LNG flows into US to increase rapidly, because
it's about storage, not price
Energy Infrastructure
Prices Mean-Revert Around Lowest Cost and Most Abundant Source
Commodity prices tend to mean-revert around long-run marginal cost of
cheapest and most abundant source. In North America (NA), marginal cost of
natural gas has gone from ~$2.00/MMBTU to ~$6-$8/MMBTU today. This
means that if there is a significant source of natural gas that is economic at
below $6-$8/MMBTU, this should eventually replace NA marginal
production.
Theory is Good, but Reality is Much More Complicated
There's a lot of stranded gas in the world with marginal all-in cost of well less
than $6-$8/MMBTU. However, liquefaction plants needed to deliver this gas
to NA have not been completed and geopolitical issues have further
complicated theory.
But Tides are Turning and the Inflection Point is at Hand
In the ensuing exuberance and proliferation of shale plays in NA, particularly
in light of high oil prices, many countries began to quietly build supply
starting in the early-to-middle part of the decade. It has gotten to the point
where we are now within a 24 month period that will witness largest
acceleration in LNG supply capacity to date of ~33% or ~9.8 BCF/Day.
LNG into US is about Storage, not Price
With ~33% surge in global LNG supply capacity over 24-month period, it is
not difficult to understand that demand is unlikely to keep-up with supply.
Simply put, this means that there will be significant quantities of LNG that is
looking for a home and the only place in the world that has enough storage to
accommodate the excess is the US.
2009 LNG Supply into US between 2.0-3.0 BCF/Day with Summer
Peak Potential of 3.0-5.0BCF/Day; Potential for More in 2010
Many factors bear down on the situation that would increase supplies into the
US and equally many factors bear down on the other side of the argument.
Regardless, LNG has been coming and will continue to come; it is only a
matter of how much, and when, that we analyze.
Impact on US Natural Gas Prices – Two Scenarios Offered
Ultimately, what matters is not how much supply comes into the US, but
what, if any, price impact this will have in NA. We offer two scenarios for
investors to ponder: The first looks at a more benign import scenario, and the
second lays out a more aggressive import scenario. In both cases, we make
some conclusions on price impact.
Perhaps, it is Only a Matter of Time
We cannot know for sure what the future brings. At odds are two very strong
view points: On one side, a macro-fundamental theory based on the
"Lemonade-stand Principle" of economics, and the other that says yes, but not
now, because reality is intruding on theory.

Executive Summary
Prices Mean-Revert Around Lowest Cost and Most Abundant Source
In the commodities world – with one exception – the long-run marginal cost of any commodity tends to mean revert around the
cheapest and most abundant source of that commodity. For decades in the past and continuing through today, North American (NA)
natural gas is priced on the marginal all-in cost of natural gas produced from NA basins. However, the marginal cost of this
production has gone from about $2.00/MMBTU as of the late 1990s to about $6-$8/MMBTU today. This means that according to the
“Lemonade-Stand Principle of Economics,” if there is a significant source of natural gas that is economic at much below $6-
$8/MMBTU, this should replace NA marginal production.
Theory is Good, but Reality is Much More Complicated
We know that there is a lot of stranded gas worldwide, and our calculations indicate that the marginal price of this gas is indeed below
$6-$8/MMBTU. However, the liquefaction plants needed to deliver this gas to NA have not been completely built-out and
geopolitical issues have further complicated the simplicity of theoretical economics. Also contributing to the delay has been the boom
in global economic growth until 2008, which rapidly increased all costs and made skilled labor and raw materials way more costly
than countries had originally planned on.
But Tides are Turning and the Inflection Point is at Hand
As commodity prices reached staggering new heights in the middle of the decade, experts and analysts all theorized that LNG would
come to the US to rescue us from the evils of high prices. Since then, predictably, new sources of natural gas were discovered in the
form of shale gas in light of the new pricing paradigm, and once again talk of LNG faded into oblivion. However, it appears that the
lessons of history and the “Lemonade-stand Principle of Economics” were not lost on countries like Russia, Iran, Qatar (RIQs) and
others. In the ensuing exuberance and proliferation of shale plays in NA, particularly in light of high oil prices, Qatar in particular, but
also Australia and others, quietly began to build supply. It has gotten to the point where we are now within a 24 month period that
will witness the largest acceleration in LNG supply capacity to date of about 33% or about 9.8 BCF/Day.
LNG into the US is about Storage, not Price
With ~33% surge in global LNG supply capacity over a 24-month period, it would not be a wild stretch of the imagination to state that
demand is unlikely to grow that fast. Simply put, this means that there will be significant quantities of LNG that has no home. That
means this excess supply has to be stored. The only place in the world that has enough storage to handle such a load would be the US,
at least in the near-term.
2009 LNG Supply into US between 2.0-3.0 BCF/Day with Summer Peak Potential of 3.0-5.0 BCF/Day;
Potential for More in 2010
Many factors bear down on the situation that would increase supplies into the US: Global economic malaise, return of the Japanese
KK nuclear plant, normalization of Spanish hydro, increasing LNG supply, lack of global storage, among others. However, there are
also many factors that bear down on reducing supplies to the US: On-time start-up of plants has not been good, operational problems
persist at existing plants (including Snovit in Norway), Indonesia continues to struggle to meet demand, and the unknown always
seems to be lurking around the corner.
Impact on US Natural Gas Prices – Two Scenarios Offered
Ultimately, what matters is not how much supply comes into the US, but what, if any, price impact this will have in NA. We offer
two scenarios for investors to ponder. The first looks at a more aggressive import scenario and contemplates a world in which the
“Lemonade-stand Principle of Economics” is a reality. In this scenario, the marginal cost of LNG becomes the price setter in the US
and NA for a very long time to come. In the second scenario, we look at a more benign import scenario that depicts a very troubled
and imperfect world. In this scenario, the price impact, if any, is limited to peak summer months, but ultimately domestic sources of
natural gas continue to set the price.
Perhaps, it is Only a Matter of Time
We cannot know for sure what the future brings. At odds are two very strong view points: On one side, a macro fundamental view
that says that the long-run marginal price of the cheapest and most abundant source of a commodity should set global prices versus the
other side that says yes, but not now, because reality is intruding on theory. Then is it a matter of time before the “Lemonade-stand
Principle of Economics” becomes a reality. If so, how long will it take? Or, will externalities always intrude on theory, forever
delaying conversion of theory into reality? To date, history has shown that theory usually becomes reality in the world of
commodities, but timing has never been predictable.

Are We There Yet?
As obvious as it may seem to state the following … when it happens, we will know. Until then we encourage investors to keep a
weather eye on the horizon, because when it happens, it is likely to be fast and furious and not many clues will come at us. Also, if
and when we get to a point that theory and reality meet, we believe that this will mark the last time in a very long time to come that we
will have a fundamental shift in the natural gas world. After that, the world of natural gas is likely to be as complicated, if not more,
than the world of oil.
The Last Frontier
We do not specifically address the following issue in this report, but the ultimate frontier is the transformation of natural gas into a
transportation fuel, either directly or indirectly (through electric vehicles). Therefore, the next fundamental shift is likely to be
predicated on whether natural gas becomes a transportation fuel or not in NA. If the transformation of natural gas into a transportation
fuel happens, it is likely to happen independent of whether or not we discover a permanent, workable and economic solution to clean
coal.