The United States must turn overseas for natural gas supplies, in spite of worries about energy independence.

It's been an unusual summer, to say the least. In the last few weeks, an unending parade of gas executives, attorneys, consultants, academics, bankers, and most notably, Federal Reserve Chairman Alan Greenspan, have commented on gas reserves issues before Congress. Certainly, the steady increase in natural gas prices gives cause for concern. Ordinary consumers (voters!) face higher utility bills-not only for winter heating, but for summer cooling, too. The news is bad even for those crystal-ball-gazers who tout hydrogen as the eventual savior of the nation's energy woes, since all that hydrogen would be manufactured largely from-you guessed it-natural gas.

Of course, every problem has a solution. With natural gas, that means looking overseas for imports. But will the United States embrace such an idea, given our past experience with global oil markets, our current dependence on Middle East oil, and the political and military costs that follow, as has been shown so vividly by recent events?

Yet economists such as Greenspan advocate a global natural gas market system, in spite of the odds.

"If North American natural gas markets are to function with the flexibility exhibited by oil, unlimited access to the vast world reserves of gas is required," Greenspan said before the U.S. House Committee on Energy and Commerce. Certainly, many other economists have said that the energy independence issue or hydrogen economy initiative, while a worthwhile goal, is not achievable for many, many decades. Furthermore, such a vision also depends on the presence of cheap gas as a bridge to the day when high-tech renewables run a pure hydrogen system.

In addition, the oil market is not necessarily the devil that some experts have made it out to be. While much has been made of Saudi Arabia's influence on oil markets, such as the 1970s OPEC oil embargo, it is rarely mentioned that this episode hurt that country's economy throughout much of the 1980s. Some economists say Middle East countries would be hard-pressed to put their economies in jeopardy again; besides, non-OPEC countries, such as Russia and Venezuela, diversify the mix.

In a post-9/11 world, emotions still run high on increasing energy dependence of foreign sources. But as Greenspan points out, natural gas resources are more diversified around the world, and a worldwide market, such as in oil, is much more resilient to supply shifts.

Greenspan explains: "Increased marginal supplies from abroad, while likely to notably damp the levels and volatility of American natural gas prices, would expose us to possibly insecure sources of foreign supply, as it has for oil. But natural gas reserves are somewhat more widely dispersed than those for oil, for which three-fifths of proved world reserves reside in the Middle East. Nearly two-fifths of world natural gas reserves are in Russia and its former satellites, and one-third are in the Middle East.

"Markets need to be able to effectively adjust to unexpected shortfalls in domestic supply. Access to world natural gas supplies will require a major expansion of liquefied natural gas (LNG) terminal import capacity. Without the flexibility such facilities will impart, imbalances in supply and demand must inevitably engender price volatility."

Europeans Corner the Market?

Even as the United States grapples with how it will meet natural gas demand (drill in wildlife preserves?), Europe already is bidding up the market for available supplies of imported LNG. Some experts wonder out loud whether Europeans might develop a pipeline system that would take the lion's share of worldwide gas. Of course, many experts say that pipeline development to the Middle East and other natural gas-rich countries is still in its infancy, and natural gas prices in the United States already divert to America resources that would otherwise go to Europe.

On June 9, the price of gas for delivery in July closed at $6.31 per million Btu. Not less than two years ago, at a European energy conference, analysts there were saying that projections of $4.00 per million Btu were enough to convince one firm to begin building 50 LNG ships to transport to the United States.

The economics of transporting natural gas to demand centers currently depend on market price, and the pricing of natural gas is not as straightforward as the pricing of oil. More than 50 percent of the world's oil consumption is traded internationally, whereas natural gas markets tend to be more regional in nature, and prices can vary considerably from country to country, according to the Energy Information Administration (EIA). In Asia and Europe, for example, LNG markets are strongly influenced by oil product markets rather than by natural gas prices. Naturally, the EIA says that as the use and trade of natural gas continue to grow, pricing mechanisms will continue to evolve, facilitating international trade and paving the way for a global gas market.

The State of LNG Investment

According to the EIA, the financial risk of building new LNG terminals in the United States has dropped a peg with the recent issuance of new policies by the Federal Energy Regulatory Commission. Yet other developments have impaired the financial circumstances of several LNG project sponsors. For example, consider four key companies involved in U.S. LNG projects.

The first company, Enron, filed for Chapter 11 protection in December 2001. The second, Dynegy, reported a $2.8 billion net loss for 2002. Similarly, AES Corp. reported a 2002 net loss of $3.5 billion. Finally, El Paso Corp.'s financial difficulties were reflected in its decision to sell $3.4 billion of assets during 2003. These four financially challenged companies are unlikely to build the LNG facilities they proposed, EIA says. The companies had previously proposed building approximately 1.6 trillion cubic feet of new LNG regasification capacity in the United States.

Furthermore, the EIA also point out that another casualty of the industry's financial problems is the El Paso "Energy Bridge" LNG concept, which was to build floating offshore docks that would allow LNG tankers to unload their cargoes out of sight of land. It was hoped that this approach would eliminate the political opposition associated with onshore facilities, EIA says. And, now that El Paso has exited the LNG business, this approach to building and operating LNG terminals might go untested for some time, EIA says.

Given that prices for gas are high and that the hydrogen economy or even a transatlantic pipeline technology never before seen is long off, LNG terminals will have to be built and financing will have to made available. Otherwise, the only answer to high gas prices will be that of Energy Secretary Spencer Abraham: conservation.

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