflationary pressure

Natural Gas Pricing Effect  Natural Gas Pricing Example –Methanol – manufactured from natural gas  Uses NG for heating and as a feedstock  Pricing incorporates NG component  Price of MeOH responds to changes in NG MeOH = $ * ($ NG)

One Potential Solution Liquid Natural Gas (LNG)  Liquid Natural Gas –Condenses at -260 o F –Takes up 1/600 th the volume of natural gas  Much cheaper to transport –More pure than natural gas  Liquefaction removes S, CO 2, H 2 O, O 2

Liquid Natural Gas  History of LNG –First produced by Michael Faraday: 19 th century –First LNG plant in West Virginia: 1912 –First LNG tanker: The Methane Pioneer: 1959  35,000 bbls. from LA to UK –Subsequent plants in Algeria, Trinidad and Tobago, and the UK

Liquid Natural Gas  Production Process –Liquefaction  Auto-refrigeration –Shipment  Large Tankers –Regasification  Increase pressure and then slowly warm

Liquid Natural Gas  Current Situation –US regasification terminals in…  Cove Point, MD  Everett, MA  Elba Island, GA  Lake Charles, LA –Main supply from Trinidad and Tobago, some from Qatar, Algeria, Nigeria, UAE –113 total storage, production, transportation sites in the world

LNG Safety Issues  Explosion –Natural gas only burns in the presence of O 2  NG concentration of 5-15% –LNG is pure methane  No explosion hazard  Spills –No slick created in a spill occurs  NG quickly dissipates  Worker safety –No deaths/injuries/accidents in 25 years at US plants –No spills, fires on any ship

Liquid Natural Gas Usage  Liquid natural gas use –Is currently 1-2% of total NG consumption –Estimated to rise 15.8% per year through 2025  30% of total by 2025  Natural gas reserves –Current proven NG reserves = 5,919 tcf  3% NG use growth rate  CURRENTLY PROVEN reserves exhausted in year 2106 –US NG reserves = 183 tcf

Liquid Natural Gas Usage

LNG Issues  Tankers –136 tankers currently in operation, 57 ordered –Very large!!  130,000 m 3 of LNG  2.70 bcf of NG –Potential explosion hazard  Energy equivalent of 0.70 megatons of TNT  Regasification plants –Plans to build in major cities – New York City

LNG Production  Much of world’s NG is in remote locations –NG extremely cheap in these areas  example: Saudi Arabia NG = $1.50/MM BTU United States NG = $7.13/MM BTU United States NG = $7.13/MM BTU  Based on economies of scale  Used as needed –“turned on” or “turned off”

LNG Production Costs -BUT... Costs are decreasing

LNG Production Costs Decreasing  E&P costs –3D seismic modeling –Complex wall architecture –Improved sub-sea facilities  Under-sea production  LNG plant capital costs –Design efficiencies –Technology improvements

LNG Production Costs Decreasing  Tanker costs –Ship size increasing –Ship power system efficiency improvement –Longer operating lives  Regasification costs –Plant costs down 18% in last 20 years

Current Production Costs  Current production cost –$1.80/MM BTU –Feedstock cost  Varies by production location  Current total cost = $ $4.00/MM BTU

The Future of Natural Gas  LNG theoretically provides a “cap” on NG prices –If NG costs more than $4.00/MM BTU, LNG is imported –If NG costs less than $4.00/MM BTU, LNG not needed

References  Institute for Energy, Law, and Enterprise  Nymex Commodity Reports  naturalgas.com  lngfacts.org  Department of Energy  California Energy Commission  energy.uh.edu  Energy Citation Database  The Center for LNG

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