US LNG Imports Unlikely to Increase in the Next 12/18 Months as Higher Temperatures and Recession Cut Demand for Natural Gas

March 11, 2009

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Implications

US LNG imports declined 55% in 2008 to 351 Bcf from 770 Bcf in 2007. The amount of natural gas in US inventories (storage) as of February 27, 2009 was 1,793 billion cubic feet (Bcf), which is 13.8% above the 5-year (2004-2008) average, according to the Natural Gas Weekly Update released March 5, 2009 by the US Energy Information Administration. LNG import prices remain 20% higher than Canadian gas at $9.06 per thousand cubic feet as of September 2008, according to the latest data released by the EIA. Natural gas prices declined to $3.86/mcf at 3/11/09 from $7.27/mcf in September 2008. The Natural Gas spot price at the Henry Hub has decreased 68%af of March 4, 2009 since its relative peak $13.31/MMBtu in early July 2008. Natural gas rig count declined to 970 for the week ended February 27, 2009 or 32% lower than the 1,418 recorded for the same week last year, according to Baker-Hughes Incorporated.

Analysis

 

Natural Gas consumption began tumbling in late 2008 as General Motors and Dow Chemicals shuttered plants amid a drop in demand for their products. The contraction in the US economy may drive down gas use by factories and petrochemical makers by 5.1% in 2009, the Energy Department said in its monthly Short-Term Energy Outlook on February 10.

Barclays Capital expects that the global LNG market will add 5.6 Bcf production capacity a day to the 23 Bcf a day currently online. However, most new LNG capacity from Russia and Indonesia is already slated to go to Japan, Korea, India and China while new production from the Middle East and possibly Nigeria is likely to be taken by Western Europe to offset unreliable natural gas supply from Russia. Excess LNG global capacity would also have to be imported to the US at below cost given the current low US natural gas prices of $3.86/mcf.

Independent LNG importers such as Cheniere will be negatively impacted by low gas prices that will reduce or eliminate demand for LNG during the recession.  Large integrated oil & gas producers such as Exxon have substantial cash flow generation from diversified operations to weather the lack of LNG imports.

LNG imports represented only 1.7% of total gas supply in 2008 and total imports, mostly from Canada, were 19.3% of total US gas supply of 20.5 Tcf. Major US natural gas producers such as Devon energy and Chesapeake Energy have been shutting down wells to match lower demand, which should provide substantial spare capacity when the US economy finally picks up steam.