High Energy Costs Return LNG to Favor ; A Controversial Fuel - Liquefied Natural Gas - May Grow to a 12 Percent Share of the US Gas Market

Chesapeake Bay is renowned for its skipjacks, the late-19th century wooden ships that "drudge" the waters in search of succulent oysters. But starting next week, a different kind of ship will be making waves here: a tanker that looks like a floating thermos loaded with liquefied natural gas (LNG).

The gas will be the start of regular shipments to this remote but picturesque facility located about an hour east of the nation's capital. The LNG - basically natural gas that has been refrigerated to minus 260 degrees F. - will be unloaded and then regasified and sent through pipelines to huge underground storage facilities for use this winter when it gets cold.

The US has been importing LNG for years, and it's the only way natural gas can be transported over water. But this Maryland facility, run by Dominion Cove Point LNG LP, will be the largest to date. Once it is fully operational, it will send out enough natural gas every day to heat 3.4 million homes. Its importance will be underscored next week when the secretary of Energy, Spencer Abraham, is expected to visit.

Despite the need for increased security for public fears of explosions, everyone from Federal Reserve Chairman Alan Greenspan to environmentalists is hailing the effort to import LNG, a clean- burning fuel that will help the economy during a time of high natural-gas prices. To illustrate the importance of LNG, Mr. Abraham will host an LNG summit later this month. Currently, LNG supplies about 1 percent of US gas needs. In the future, some experts believe it might supply 10 to 12 percent.

"It's part of the solution, an important part," says Mr. Abraham in an interview. "There could be a lot of possibilities if we had a greater capacity to receive it."

In the pipeline

There could be more development, given there are proposals to build 20 to 30 new LNG terminals. One company wants to use an old oil rig in the Santa Barbara Channel as a dock to pump gas onshore at Oxnard, Calif. Another group is dreaming up an undersea pipeline from the Bahamas to Florida. There are several proposals to build terminals in Mexico and then pipe it north of the border.

Fueling all the interest is the high price of natural gas. The Cove Point facility, for example, was originally opened in 1978, the same year gas was deregulated. Deregulation spurred exploration, and within two years, the LNG terminal shut down because prices were low. It was later used only to supply natural gas during times of peak usage.

"Cove Point is economical when gas is $3.50 per mcf [thousand cubic feet]," says Dan Donovan, a spokesman for Dominion. Gas is now selling closer to $5.50 per mcf.

At the same time, the cost of liquefying natural gas has come down as major consumers such as Japan have helped develop the technology. And the technology has improved at just the right moment. "Fortunately, the world is awash in stranded gas [gas resources without nearby markets]," said Daniel Yergin, chairman of Cambridge Energy Research Associates at a DOE natural-gas summit last month. …