LNG Imports Grow in Time of Supply Surplus: Why?

June 2009

• As the recession continues and natural gas prices remain low, one may question why there is a growth in liquefied natural gas imports by the US.
• The US has the storage capacity when other consumers of LNG limit their imports.
• Despite the recession, LNG infrastructure projects are coming into service so the recovery of construction costs can begin.
• Natural gas liquids may offer a more attractive profit than LNG.

As the recession continues and natural gas prices remain low, one may be struck by the growth in liquefied natural gas (LNG) imports by the US.

According to the US Energy Information Administration, the US has a surplus in gas inventories and natural gas output has only recently begun to decline. With supplies already exceeding demand, one may wonder why LNG imports into the US would grow, exacerbating a situation of excess supply.

US has the storage capacity

The US acts as a 'dumping ground' for LNG because of its large storage capacity. LNG normally forms an important share of the energy supply in countries that are large consumers of natural gas but lack pipelines. Examples of such countries include Japan, Korea, and Spain. If these usual destinations limit their imports, producers of LNG would send their output to an area, in this case the US, where it could be stored for future use or used immediately.

Despite recession, infrastructure projects are coming into service

The infrastructure required for the production and receipt of LNG has been coming into service gradually as projects are completed. The trend toward constructing LNG infrastructure has existed since the early part of the decade, but the realization of these projects has been hindered by delays and cost overruns.

For example, LNG re-gasification facilities that were to begin operation in the last couple of years are only now coming into service - and in the middle of a recession. The proponents for such projects, which were planned during better economic times, might have scaled back or even cancelled the projects if they had been able to anticipate the depth and intensity of the current recession. But with construction now complete, operation of the facilities often begins, despite the weak demand for natural gas, in order to begin recovering the costs.

Natural gas liquids may offer a more attractive profit

The production of natural gas yields natural gas liquids (NGLs). Natural gas liquids include ethane, propane, and butane. They are used not only in final products such as barbeque propane, but also as raw materials, or feedstock, in industrial processes (e.g., ethane is used in ethylene production which in turn is used in the manufacturing of plastics). As natural gas and LNG are but two products of the entire production process, it stands to reason that if producers can realize a profit in the sale of NGLs, it may not matter much that their profit margins for natural gas or LNG are near-zero or even negative. This particular idea has been suggested, among others, by G. Allen Brooks, managing director of the energy investment banking firm, Parks Paton Hoepfl and Brown.

Impact of growth in LNG imports

One potential effect arising from the growth in LNG imports could be pressure on natural gas markets that prolongs the current situation of excess supply and low prices. In turn, this pressure could exert itself to the point where US producers of natural gas decry the globalization of their markets and lobby for protection. For the time being, however, low natural gas prices and an abundance of supply are supportive of gas-fired generation. Indeed the EIA is forecasting that growth in natural gas consumption in 2009 by electric power generation will offset the decline in consumption by industrial users.

Role of LNG in North American Markets Read more»