Hot Debate Over A Cool Fuel

Liquefied natural gas answers a demand -- but critics abound

Demand for clean-burning natural gas has marched steadily upward during the past two decades, and the output from North American gas fields hasn't kept pace. Last year, in fact, U.S. production fell by 3%, while demand rose 2.2%. Prices have doubled since the 1990s, to around $5 per 1,000 cubic feet. The U.S. has some of the world's highest natural gas prices, "and there isn't any silver bullet on the horizon to change that," says G. Steven Farris, president and CEO of Houston's Apache Corp. (APA ), an independent producer of oil and gas.

The shortfall has forced energy players to embark on a crash program to import natural gas from overseas in liquid form. While liquefied natural gas (LNG) accounts for just 2% of U.S. gas consumption today, that's headed to become as much as 30% over the next two decades. By 2025, the Energy Dept. estimates that domestic gas demand will total 32 trillion cubic feet, 28% more than domestic output. The global energy giants are now racing to build $200 billion worth of facilities worldwide. Besides the enormous expense, the companies are up against community activists, who fear that LNG could be a dangerously combustible fuel. Still, the experts say such construction is necessary. Michael Stoppard, director of Global LNG at Cambridge Energy Research Associates (CERA), says the industry needs to build as much capacity in the next eight years as it has in the past 40. "It's a startlingly large target."

The problem with importing natural gas from outside North America is that it has to come by ship rather than pipeline. That means it has to be compressed and put into specially built ships, then returned to its gaseous state in so-called regasification plants at the point of delivery. With only four of these plants in the lower 48 states, the U.S. lacks the capacity to handle all the LNG it will need to import in the future.

So the industry -- led by giants such as Exxon-Mobil (XOM ), Royal/Dutch Shell, and BP (BP ) -- is spending heavily on infrastructure. Exxon Mobil Corp. alone is pouring at least $10 billion into LNG facilities and supply contracts in the U.S. and abroad. "We are prepared to make these investments, recognizing there is a huge demand for this gas [in North America]," says Alan Stuckert, public affairs manager at ExxonMobil Gas & Power Marketing Co.

Most consumers know natural gas as the invisible, clean-burning fuel that they use in their kitchen stoves. LNG is simply natural gas that has been chilled to -260F and condensed into a liquid, shrinking the gas to 1/600 of its original volume. The process starts when gas vents up from a subterranean reservoir, into a gas well, and through a pipeline to a nearby liquefaction facility. There, the natural gas is superchilled into a liquid through a cryogenic process. In its liquefied state, the gas is either stored in heavily insulated tanks or pumped directly into tankers. Once the ships arrive in port, the LNG is either stored or piped into a regasification plant that uses air or water to reheat the LNG and return it to its original gaseous state. The natural gas is then moved through pipelines to the households of customers, who never know the difference.

Indeed, five years from now, a homeowner in Los Angeles could be cooking dinner with natural gas that has come from as far away as Russia or Australia. Sustained U.S. gas prices -- from $3.50 to $6 per 1,000 cubic feet -- in recent years have helped make it economically feasible for companies to bring gas from that far away. Equally important, the costs to drill, liquefy, transport, and gasify LNG have come down by 30% to 40% over the past decade, making it a competitive alternative to U.S.-produced natural gas.

Costs have been driven down by economies of scale, efficiency gains, and technological advances, primarily in liquefaction and shipping. Since the mid-'90s, the price tag of a liquefaction facility has fallen by 50%, measured by cost per capacity. These gains have come from a wide array of incremental improvements, such as a new generation of pumps and more efficient turbines. For example, Air Products & Chemicals Inc. (APD ) sells a new heat exchanger -- the chamber where gas is compressed and chilled -- able to process up to 5 million tons per year. In the 1980s, a typical unit handled just 1 million tons. Air Products is developing technology that will increase volume an additional 50%, to 7.8 million to 8 million tons a year. "The larger the plants, the better the cost efficiencies," says James Solomon Jr., international sales manager at Air Products' commercial LNG business. Even the ships that will haul LNG from the liquefaction plants have gotten cheaper. Thanks to intense competition between Asian shipyards, the price of a standard LNG tanker is now $175 million, down from around $250 million in 1995.


For now, there are only four regasification sites in the lower 48 states that can off-load these inbound ships. But more capacity is on the way. Existing plants have a combined capacity of 2.8 billion cubic feet per day. All of the facilities are in the process of expanding, which will boost throughput by more than 40%, to 3.9 billion cubic feet per day. And spurred by a recently streamlined federal approval process, there are some 40 new onshore and offshore LNG facilities on the drawing boards for North America -- so many, in fact, that most will never be built. The first flurry is expected to come online around 2007.

Although prices have fallen, the scale of investment is still huge. North America has $15 billion to $20 billion worth of projects being planned. Three have made it through the approval process: Sempra Energy's $700 million Cameron LNG project in Lake Charles, La.; ChevronTexaco's (CVX ) $800 million Port Pelican facility about 40 miles off the Louisiana coast; and Excelerate Energy and El Paso's $60 million offshore Energy Bridge in the Gulf of Mexico south of New Orleans. Energy Bridge is on track to be the world's first completed offshore LNG port and will likely be the first new LNG facility in the U.S. in 20 years. Excelerate President Kathleen Eisbrenner says construction began on the 500 million-cubic-feet-a-day project in January, and it should be ready to receive its first shipment by January, 2005.

Cost isn't the only hurdle. Environmental and safety questions also loom. Critics contend that LNG, because of its density, has huge explosive potential -- by accident or by terrorist act. Locating the terminals offshore might mollify the safety activists, but it could alarm environmentalists, who may worry that the energy terminals could harm marine life.

Recent events have only fueled skeptics' worries. An explosion at an LNG facility in Algeria last month that killed 30 people and injured 70 is giving new ammunition to the case for not-in-my-backyard arguments against the construction of LNG terminals. Industry experts say that the Algerian facility used an outdated design and that, in any case, the regasification facilities are safer than those that liquefy the gas at the point of origin. Still, the critics aren't persuaded. Last year Royal Dutch/Shell and Bechtel withdrew a proposed terminal in Vallejo, Calif., near San Francisco, because of community pressure. And earlier this month, Fall River (Mass.) residents mobilized to fight Weaver Cove Energy LLC's plan for a $250 million LNG facility in their city. "We are very concerned about the potential for accidents or terrorist attacks," says Fall River Mayor Edward M. Lambert Jr. "There's a lot of opposition, and it continues to grow."

Yet as the opposition to importing tanker loads of superchilled LNG grows, so does the demand for natural gas. And even stepped-up efforts to produce gas in North America are unlikely to satisfy the demand. "Right now, on the supply side, LNG is the only lever we have to pull," says EOG Resources Inc. Chairman & CEO Mark G. Papa. That's why the coldest fuel is suddenly heating up.

By Stephanie Anderson Forest in Dallas

    Before it's here, it's on the Bloomberg Terminal.