Seats at the LNG supply table for California are dominated by the high rollers of the oil business and if you are not at the table then you are not in the game. When the calls are made on import terminals for the hot US west coast market, will Australian companies bluff their way through with weak hands or will they have to fold?
For all the talk of China being the hottest play in the LNG game, the short term market is dominated by the upcoming energy shortage in California, the US of A's most populous and productive state. As a stand alone economy, California ranks around the 6th largest in the world, quite a remarkable feat and testimony to the fact they have a huge interest in the security of their energy supply chain. Being situated at the 'end of the line' as far as the US domestic pipeline network is concerned and memories of the recent Enron generated energy spike still fresh in the mind, declining Canadian and domestic gas production is ringing alarm bells. Imported LNG is seen as the best short term answer with 2008 being the critical timeframe for supply to commence.
From a cost perspective, it is highly beneficial for companies in the game to be in a position to market their product from facilities in the immediate vicinity of the end user market but there are high hurdles to negotiate. California has probably the most active and vocal environmental lobby in the world and a number of proposed LNG import terminals have already been canned because of local resistance. The energy is wanted but not the facilities that make the security of supply commercially attractive to both supplier and end user. Nevertheless, the market is lucrative enough that LNG players have been lining up to stake their claim on the market.
Before concentrating on the players with proposed import terminals directly in and around the California coastline, it is important to note a proposed import terminal planned for St Helens in Oregon (Port Westward LNG) which would be in a position to supply California from the north and the planned Sonora Pacific import terminal (Sonora Pacific LNG) in North West Mexico which would hook into the US pipeline network at Tucson, Arizona. If these projects eventually get up they would have a cost advantage over other players further afield, but would themselves be a secondary supplier to proposed terminals closer to the market.
The main players closer to the market are as follows: Chevron/Texaco with a proposed import terminal, GNL Mar Adentro de Baja California, located offshore Tijuana, Mexico. Shell/Sempra with their proposed Energia Costa Azul onshore terminal located about 14 miles north of Ensenada, Baja California, Mexico. Sound Energy Solutions (a subsidiary of Mitsubishi) with their proposed onshore terminal located on Terminal Island in the Port of Long Beach, Los Angeles County, California. BHP Billiton with their proposed Cabrillo Deepwater Port import terminal located 14 miles offshore the California coast and Crystal Energy/ Woodside (USA) Energy Inc. proposed Crystal Clearwater Port import terminal located approximately 12 miles offshore the California coast.
At present all of the above proposed LNG import terminals are at various stages of the permitting/approvals process in the respective country regulatory authorities. All other things considered and despite the braggadocio of individual parties, it should be made clear that onshore terminals would have the most likely chance for early passage through the regulatory process if only because there are technical issues surrounding offshore LNG import/re-gasification facilities, the first of which is still to be completed anywhere in the world.
As noted above, onshore LNG terminals have an advantage as far as regulatory approval is concerned and in that regard the proposed Shell/Sempra facility has a clear lead and the strongest hand. Shell are already well ensconced into the Mexican LNG scene with their Altamira receiving terminal on the other side of the country looking to come onstream in late 2006. Shell's partners in the Altamira terminal are Total and Mitsui who has recently bought into the project. The proposed Sound Energy Solutions onshore terminal is also in that category, but as their facility is within California itself there are strong reasons, based on previous withdrawals, to suggest final approval may be a long drawn out process. They will need all the cards to fall their way to take a piece of the pot.
The proposed offshore facilities are led by the Chevron/Texaco terminal offshore Tijuana. Although the proposed project has received environmental approvals there are still many hurdles to cross before the project gets the final go ahead. The technical issues with offshore receiving/re-gasification terminals are still unproven and relate to docking/offloading arrangements and the actual product transfer process itself. With the amount of research and development that is underway in this area it is to be expected the technical issues will be resolved in due course but with such large capital sums involved the time element will certainly play its part as far as being first into the California market is concerned. This project is of particular importance to both Chevron/Texaco and to the prospects of supplying Australian LNG (via Gorgon) into the US market. California is home ground for Chevron/Texaco regardless of the recent corporate move to Houston. With friendly connections in the right places the Chevron/Texaco proposal opens with a strong hand but needs to be dealt further matching cards to bring home the bacon.
Moving further around the table we come to the BHP Billiton proposal. This being a high stakes game, BHP have come up with an innovative proposal and a first reading of the cards suggests a strong hand. Although they have been working on offshore LNG facilities for a number of years now, in effect they face the same technical problems as everybody else. Mooring large vessels alongside offloading facilities in open water and solving the problem of transferring volatile substances in a short time window without the benefit of large diameter flexible hosing, is a tough nut to crack and no amount of modelling will prove the concept until it is achieved in a full scale dynamic environment. It doesn't help the cause of BHP's proposal that the US Geological Survey produced a report a few months ago (2004-1286) suggesting an estimated 35% probability of a magnitude 6.5 or larger earthquake occurring within 30 miles in the next 30 years in the area of their proposed facility. The cards are going to have to be very kind for the BHP proposal to get up but stranger things have been known to happen.
At the opposite side of the table we have the Crystal Energy/Woodside (USA) Energy Inc. offshore LNG receiving terminal proposal and the cards have not been kind. Woodside raised the stakes in the game by buying into this project and hopefully looking to operate the project but entry to the game at this table may prove costly in this instance. There were probably good reasons for making the play but there is no point in assessing prospective chances of success because the same US Geological Survey Report (2004-1286) mentioned previously, estimated a probability of a magnitude 6.5 or larger earthquake occurring in the next 30 years within 30 miles of the project's proposed facility to be 50-60% which just about negates the proposal on all known risk analysis profiles.
Of more interest is Crystal Energy/Woodside's proposed project facility, Platform Grace, an old Chevron production/distribution platform. I won't go into its early history but not too long ago it was slated for the Chevron rigs to reef program at the end of its useful life.
As is often the case when there is an excess of investment dollars floating around an economy, strange and exotic investment opportunities appear out of the woodwork. The platform was picked up by a venture capital company (Small Ventures USA LLC - Crystal Energy is a subsidiary of Small Ventures USA LLC ) and destined to become a fish farm pending proposed legislation to authorize open ocean finfish aquaculture in federal waters. But now it is proposed as an LNG import receiving terminal with Woodside operating?
It seems like a fishy story but perfectly true and verifiable.
Although strictly prohibited at the card table, coffeehousing (chat between players that goes towards misleading or manipulating other players) is a regular occurrence in the LNG supply business and in fact some players often join forces to achieve a piece of the pot.
Raise then Showdown
When the stakes are raised at the US West Coast LNG supply table it is to be expected there will be some difficult decisions to be made in relation to stakes already invested and either holding or folding. In the showdown stage it is certain the pot will go to more than just any single player. Who the eventual winners will be is always uncertain but one can speculate that the experience and nerve of the high rollers will probably see them collecting the overwhelming lion's share of the pot in the middle of the table.
Further reading on the subject matter in this article can be found at www.usgs.gov