Ken Silverstein EnergyBiz Insider Editor-in-Chief

LNG, as it is known, is an imperfect solution to the dilemma before U.S. policymakers. A greater reliance on it means even more dependence on foreign governments and especially some that have tenuous relations with this country. Investors then require added assurances -- something that puts the ball in the court of lawmakers and regulators. At this point, though, it appears that national policy will favor increased LNG usage because the natural gas demand here outstrips the domestic supplies.

"I would characterize LNG as an evolutionary step in the natural gas industry," says Bob Linden, member of PA Consulting Management Team in Washington, D.C. "Our gas profile will dramatically go up. LNG is here now. But as technology moves forward, we will find newer ways to produce gas. Still, the cycle time for any new idea is 5-10 years away. When the press starts talking about it, start the clock."

LNG, for example, has taken some time to get its legs. Last year, it comprised 2 percent to 3 percent of the natural gas supply in this country. Projections are that it will make up 20 percent of the supply within 20 years. Globally, the LNG market has grown by 33 percent over the last five years and more than $4 billion has been invested in that effort, adds the International Energy Agency in Paris.

In its vaporized state, natural gas is voluminous and therefore the rate of energy transferred moves slowly through high-pressured pipelines. Moreover, pipelines are not ubiquitous and so other means of transportation from off-shore points must be considered. By cooling natural gas and reducing its volume, the subsequent LNG can be efficiently shipped in containers. It is then shipped to an LNG storage facility.

The whole value chain can run into the billions. That's why experts such as those at Standard & Poor's say that natural gas prices must be in the range of $2.50 to $3.25 per million BTUs if such enterprises are to be profitable. With prices now well above that and expected to not dip below $6 per million BTUs, the field has attracted major companies including ExxonMobil, ChevronTexaco, Shell Gas and Power, and BP. Sempra Energy says that it expects to earn $50 million to $800 million in the LNG business by 2008.

All players want some political, regulatory and financial assurances before they continue to invest. "Given the energy prices we are now facing, policymakers are looking at various ways to dampen the price volatility," says Kevin Madden, executive vice president for AGL Resources in Atlanta. The company is working to grow storage at El Paso Corp.'s Elba Island LNG facility in Savanna, Ga. as a way to ease prices.

Increased Dependence

While Madden says that most Georgia residents support that expansion, the same can't be said for residents in other parts of the country that are considering the building of LNG facilities. Eureka, Calif., for example, recently balked at having such a facility in its backyard. The fear is that the gas would escape, congeal and possibly create a huge explosion. Others worry about terrorist attacks on these plants.

At the same time, the natural gas to produce LNG is coming from such countries as Algeria, Angola, Indonesia, Libya and Nigeria -- countries that might not possibly be in-tune with American ideals or countries that might not be politically steady. Critics of LNG say that if the United States gets to a point in which it cannot wean itself from those exports, the outcome could be unfortunate.

"The increased dependence on natural gas and on foreign natural gas would be extremely bad," says Julian Darley, author of High Noon for Natural Gas. "It won't be long before we start seeing problems."

Clearly, the demand for energy will only increase and particularly as many underdeveloped countries grow their economies. The long run may hold out hope for fuel alternatives that include more green energy or coal gasification that attempts to purify coal before it is burned and goes out the smoke stack. In the coming years, though, the United States must address the natural gas supply imbalance.

U.S. regulators say that they understand the security concerns of effected communities. Toward that end, they say that the due diligence process for permitting LNG storage facilities will never be short-circuited. But the permitting process now consumes about 4 of the 7 years it takes to get a receiving plant up and running here. And that's one reason why Congress passed an energy bill that gives the Federal Energy Regulatory Commission exclusive jurisdiction when it comes to giving site approval for these plants, although states can still exercise legal rights to try and prevent such permission.

Others, meanwhile, rebut the argument that the country's welfare would be at risk if it becomes LNG dependent. Not that those concerns are unfounded, but the imports will come from some that are friendly and stable such as Qatar and Egypt that are increasingly opening up to western capital, says Ken Medlock, senior fellow at Rice University. He adds that if the dependence is on a multitude of countries, then the risks are spread -- much like an investment portfolio.

In any event, oil executives have predicted that LNG will surpass petroleum as the world's main fuel source by 2025 and will make up 20-25 percent of the total gas demand in the United States. It's no wonder then that 30 LNG terminals are currently at various stages of development in North America.

"Developers have huge capital costs they now need to recover," says Linden, with PA Management, adding that they have made investments in tankers, terminals and gasification plants. "When those costs sink in, they will want to move that natural gas and a price correction could eventually come."

LNG has promise and will likely experience high growth in the coming years if natural gas prices remain high. At the right price, LNG can be transported to the United States and elsewhere from gas-rich foreign sources giving producers a chance to earn adequate returns. But, ramping up production will take time and any subsequent benefits will not be realized until 2008 when the first group of new LNG terminals comes on line.

Copyright © 1996-2005 by CyberTech, Inc. All rights reserved. Energy Central® is a registered trademark of CyberTech, Incorporated.