Working Document of the NPC North American Resource Development Study Made Available September 15, 2011 Paper #1-10 LIQUEFIED NATURAL GAS (LNG) Prepared for the Resource & Supply Task Group On September 15, 2011, The National Petroleum Council (NPC) in approving its report, Prudent Development: Realizing the Potential of North America’s Abundant Natural Gas and Oil Resources, also approved the making available of certain materials used in the study process, including detailed, specific subject matter papers prepared or used by the study’s Task Groups and/or Subgroups. These Topic and White Papers were working documents that were part of the analyses that led to development of the summary results presented in the report’s Executive Summary and Chapters. These Topic and White Papers represent the views and conclusions of the authors. The National Petroleum Council has not endorsed or approved the statements and conclusions contained in these documents, but approved the publication of these materials as part of the study process. The NPC believes that these papers will be of interest to the readers of the report and will help them better understand the results. These materials are being made available in the interest of transparency. The attached paper is one of 57 such working documents used in the study analyses. Also included is a roster of the Task Group for which this paper was developed or submitted. Appendix C of the final NPC report provides a complete list of the 57 Topic and White Papers and an abstract for each. The full papers can be viewed and downloaded from the report section of the NPC website (www.npc.org). Working Document of the NPC North American Resource Development Study Made Available September 15, 2011 Resource & Supply Task Group Chair Andrew J. Slaughter Business Environment Shell Exploration & Advisor – Upstream Production Company Americas Government Cochair Christopher J. Freitas Senior Program Manager, U.S. Department of Office of Oil & Natural Energy Gas, Office of Fossil Energy Assistant Chair Kevin M. O’Donovan* Director, Policy and State Shell Oil Company Government Relations, Government Affairs Marianne Funk Director, CO2 Advocacy Shell Oil Company Alternate Government Cochair John R. Duda Director, Strategic Center U.S. Department of for Natural Gas and Oil, Energy National Energy Technology Laboratory Secretary John H. Guy, IV Deputy Executive Director National Petroleum Council Members Richard P. Desselles, Jr. Chief – Resource U.S. Department of the Evaluation Methodologies Interior Branch, Resource Evaluation Division, Bureau of Ocean Energy Management Jackie Forrest Director, Global Oil IHS Cambridge Energy Research Associates Thomas A. Menges Houston, Texas Brenda S. Pierce Program Coordinator, U.S. Department of the Energy Resources Interior Program, U.S. Geological Survey Working Document of the NPC North American Resource Development Study Made Available September 15, 2011 Kevin P. Regan Manager, Long-Term Chevron Corporation Energy Forecasting Robert C. Scheidemann, Jr. Geological Advisor Shell Upstream Americas Charles E. Sheppard, III Independent Industry, Kingwood, Texas Government and Public Service Don K. Thompson Vice President, Green Enbridge Inc. Energy Douglas J. Tierney Vice President, Business Encana Corporation Development Alan P. Wilson Team Leader, Business Encana Oil & Gas Development (USA) Inc. Gerry A. Worthington** U.S. & Argentina Joint ExxonMobil Production Interest Company Gregory J. W. Zwick Director, Energy Market TransCanada PipeLines Analysis Limited * Replaced by Marianne Funk in April 2011. Individual has since changed organizations but was employed by the specified company while participating in the study. ** Retired April 2011. Working Document of the NPC North American Resource Development Study Made Available September 15, 2011 LNG White Paper 1. Introduction LNG, or liquefied natural gas, comprises a small but important and growing part of the global natural gas market. According to the BP Review of World Energy, LNG consumption in 2009 was 23.5 Bcf/d or 8.2% of total world demand for natural gas. Although 2009 natural gas consumption in its entirety declined by 2.1% in 2009 due to the recession, LNG demand grew by 7.2%. This continues a multi- decadal growth pattern of 6 to 7% per year, far faster than the overall growth in the total natural gas market of 2 to 4%. The U.S. imported 1.24 Bcf/d in 2009 or approximately 5.2% of the global trade of 23.5 Bcf/d. The inclusion of Canada and Mexico raises that volume to 1.67 Bcf/d for slightly over 7% of the worldwide total. North America is thus having a demonstrable effect on the LNG industry although the rapid expansion of shale gas production has called into question the region’s future share of the market. 