A merchant market in liquefied natural gas may begin to develop in 2008 to 2009, when power producers will have potentially dealt with another three or four consecutive years of high natural gas prices, say Lasan Johong, analyst at RBC Capital Markets.
Johong considers utilities and pipeline companies to be major candidates to get involved in merchant LNG. He also sees gas prices coming back down to earth as LNG becomes a big part of the equation, with prices falling to the $4.50 range. He also anticipates that construction of LNG facilities will not be centered around the Gulf of Mexico, but will be spread out along coastlines off the shores of major metropolitan areas, to save on the costs of moving the gas.
“Any major city [government] will think, ‘Do I really want to pay shipping charges, $1 or more, when I can put a facility 20 miles out on the Atlantic Ocean?’ “The placement of LNG terminals close to the plants that would consume the fuel could also raise serious issues for pipeline companies, says Johong.
Johong looks to Sempra Energy as a bellwether for LNG. He says that one way to know when investment in LNG is getting heady is when Sempra decides to exit. Johong says it would not surprise him if developers succumb to the temptation of building larger LNG facilities than they need, in the same way merchant power developers overbuilt, leading to a glut in supply and a decline in prices.
Among players currently involved in LNG, Johong says Cheniere Energy seems to be willing to shoulder more market risk, taking an “if you build it, they will come” approach, while Sempra is taking the opponent stance.