5.4. ERMUSR 01-15-2008 - Laserfiche WebLink

Home Browse Search

~ PACE Fourth Quarter 2007 demand of roughly 23 Tcf and 4.0 Tcf of storage capacity (~17%). Therefore, the U.K.'s ability to prepare for, and ultimately serve, peak winter demand is extremely limited. In addition, as illustrated in the following exhibit, the U.K. natural gas market has a distinctly seasonal pattern. Lack of storage and significant seasonal demand characteristics, leads to soft prices in the traditional off- peak summer season and "must have" high prices in the peak season to attract global LNG. Exhibit 1: Gas Prices & LNG Imports Forecast (2005-2015) ~ s.o ta.o f z.o to.o 'G 8.0 m s.o a.o z.o o.o Source: EIA, Pace What's next? As of November 16, the Tokyo Electric Power Company, owner of Kashiwazaki-Kariwa, did not include power output from the facility in its winter supply capacity forecast. So, LNG imports there should be expected to continue at high levels (October was up 23% year over year) throughout the winter of 2007-2008. Longer term, Japan will remain a large importer of global LNG but it is not expected to be a major competitor for cargoes otherwise destined for the U.S. We should expect the U.K., with a peak winter demand three times that of the summer and extremely limited storage capacity, to continue to outbid the U.S. for LNG cargoes it deems necessary to meet winter heating requirements. Especially when, as is the case in 2007, the vast underground storage fields in the U.S. are flush with gas -- high storage levels, mild winter weather projections and strong domestic gas production offer little support for the dramatic increases in prices necessary to compete with desperate bidders in the U.K.' A pattern in which summer cargoes fill U.S. storage facilities and winter cargoes serve European demand will continue in the future. The larger long-term question here is whether LNG supply will be available. If all goes as currently planned, (which, admittedly, promotes hope over experience) global liquefaction capacity will increase another 21 % in 2008, 17% in 2009 and 18% in 2010 - a 67% increase in world production capacity over the next three years. New liquefaction plants require a huge upfront investment and, once operational, have very low marginal production costs, so these plants are expected to run 24 hours a day, 365 days a year, for the life of their underlying production basin's life (25-70 years). With China and India at least temporarily sitting back because of high prices, where will all this new supply go? It seems likely the answer is that it will go to the market big enough to absorb the gas, the United States. 'Of course, there is no explaining the impact of market vapors Spot gas prices in New York City went as high as $24/MMBtu in mid December, despite ample Proprie[ary and Confidenda/ -2- www.paceglobal.com Is Liquefied Natural Gas a Dream or Reality? N CJ fh {+~ {'J V ~ ~ O N 1° h h 10 Ip 10 f0 4 4 4 4 4 4 g q R 9 4 4 4 4 q 4 4 4 4 R ~ Q~ O~ Q~ O~ Q '~ O~ Q~ O~ Q~ O ^ Energy Sector ^ Power Generation ^ Industry ^ Residential 8 Commercial ^ Other Final Users