Firms See Profit Opportunity in Expected Natural Gas Shortfall

To Tom Giles, a battered expanse of concrete and warehouses in the Port of Long Beach looks like a moneymaker -- especially if natural gas stays on its current expensive course.

Giles runs a Mitsubishi Corp. subsidiary that wants to build a facility to import liquefied natural gas from the Pacific Rim. Giles believes that federal regulators will give the go-ahead because the price of natural gas has soared 200% in the last 17 months, creating a strong market for imported supplies.

“There are gas needs on the Western coast of the United States, and there had recently been an energy crisis in California,” Giles said, “and so the timing seemed good to propose bringing in liquefied natural gas.”

In crisis, opportunity abounds. Mitsubishi and a host of companies are jockeying for position in what they hope will be a prolonged period of high natural gas prices.

“Everyone is getting on the bandwagon now,” said Mark Baxter, director of the Maguire Energy Institute at Southern Methodist University’s Edwin L. Cox School of Business in Dallas.

The crisis mentality is driven by the fact that the amount of natural gas in storage in the United States is about 22% below the five-year average, with stocks depleted by a cold winter, declining production from old fields and increasing demand from gas-fired power plants. Natural gas prices now are in the neighborhood of $6 per million British thermal units, and short-term spikes recently have sent prices even higher. In late January 2002, natural gas could be had for $2 per million BTU on the New York Mercantile Exchange.

Industry groups and Federal Reserve Chairman Alan Greenspan have issued warnings of potential shortages and economic harm. A Dallas Federal Reserve economist has cautioned that steep prices could slow economic growth by as much as 2.1%. On Thursday, Energy Secretary Spencer Abraham is scheduled to convene an emergency meeting with industry representatives to discuss the situation.

Natural gas prices rarely are stable for long. Tight supplies bring high prices, which in turn push companies to drill more wells. That increases supplies and reduces prices.

But some analysts say that might not happen this time. Paltry results from the last drilling boom indicate that domestic natural gas production -- particularly of the cheaper, easy-to-extract stuff -- has peaked, they say.

The Energy Information Administration, the research and statistics arm of the Energy Department, predicts that by 2025, natural gas demand will reach 35 trillion cubic feet a year, while domestic production will total 26.4 trillion cubic feet.

The shortfall will have to be filled, unless the country cuts back on natural gas use, and that’s unlikely.

“Because natural gas will be the fuel of choice for electricity generation and for home heating, there will be substantial growth in natural gas consumption” in the years to come, said economist Thorsten Fischer of Economy.com, a research firm in West Chester, Pa.

For energy companies, that looks like a profit opportunity.

Storied investor Warren Buffett has been snatching up natural gas assets for months, primarily in the pipeline end of the business. ChevronTexaco Corp. announced last month the formation of a unit to build the San Ramon, Calif.-based company’s global natural gas business.

Drilling activity in North America has been climbing sharply, according to Baker Hughes Inc., a Houston company that publishes drilling rig statistics. There were 1,067 U.S. rigs searching for oil and natural gas last week, 27% more than a year ago. Of all the rigs at work in the country, 85% are looking for natural gas.

But chances are they won’t find significant new affordable sources, experts say. As it is, the nation gets most of its natural gas domestically or from Canada. California produces less than 20% of the roughly 6.1 billion cubic feet consumed every day in the state; the rest is piped in from the Southwest, the Rockies and Canada.

So, with rising demand and low inventories pushing up prices, the notion of importing natural gas from Asia, North Africa and the Middle East isn’t as outlandish as it has recently seemed. Total U.S. imports of natural gas from overseas averaged 238.1 billion cubic feet in 2001, up nearly tenfold from 1996 but enough to supply the nation for only about four days.

Mitsubishi isn’t the only company keen on increasing imports. San Jose-based Calpine Corp., an independent power producer that is struggling to refinance a hefty debt and is canceling electricity projects, said recently that it would be interested in investing in a West Coast terminal to receive imported liquefied natural gas. And San Diego-based Sempra Energy, which owns Southern California Gas Co. and San Diego Gas & Electric Co., is pushing aggressively into the LNG business.

When natural gas is to be transported over vast distances, it’s chilled to a liquid state and shipped in vacuum containers -- imagine big Thermos bottles -- on oceangoing tankers.

The ships deliver the fuel to facilities that return the liquefied natural gas to its pre-chilled state and send it by pipeline to customers.

Sempra hopes to begin construction this fall of an LNG terminal and re-gasification facility near Ensenada to process up to 1.2 billion cubic feet of gas a day. The LNG operation could be open in the second half of 2006, which would make it the first to be completed among several Baja LNG projects intended to serve the U.S. and Mexico.

The company just bought an LNG terminal project planned for Louisiana from Dynegy Inc. that could be operating in 2007, processing up to 1.5 billion cubic feet of gas a day.

“We’re always looking for other projects because we think that it is very important for North America that we have sufficient receipt facilities built to allow the importation of gas in order to meet our nation’s gas needs,” said Darcel Hulse, president of Sempra Energy International.

Recent LNG projects in California have had a rough time. A terminal proposed by Royal Dutch/Shell Group and Bechtel Group Inc. for Mare Island, near Vallejo, Calif., was abandoned in January in the face of significant community opposition and a weak economy.

Mitsubishi hopes to avoid that fate because of the industrial location of its proposed site in the Long Beach Port, said Giles, chief operating officer of Sound Energy Solutions. In addition, he said, the Mitsubishi subsidiary is planning extensive community meetings to calm environmental and safety concerns about its $400-million project.

The proposed Long Beach terminal, projected to be completed late in 2007 at the earliest, would process up to 700 million cubic feet a day. The project would include an LNG fuel terminal for use in a program to convert diesel-powered vehicles to cleaner-burning natural gas, Giles said.

“We’re confident that we can be competitive and bring a competitive natural gas price for our product even if these high prices are not sustained,” Giles said.

There is a danger, economist Fischer said, that some projects may never come into being, which is what happened when high electricity prices sparked a flurry of planning for new power plants. When electricity prices plummeted in 2001, many projects were canceled.

But Sempra’s Hulse says the comparison should be with crude oil. Domestic production peaked in the 1970s, and the U.S. since has become increasingly dependent on imports.

“The supply-demand picture in the U.S. is such that it will support the investment of billions of dollars in LNG” and other natural gas projects, he said.

“This is a resource that we have grown accustomed to in the U.S. We haven’t found any other energy source that can take its place, that provides as many benefits to the customer, as gas.”