Liquefied Natural Gas (LNG) Markets in Transition: Implications for U.S. Supply and Price

Natural gas consumption in the United States is expected to increase substantially over the coming decades primarily because of its usefulness in generating relatively clean electricity.Domestic supplies are projected to be unable to meet increasing demand because existing fields are yielding less production and new drilling efforts are not replicating past success rates.Pipeline imports from Canada are also projected to decline.Various alternatives exist that might close the demand and supply gap, with imports of liquefied natural gas (LNG) being touted as one of the most promising.As a result of projected supply increases, much of the LNG debate and analysis has focused on the availability of the physical facilities needed to bring larger quantities of LNG into the United States.However, other changes in LNG market structure and practices are also likely to be needed before expanded quantities of LNG can be supplied at market-based prices.The traditional LNG market, which developed in the 1970s, and which only recently has begun to be liberalized, can be characterized as capital intensive, long term, with restrictive contractual provisions.Risk was managed through the sales contract, and the whole production chain was committed in advance to ensure economic viability of the project.Many of the characteristics of this market are inconsistent with a more competitive market environment.The LNG market is in the early stages of a transition which incorporates a viable short term spot market, price discovery through gas-to-gas competition, financial instruments to manage risk, competitive capital acquisition, open access of various links in the supply chain to insure efficient resource allocation, and an expanded set of producers and buyers.Full realization of the potential of LNG to provide a stable source of supply to U.S. markets, as well as providing a price cap to U.S. natural gas prices awaits changes in market structure as well as investment in receiving terminals.The extent to which the LNG market develops market based characteristics may determine the extent to which other sources of natural gas supply are needed.The Alaska Natural Gas Pipeline, drilling on restricted land in the Rockies, and developing advanced technologies to extract natural gas from unconventional sources may be considered as substitutes in closing the projected demand and supply gap.The 108 th Congress has considered policy to support the construction of an Alaska natural gas pipeline (H.R. 6) and the availability of more LNG terminals (H.R. 4413).This report will not be updated.