5.4. ERMUSR 01-15-2008 - Laserfiche WebLink

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~ PACE Fourth Quarter 2007 On the heels of establishing record high levels of liquefied natural gas ("LNG") imports into the U.S., November imports hit their lowest levels in three years. Of course, members of the easily-spooked "permanently short" club suggest that the dream of LNG is over. Could they be correct? A closer look at fundamentals in the global LNG market suggests otherwise. The year 2007 began with "normal levels" of LNG imports in the U. S. -around 1.5 Bcf per day for January and February. March came as a pleasant surprise to the U.S. natural gas market when LNG ships lined up to its domestic ports and imports climbed to nearly 2.9 Bcf per day for the month and up again to just over 3.1 Bcf per day in April, a level that was more or less maintained through September. Many in the industry agree that the sudden increase in U.S. LNG traffic can be attributed to increased global liquefaction capacity coming online over the winter of 2006- 07, as well as increased natural gas production from Norway and mild weather in the U.K. and continental Europe. Still the question remains, what happened in November? To be certain, there are many factors at work in the intricacies of the global LNG market, but for the purposes of simplicity we will focus the account on two markets which had the greatest amount of influence: Japan and Europe. On July 16 the world's largest nuclear generation facility, the 8.5 gigawatt Kashiwazaki-Kariwa plant, sustained major collateral damage from a 6.8 magnitude earthquake. Efforts have been underway to repair the facility and bring it back online. Meanwhile, Japan is buying up massive quantities of LNG, coal and fuel oil from the global market to run thermal plants (which were previously offline) in an attempt to maintain the integrity of the power grid so they may continue to churn out steel and big boats that carry -wait for it -LNG, coal and fuel oil. This is having a significant, likely short term, impact on the global LNG and dry bulk shipping markets. The European gas market is the main competitor for LNG to North America, where prices in each of the relevant markets - U.S., U.K. and continental Europe -determine the course of LNG cargoes throughout the year. Transportation economics play a role in the transatlantic arbitrage as opportunities to redirect ships occur when the price differential for a commodity exceeds the corresponding transportation costs. However, the larger question is that of the commodity cost on either side of the ocean and underlying pricing dynamics of their respective markets. Europe is surrounded by major gas supply provinces which include the North Sea, Russia and Algeria. However, due to geological constraints, there is lack of natural gas storage in the region. The U.K. has particularly limited working gas capacity, especially evident when viewed as a percentage of its consumption. The U.K. consumes approximately 3.6 Tcf of natural gas per annum and has but 141 Bcf of storage capacity (~4.0%), in comparison to the U.S. which has an annual Proprietary and ConfidenAiai www.paceglobal.com Is Liquefied Natural Gas a Dream or Reality?