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The Global LNG Gamble

The Geopolitical Risks of LNG
Fortnightly Magazine - March 2005

in the Holy Land.

In October 1973, on Yom Kippur, Egypt and Syria invaded Israel. By November, Israel's borders were fully secured. In the meantime, the veil of energy security was ripped away.

In retaliation for Western military support of Israel, OPEC imposed a 70 percent increase in crude oil prices, sending shockwaves through the world energy market. U.S. gasoline prices quadrupled, and the stock market plummeted. In the months that followed, the Dow Jones Industrial average lost 45 percent of its value. 1

"The nation learned, quite painfully, the price of dependence upon foreign sources of crude oil," said Carl English, president and CEO of Consumers Energy, speaking before the House Energy & Commerce committee. "We also learned, through long gasoline lines and shuttered factories, that energy is the lifeblood of our economy. We can blame some of the past energy problems on a lack of foresight, understanding and experience. We will not be permitted to do so again."

Getting Hooked on Imports

Despite the wisdom that comes with experience, the U.S. cannot help but to sink another hook into its energy jugular. Admittedly the LNG hook is smaller than the petroleum hook, but it perforates a new and strategically critical vein of the U.S. economy-electric and gas utilities.

Until a few years ago, the United States was almost independent in terms of its natural gas supplies. Some gas entered this country from Canada through pipelines, and a tiny amount arrived in the form of LNG-about 1 percent of U.S. natural gas consumed at its recent peak in 2002. Since then, however, existing LNG terminals and storage capacity have expanded, and imports have more than doubled. 2 This growth continues; U.S. LNG imports are expected to increase by an order of magnitude over the next decade, as gas companies develop billions of dollars worth of LNG infrastructure here and abroad. 3

A recent accounting showed 49 LNG terminals in development in North America, with a combined total capacity of more than 49 billion cubic feet (bcf) per day. Only a small share of those projects will ever see a drop of LNG, but current projections call for between six and 12 LNG import terminals to be built by 2012. So far nine projects, totaling 10.9 Bcf/day of capacity, have cleared permitting and licensing hurdles, and two are in construction. 4

This quantity of LNG capacity is significant, though probably not large enough to flood the U.S. market with cheap gas in the foreseeable future. If gas prices remain high enough for LNG to compete, then most domestic gas production will continue. The Department of Energy's Energy Information Administration (EIA) projects U.S. imports will reach 16 percent of U.S. gas consumption by 2025. 5 However, global expansion of the LNG trade suggests the imports will have an increasing influence on gas prices, 6 and indeed some analyses show that LNG already has become a determining factor in U.S. gas prices. 7

Not surprisingly, amid these market developments, an international gas cartel might be emerging.

Cooperation Among Suppliers

Early last year, news reports