2. History Liquefied natural gas is created by cooling natural gas to minus 161 degrees Celsius. At that temperature, natural gas becomes a liquid and the volume drops by a factor of approximately 600. Thus 600 cubic feet of natural gas at room temperature can be contained in a volume of a single cubic foot when liquefied. That decrease in volume allows natural gas to be economically transported by specialized ships to distant markets. The United States is itself a producer of LNG from its Kenai, Alaska facility which opened in 1969 using gas from the Cook Inlet nearby Anchorage. LNG has been continuously produced from the 200 MMcf/d plant since its inception and sold to its long term contract holders, Tokyo Gas and Tokyo Electric.The United States first imported LNG in 1971 to a regasification terminal in Everett, Massachusetts. The Elba Island, Georgia and Cove Point, Maryland import terminals opened in 1978 while the Lake Charles, Louisiana terminal became commercial in 1982. Due to changes in world markets and prices, the Elba Island and Cove Point terminals ceased operation in 1980 and the Lake Charles project closed shortly after it opened in 1982. The Everett facility, however, protected by downstream contracts in a region that needed LNG for winter peaking demand services, continued to operate. The inoperative terminals gradually came back into service, first Lake Charles in 1989 followed by Cove Point in 1995. The latter, however, initially served solely as a storage facility, using small scale liquefaction located on site, and did not actively receive import cargoes until 2003. Elba Island was the last of the first wave of terminals to reactivate, when it reinitiated cargo imports in 2001. The four original terminals, plus new projects, enabled import growth to 2.11 Bcf/d in 2007, when LNG provided 3.3% of total U.S. consumption. The last several years have seen lower volumes due to higher global prices that have attracted cargoes to alternate markets in Asia and Europe. Working Document of the NPC North American Resource Development Study Made Available September 15, 2011 Figure LNG 1, US LNG Imports, Excel file NARD RSTG LNG Whitepaper 12-28-10 The late 1980 - 1990’s saw a steady erosion in proved gas reserves in the United States, at the same time as domestic consumption was rising. The reduced reserves to production ratio led to an increased emphasis on drilling unconventional reservoirs, such as coal-bed methane and tight gas sands. Although these reservoirs allowed producers to add an impressive amount of reserves, their low permeability required costlier drilling and production techniques, supporting higher prices for produced natural gas. With the decline in conventional reserves and the increase in the average price of domestic natural gas, energy companies and consultants forecast an increased need for LNG imports. Although the cost to produce, liquefy and transport LNG would be high, it was believed those import costs would most likely be lower than the future marginal cost of U.S. gas. Working Document of the NPC North American Resource Development Study Made Available September 15, 2011 Figure LNG 2, US Natural Gas Prices, Excel file NARD RSTG LNG Whitepaper 12-28-10 As a result of the expected need for LNG imports, expansion activities began at the existing four terminals and multiple firms began development of new regasification facilities. A January 2003 report on LNG by the Energy Information Administration (EIA) cited 11 different domestic regas projects and listed 7 more in the Bahamas, Canada and Mexico that were designed to supply natural gas to U.S. markets. Development activity continued to expand and a February 16th 2007 report from the Federal Energy Regulatory Commission (FERC) showed five operating U.S. terminals (the original four plus the Excelerate Gulf Gateway facility) and twenty four projects approved for construction; nineteen onshore and five offshore. In addition, nine projects had been formally proposed to the FERC, which has jurisdiction for onshore developments, and five more to the United States Coast Guard, which takes precedence for off shore facilities. Still more proposals were in an evaluation stage in the U.S. and other efforts were active in both Canada and Mexico. At about this time, however, it became apparent that U.S. proved reserves of natural gas were rapidly growing due to development of tight gas sands and coalbed methane resources. In addition, promising early results from the Barnett shale gas were just becoming public. By 2008 the basic premise that the United States had to import large amounts of LNG to meet projections of rising natural gas demand was called into question. As shown in the chart below produced from Annual Energy Outlooks (AEO) developed by the EIA, expectations for future LNG imports began to plummet by the end of the decade and LNG regasification development efforts began to wind down with a number of projects either suspended or cancelled. Working Document of the NPC North American Resource Development Study Made Available September 15, 2011 Figure LNG 3, US Projected LNG Imports, Excel file NARD RSTG LNG Whitepaper 12-28-10 3.