11 OUR EMERGING DILEMMA IN LIQUEFIED NATURAL GAS Frank Clemente Ph.D. Senior Professor of Social Science & Energy Policy Penn State University

2 We were forewarned about the consequences of the first “Dash to Gas” 1997: “if Lower-48 proved gas reserves are reported to EIA with reasonable accuracy, and inferred reserves as assessed by the Department of the Interior prove generally reliable…by early in the next century, natural gas will have become more of an energy problem than an energy solution” (Joseph Riva, Colorado School of Mines)

3 Concerns about LNG are not misplaced 1.“U.S. gas productive capacity, like oil, is now in permanent decline”. (Daniel Yergin, CERA, 2005) 2.“The North American markets are now dependent on the growth of liquefied natural gas. If we don’t get LNG, we don’t have a plan B”. (Michael Zenker, CERA, 2005) 3.“Six wildcard nations will ultimately determine the size of world LNG markets – Russia, Iran, Nigeria, Venezuela, Algeria and Libya”. (LNG Express, 2007) 4.“pricing for LNG is being forced towards oil-price parity…China’s recent decision to contract for long term LNG at market prices… may be a turning point” (UBS,2007) 5.“the US is the market of last resort for LNG…we will get the gas Europe and Asia don’t need” (Goldman Sachs, 2008)

4 Our Emerging LNG Dilemma 1.Since 2000, the U.S. has built a vast fleet of natural gas (NG) power plants and over 5 million NG heated homes. 2.Production in the lower 48 states provides almost 85% of our NG but has declined since Increased demand amidst declining supply has dramatically escalated NG prices for all consumers, including families and industry. 4.Thus, we have built a NG infrastructure where new demand must increasingly be met by sources of NG outside the lower 48.

5 Our Emerging LNG Dilemma (cont’) 5.Canada provides 13% of our NG but will be of little help. Canadian production peaked in 2004 and demand for NG in oil sands development is rapidly growing. 6.The Alaskan Pipeline may or may not be built, but flow is not projected before 2020 and prices will be high. 7.By default, we have made a risky bet on our ability to import Liquefied Natural Gas (LNG) to meet growing demand. 8.There are huge reserves of NG in the world (over 6,000 TCF) but much is “stranded” in remote areas away from existing infrastructure and will be expensive to extract and transport.

6 Our Emerging LNG Dilemma (cont’) 9.Further, much of the world’s NG is concentrated in risky or hostile nations – Russia, Iran and Venezuela have over 45%. 10.Actual LNG supply will fall short of optimistic expectations because liquefaction plants have been cancelled or delayed across the world. 11.And, since Europe and Asia are also increasingly dependent upon NG, the competition for the LNG that is available will be intense.

7 Our Emerging LNG Dilemma (cont’) 12.Prices will be higher than previously projected because major producers such as Qatar are linking new LNG contracts to the price of oil. 13.As the most distant market from virtually all major sources, the U.S. will be forced to pay the highest price. 14.In effect, for the first time in history, the reliability of our electric supply system will be dependent upon decisions made in foreign nations.

8 8 Reserves of NG are Just As Concentrated As Oil Top 5 Countries Control 60% of the Resource Oil NG Source: BP

9 9 The Steady Drumbeat of Global Natural Gas Demand Source: EIA 2007

10 Competition for NG/LNG Will Intensify Projected growth in NG consumption by region,

11 The U.S. Bets On A Brave New World Where new NG supply came from Where new supply is projected to come from Source: EIA “North America is setting itself to import LNG in large quantities” (IEA, 2007)

12 Draining Trinidad First

13 We Will Look To Distant Sources and Pay a Premium Data adopted from Drewry Shipping and University of Texas, 2007

14 Three Nations Will Account for 62% of Global Incremental LNG Supply though 2015 Sources: Goldman Sachs; UBS

15 The Risky Realities of LNG “Once LNG cargoes hit the water, they’re going to the highest-price market regardless of the type of contract you have in place”. (Bruce Williamson, CEO, Dynergy, 2007) “LNG importing countries in Asia and Europe rely on LNG imports…resulting in a willingness at times to pay prices exceeding those in the U.S. markets in order to have LNG cargoes diverted”. (EIA, 2008) “Molecules flow to dollars. Spain paid the equivalent of $14 last summer and the molecule went there and did not come here”. (James Duncan, Director, Conoco Phillips, 2006) “Turkey is paying record prices for liquefied natural gas cargoes after Iran slashed exports through a natural gas pipeline”. (Bloomberg News, 2008)

16 U.S. Will Pay the Market Price for LNG “ The U.S. will have to compete with oil linked markets long term and U.S. prices are now expected to climb with oil.” (WoodMac, 2007) “U.S. prices will have to migrate to the top of the heating oil/resid band to keep USA netbacks competitive with western Europe”. (Tristone Capital, 2008) “ Korea Gas Corp and Qatar’s Ras Gas…20 year deal was signed in November for LNG at around $11…The price varies as oil prices rise or fall”. (Gulf Times, 2007) “if the North American market wants more LNG, prices will have to rise to closer to global levels” (First Energy Canada, 2008)

17 EIA 2005 Outlook Set the Stage for Optimism * Actual was only 631 BCF in 2005 and in 2007 was 774 In 2005 EIA projected these increases through Source: EIA

18 Cavalier Optimism is Contagious and Ongoing 2004: “A tsunami of LNG tankers is headed toward U.S. ports”. (Hill Huntington, Stanford Energy Modeling Forum) 2005: “6 Tcf per year … of liquefied gas is pointed toward U.S. markets at delivered prices under $4.50”. (AGA/EEA 2006) 2006: “by 2010, U.S. imports [of LNG] will exceed the requirements of either Europe or Asia”. (EPRI) 2007: “Florida: LNG to the Rescue”. (CERA)

19 Optimism All Around: LNG Prices Would be low and stable

20 Optimistic Supply Projections to 2008 From as Recently as Three Years Ago Never Materialized Latest EIA estimates for 2008 is 784 BCF

21 Optimism Still Persists: Projected Global Supply of LNG in 2015 All projections made in Current LNG Supply

22 Optimism Dominates: Projected North American LNG Imports in LNG Import Level = 784 bcf/d

23 Increasing recognition of supply constraints “…the global LNG market points to a future where the supply demand balance becomes increasingly tight as new liquefaction projects suffer continuing delays”. (UBS, 2007) “Unfortunately, the supply of LNG around the world is not as plentiful as one would have thought”. (Jim Mulva, Conoco Phillips, 2007) Current bottlenecks in upstream production and liquefaction capacity are tightening”. (IEA, 2007) Liquefaction capacity is not growing at the same rate as … regasification capacity or global natural gas demand growth”. (CIBC World Markets, 2008)

24 Reality Sets In: The Steady Decline in EIA Forecasts of U.S. Imports of LNG in 2008 Year Forecast Made For 2008 Imports

25 The Sweep of Optimism Fades: EIA Forecasted Imports for 2015

26 Construction Costs of Liquefaction Plants are Rising Dramatically Source: Jensen Associates, December Estimates by James Jensen

27 Escalating Cost of Liquefaction Plants: Key Examples South Pars (Iran)Sakhalin II (Russia)

28 Breakeven NG Prices for the Six of the Largest LNG Plants Under Construction or Proposed * Source: estimated from UBS 2007