North America has long enjoyed a competitive advantage for energy supply relative to other industrialized nations due to abundant supplies of natural gas that could be produced relatively inexpensively. Natural gas supply basins in Texas, the Mid-Continent, the offshore Gulf of Mexico and Canada - accounting for more than 50 percent of North American production - have exhibited sharp declines since 2000.
This natural “maturation” and decline of existing gas basins show no sign of improvement, and despite record drilling activity, reserve additions are not keeping pace with depletion. Natural gas basins in Western Canada, which supply about 17 percent of the U.S. markets, are also showing signs of aging. This coupled with increased Canadian demand has caused gas imports from Canada to flatten. |
The short term market response to these declines has been a sharp increase in prices which encourages marginal production, but also results in reduced demand. The long term effect of high prices can be damaging to our industry and economy. Sustained high energy prices lead to permanent demand destruction in energy intensive industries. The demand destruction scenario can be avoided through a supply response which brings incremental supplies into the North American market to offset production declines and fuel growth.
LNG is the only available near-term solution which can provide a significant supply response at reasonable prices. It is time for the North American natural gas industry to position itself in the world gas market to compete for new LNG supply.
In the next few years, LNG will become an increasingly important component of the North American gas portfolio. The direct role of the utility as a LNG buyer has yet to be defined in the North American market; and LNG suppliers are in the process of defining the appropriate supply strategy for North America.
The liquidity and price transparency of the North American gas market has enabled the industry to migrate toward short term gas supply agreements at pools. This purchase behavior is not adequate to support the investments in the upstream infrastructure and guarantee the consistent dedication of LNG supplies to North America. Long term contracts will be required for U.S. utilities to exert influence on the LNG supply and ensure consistent deliveries to North America.
The U.S. call to action for LNG development by President George Bush, former Secretary of Energy Spencer Abraham, and former Federal Reserve Chairman Alan Greenspan helped spur an international supply response. Projects currently under construction or in advanced development will increase worldwide LNG production from 23 Bcf/d to almost 36 Bcf/d by 2010. This incremental supply is more than enough to satisfy the U.S. near-term needs, but we will have to compete with other worldwide consumers for our share. Without long-term contractual commitments from U.S. consumers, new supply will become dedicated to other markets, leaving the U.S. dependent on the spot market. Utilities must recognize the need for a “strategic decision” and the importance of their role with regard to LNG.
Building strong relationships with industry leaders is critical to bridge the gap between suppliers and consumers to secure LNG supplies for the North American market. The U.S. economy, the natural gas industry and the consuming public will benefit from stable energy prices and increased global access to gas supply, but success will require vision and initiative. Cheniere is offering discounted terms to key industry leaders to encourage and reward early movers.
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