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The Global LNG Gamble

The Geopolitical Risks of LNG
Fortnightly Magazine - March 2005

not cover the entire range of risks affecting the LNG trade.

Gas Gambit

Amid all the uncertainties about the LNG trade, one thing is certain: Contracting for LNG poses geopolitical risk factors that aren't present in existing U.S. gas-supply markets. Predicting the future of geopolitics is a notoriously difficult task, but most analysts expect social entropy to increase in the future.

"The underlying assumption is that the world isn't going to change, and political risk isn't going to increase in a way that will affect the LNG trade," says Korin of IAGS. "I don't think that is a good assumption to make."

Numerous wild-card factors complicate the analysis. One such factor, for example, is the role that might be played in the near future by Russia, which holds the world's largest gas reserves, as well as by China, India, and other Asian countries, whose LNG demand promises to increase dramatically.

In particular, China's growing LNG demand likely will put greater burdens on the Pacific LNG trade, further limiting flexibility for other gas markets. But the dynamics of China's economic and political influence could have even broader implications.

"It all depends on China's stability," Woolsey says. "What role China plays, in terms of demand or otherwise, depends on whether it remains politically stable and moves toward reform and democracy. An economically prosperous China that is beginning to liberalize politically is one thing, but a China that is getting nervous because of unemployment and economic changes could become hostile, particularly over Taiwan. That is a major variable."

Already recognizing its energy needs are growing quickly, China has begun investing in the LNG supply chain in Indonesia and Australia, 4 and is getting more actively involved in Middle East politics. The U.S. State Department has expressed concerns in recent years about China's sale of missiles and military technology to Syria, Libya, Iran, Iraq and increasingly Saudi Arabia. 5

Such wild cards make U.S. decision makers uncomfortable about relying on LNG.

"We'd like to be able to reduce the need for LNG," the Ohio PUC's Mason says. "If I had my preference, I'd rather see America become more dependent on North American resources of any nature, whether oil, gas, coal, or something else, instead of anything coming from overseas. It is easy to cartel crude oil, and unfortunately it probably is as easy to cartel LNG once you build American dependence."

Whatever U.S. utility decision makers might prefer, however, the country seems destined to increase its reliance on LNG imports. This destiny is driven by the fundamental belief that natural gas demands will rise in the future, particularly as environmental sensitivities intensify. Imported LNG is competitive today with domestic North American natural gas supplies, and it is expected to remain competitive in the future. 6 The U.S. economy depends on affordable natural gas, and therefore, somehow, LNG terminals will be built on American shores.

Absent from this calculus are the public policy ramifications of extending energy dependence into the utility industry. Such factors have escaped serious consideration largely because LNG investment decisions are predicated on market