March 12, 2001 By Wall St Journal

LNG in Trinidad & Tobago

POINT FORTIN, Trinidad -- When energy executives gathered on this small island in May 1994, the notion of building a profitable liquefied-natural-gas plant here drew scorn. Martin Houston, then head of British Gas PLC's Trinidad operations, recalls a competitor commenting, "If you build an LNG facility in Trinidad, I will eat my shoes." Two years later, at a ground-breaking ceremony for just such a facility, Mr. Houston suggested to the crowd that the skeptic be sent "a little bit of hot pepper sauce for his shoes."

Today, the Caribbean nation of 1.3 million people is an increasingly important energy supplier to the U.S. East Coast. The Trinidad plant provides 40% of U.S. imports of liquefied-natural gas, or LNG -- far more than Algeria, the next biggest supplier.

It's a good time to be selling LNG. Natural-gas supplies have been tight this winter, with skyrocketing prices contributing to the energy crisis in California and to the broader U.S. economic downturn. Demand for clean-burning natural gas continues to rise. More than 90% of new U.S. power-generating plants under construction are gas-fired.

This week, Royal Dutch/Shell Group displayed its eagerness to exploit the U.S. market by launching a hostile $1.8 billion tender offer for little-known Barrett Resources Corp., a Denver gas producer.

Liquefying natural gas for storage on ships or in tanks on land ordinarily makes LNG more expensive than gas transported by pipeline in vapor form. But as older U.S. natural-gas fields run low, suppliers are scrounging for anything they can get. LNG shipped 2,200 miles from Port Fortin to energy-strapped New England now competes favorably with gas sent by pipeline from such places as Texas.

Trinidad, an island best known for Carnival celebrations, satiric Calypso music and spicy East-Indian food, operates the only liquefied-natural-gas plant in the western half of the Atlantic. It provides about 15% of New England's overall gas needs and as much as 30% during peak-usage periods, such as when temperatures fall sharply.

Mr. Houston and others give much of the credit for Trinidad's unlikely ascension in the LNG field to Gordon Shearer, a determined geophysicist born and raised in Scotland. In the late 1980s, Mr. Shearer was asked by his employer, Boston-based Cabot Corp., to revive the company's struggling LNG business. His audacious rescue plan eventually focused on building a plant in Trinidad few believed would ever succeed.

Only seven miles off the coast of Venezuela, Trinidad is on the eastern edge of a region rich in oil and natural gas that extends to Colombia. For more than half a century, oil had been the island's lifeblood. Natural gas, which sometimes surfaces during oil drilling, used to be seen as a nuisance in Trinidad and was generally burned off into oblivion. But as oil supplies here have begun drying up, producers have discovered large offshore reservoirs of natural gas in the soft sedimentary rock beneath the Atlantic Ocean and Caribbean Sea.

Once seen as an exotic, volatile form of fuel that many wrote off as too expensive and dangerous for the U.S. market, LNG is natural gas cooled to minus 260 degrees Fahrenheit -- enough to change it to a liquid from a vapor. The cooling process shrinks the gas to one-six hundredth of its original volume, allowing it to be stored in ships and land tanks. When the fuel is needed, it is converted back into a gas.

The cooling and conversion processes cost about $1.50 per million British thermal units, or BTUs, of natural gas. (The typical U.S. home using natural gas this winter consumed one billion BTUs, costing $933, or 73% more than last year.) When the wholesale price of gas was about $2 per million BTUs, as it was for most of the 1990s, LNG was simply too expensive an option for the U.S.

As American gas prices soared to near $10 per million BTUs last year, and then settled back into a range of $5 to $6, it became possible to make a profit on LNG in the U.S. For many years, LNG has been a key energy source in Japan and other parts of Asia that lack domestic fuel sources and where gas prices are comparatively high.

LNG so far makes up less than 2% of the U.S. natural-gas supply. But the Department of Energy predicts LNG imports will increase more than fivefold by 2020, to 390 billion cubic feet a year. In recent weeks, several U.S. natural-gas companies have said they are bringing back mothballed LNG terminals and looking to build new ones. Enron Corp. and a group led by Shell are negotiating with Venezuela to build two separate liquefaction plants there. El Paso Corp. plans to construct a handful of terminals to serve the U.S. and Mexican markets, including at least one aimed at fuel-starved California.

Trinidad has a huge head start, thanks largely to Cabot's Mr.Shearer. He was 32 years old in 1987 when Cabot handed him the job of turning around its LNG business. At the time, that business consisted of a receiving terminal in Massachusetts that had been shut down because of a contract dispute with Algerian suppliers.

Similar price disputes with those suppliers had shut the three other U.S. receiving terminals, and fears lingered about the safety of LNG's high volatility. An LNG-fueled fire in Cleveland in 1944 killed 128 people and still haunted the industry. Cabot's Boston-area terminal had been the subject of a "60 Minutes" broadcast in 1978 warning of LNG's explosive capability.

Still, Mr. Shearer, who holds a Harvard MBA, and his boss, Sam Bodman, Cabot's chairman, viewed their terminal as a hard-to-replicate facility that one day could serve as a hub for the New England natural-gas industry.

Safety improvements had been made over the years in how LNG was stored and handled. So, Mr. Shearer settled the Algerian price dispute, reactivated Cabot's terminal and began looking for new LNG sources.

A lanky, bearded man who sails as a hobby, Mr. Shearer considered Nigeria and Venezuela as sources but ultimately set his sights on Trinidad. Critical to this decision was a seaside lunch in June 1990 in Laguna Nigel, Calif., with Cliff Davis, an industry veteran who had tried for nearly a decade to pull together an LNG project on the island.

Mr. Davis, then chairman of Midcon Corp., pointed out that Trinidad's potential gas supply was large and proximity to the U.S. would lower transportation costs. What's more, gas fetches a relatively high price in New England because it is expensive to move it by pipeline the long distance from the Southwest and other gas-rich regions. For unrelated reasons, Mr. Davis's Midcon had abandoned any Trinidad ambitions, and he turned over valuable files and contact information to a grateful Mr. Shearer.

"Here is little rinky-dink us [Cabot], just barely out of the ditch, and it's like, 'Wow!' " Mr. Shearer says, recalling his enthusiasm. With an introduction from Midcon, he presented Trinidad officials with a plan designed to assuage fears on the island of a giant new plant. He proposed a small, relatively inexpensive facility that would serve Boston's LNG needs and could be built quickly. The $1 billion project would be half the size of industry standards at the time.


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