Where the LNG Will Go
With the approval yesterday of Shell's Gulf Landing liquefied natural gas (LNG) terminal offshore Louisiana, a likely scenario for the development of US LNG infrastructure is taking shape. Although 38 new LNG terminals have been proposed for the US--to supplement the four existing ones--all of those approved so far are clustered along the Gulf Coast, where much of the country's domestic natural gas production is centered, rather than close to the markets for which gas supply has been most problematic. There are both benefits and drawbacks to this pattern.

First, it's important to understand that LNG requires substantial fixed infrastructure in order to re-gasify, store and deliver the gas being received from tankers. These facilities typically range from 0.5 to 1.5 billion cubic feet per day (BCFD)of capacity, determined by economics, logistics and technology. With current US natural gas demand running at around 60 BCFD, a typical LNG terminal can import just under 2% of domestic demand.

Because of the way the US natural gas industry developed, the Gulf Coast has a high concentration of gas infrastructure. This includes pipelines, storage facilities, and gas plants, where the ethane, propane and butane contained in the gas are separated. Bringing LNG into this network reduces the amount of new infrastructure required to reach customers, thus improving the overall economics of LNG supply. It also substitutes nicely for lost production in the same vicinity, as the mature gas reservoirs in the Gulf of Mexico deplete.

The LNG imported by these new terminals will give the large industrial users along the Gulf Coast and mid-continent greater security of supply and somewhat lower gas prices. It will also benefit residential and commercial customers in the southeast. Unfortunately, these facilities will do little to dampen the high prices affecting more distant markets. Gas customers in the northeast, including electric utilities that burn gas to generate power, already pay significant premiums over Gulf Coast prices, because of limitations in the infrastructure for delivering gas over long distances. Only local LNG terminals can provide relief, and all of the proposed terminals that would benefit these customers directly face bitter opposition, as I've described in previous postings.

So the picture that emerges, at least for now, is one in which LNG backfills for declining domestic production along the Gulf Coast, with more distant customers still at the mercy of pipeline capacity constraints. If this scenario holds, we will miss the opportunity to continue displacing dirtier fuels with our cleanest hydrocarbon, gas, which is still in ample supply globally. Even though I remain skeptical that LNG is quite the panacea that some claim it is, our current approach to it can only be described as short-sighted and parochial.