Liquefied Natural Gas: Regulation in a Competitive Natural Gas Market

Article excerpt

I. INTRODUCTION

Over the past three years there has been increasing discussion of the role imported liquefied natural gas (LNG)1 may play in the supply of natural gas for the U.S. market. This is a result of the projections of domestic production and importation of natural gas from Canada (compared with projections of the growing demand for natural gas), as well as the significantly higher prices in the domestic spot markets. Forecasts of LNG consumption by 2015 range from 4% to 10% of domestic natural gas consumption, with more aggressive projections reaching the 10% level by 2010. During 2002, LNG constituted approximately 1% of domestic natural gas consumption.2

LNG projects are large endeavors requiring investments in the hundreds of millions of dollars for a single LNG terminal. A full supply chain project can require investment in excess of $2.5 billion.3 The structure of future LNG projects and the regulatory environment must be capable of encouraging and facilitating the necessary investments. The recent focus on the need to construct the infrastructure to facilitate a sharp increase in the supply of LNG has resulted in significant policy changes by the Federal Energy Regulatory Commission (FERC or Commission).

LNG was viewed as a high-cost source of natural gas in the early years of its importation into the U.S. This view changed during the periods of natural gas supply curtailment, when LNG was seen as necessary to augment an inadequate supply of domestic natural gas. Additionally, LNG was viewed as a largely seasonal source of natural gas to be utilized at times when users were willing to accommodate the higher prices. Recently, LNG has come to be viewed as more than just a peaking supply of natural gas. Proponents of new LNG projects assert that in the future LNG can be a competitively priced source of natural gas available to fill an increasing portion of the growing demand for natural gas in the U.S.

Whether the U.S. will have adequate supplies of natural gas to meet the expected growth in demand, at prices that will allow economic growth, has become a dominant energy issue, as well as a significant economic and political issue.4 The supply and price of natural gas, as well as the growing importance of LNG as a component of the U.S. natural gas supply has gained the attention of both the FERC Chairman and the Federal Reserve Board Chairman.5

This article examines the growing importance of LNG in the U.S. natural gas supply. Recent legislation and changes in regulatory policies are intended to remove perceived impediments to the development of the infrastructure. This infrastructure is necessary to facilitate the importation of significantly increased quantities of LNG. The article is in the context of the growing global trade in LNG, in the light of its mixed history in the domestic natural gas market.

II. LNG IN THE WORLD NATURAL GAS SUPPLY

The global consumption of natural gas has increased dramatically during the past thirty years and is projected to continue to grow at a high rate over the next twenty-five years. Natural gas is forecasted to be the fastest growing component of global energy consumption, with projected average annual increases of 2.8% between 2001 and 2025.6 As shown in Figure 1, worldwide natural gas consumption is projected to increase from 90 trillion cubic feet (Tcf) in 2001 to 176 Tcf in 2025.

LNG will play a significant role in satisfying the growing demand for natural gas. The global demand for LNG has been consistently growing at a rate of 6% to 7% annually since 1970. In some countries, LNG has been a major component of the natural gas supply for several years, often serving as a primary source of natural gas for regions lacking natural gas supplies that can be delivered by pipeline. Historically, LNG has played a minor role in the U.S., providing only about 1% of the natural gas supply during 2002, while providing about 97% of the supply in Asia. …