U.S. dependence on LNG carries risks Growing demand from foreign sources increases dangers such as those in oil industry

WASHINGTON – The United States increasingly is going overseas to meet its natural gas needs, setting in motion a significant shift with a familiar, if unpleasant, side effect for the world’s largest energy consumer.

As America becomes a bigger player in the global natural gas trade, its vulnerability to faraway production snags and price gyrations will rise, as will its dependence on energy from the Middle East and other volatile regions.

Unlike oil, natural gas for decades has had the advantage of being a local energy source. It came from either within the United States or by pipeline from Canada. But as North American supplies dwindle and demand grows, the energy industry is investing billions of dollars to ship the fuel across oceans as liquefied natural gas, or LNG.

LNG is still a relatively small source of supply for the United States. But imports are expected to rise fivefold over the next decade, intensifying the competition with Europe and Asia for natural gas coming primarily from the Middle East, West Africa and countries formerly part of the Soviet Union.

“There’s a geopolitical overlay that’s going to look similar to oil,” said Michael Zenker, managing director of the global natural gas team at Cambridge Energy Research Associates.

This means the price that American homeowners, manufacturers and power plants pay for natural gas will be linked increasingly to the weather in Europe and the pace of economic growth in Asia – not to mention the political stability of countries such as Russia, Iran and Qatar, which combined hold more than half of the world’s natural gas reserves.

The reverse is also true. “A surge in U.S. demand could effectively raise the price for spot LNG cargoes, affecting the price in Japan and other countries,” said George Beranek, a manager in the global gas group at PFC Energy in Washington.

Fuel-hungry America is already the third-largest LNG importer behind South Korea and Japan, according to Energy Department statistics. Spain and France are other major importers today, while China and India are expected to be significant players down the road.

Until recently, the North American natural gas market was an island unto itself with an abundant resource, and prices were relatively cheap. A supply disruption in the Gulf of Mexico might drive up prices temporarily, but a problem with natural gas output in the Persian Gulf would have virtually no impact.

The fact that natural gas is cleaner-burning than heating oil and coal only burnished its public image, and demand grew rapidly during the 1990s as it became the fuel of choice for heating new homes and running new power plants.

Gradually, though, U.S. – and then Canadian – output began to taper off. Producers drilled many more wells, but still could not offset the depletion of existing wells while satisfying rising demand.

To bridge the gap, LNG imports tripled in the ’90s, rising to 226 billion cubic feet per year by 2000. They nearly tripled again by 2004, climbing to 652 billion cubic feet, or 3 percent of the country’s total natural gas consumption.

But there is still not much of a supply cushion in the U.S. natural gas market, which is a major reason prices climbed steadily in recent years, then skyrocketed after Hurricane Katrina disrupted output in the Gulf of Mexico. Natural gas futures averaged $9.01 per 1,000 cubic feet in 2005, more than five times the price in 1995.

Meeting the country’s anticipated demand by 2015 could require the U.S. to import more than 10 billion cubic feet per day of LNG, according to government and industry statistics. That’s greater than the amount of gas it will get from Canada by pipeline.

The competition for LNG will be most pronounced in the spot market, a small piece of the global trade in which tankers are usually directed on short notice to wherever the price is highest. But analysts said it also could affect long-term supply contracts because those deals are benchmarked to futures prices, which rise and fall based on short-term events. The U.S. buys LNG primarily on the spot market.

The industry prefers to sell at least a portion of its LNG through long-term agreements to help pay for the large capital investments needed to build critical infrastructure, including plants to liquefy the natural gas, refrigerated double-hulled ships to transport it and terminals on the receiving end to regasify the fuel. It also gives producers a measure of confidence that there will be a market for their supply.

Indeed, companies such as Exxon Mobil Corp., Royal Dutch Shell Plc and BG Group – the largest importer of LNG into the U.S. – are making multibillion-dollar investments up and down the LNG supply chain, creating what one BG executive referred to last fall as a “global virtual pipeline.” The U.S. has five LNG import terminals today, with four more under construction and dozens more proposed.

Some analysts say the U.S. already is feeling the impact of global events that a decade ago would not have registered the slightest ripple in its natural gas market.

For example, UBS natural gas analyst Ronald Barone noted in a recent report how U.S. supplies tightened in January because LNG originally scheduled for delivery at a terminal in Cove Point, Md., was redirected to Europe. European demand for natural gas rose over the past year, analysts said, because of a new import terminal in Britain and a drought that sapped strength from Spain’s hydropower sector.

In fact, much of the LNG shipped to the U.S. from Trinidad – the biggest supplier to the U.S. – is actually contracted for delivery to Spain, which resells the fuel it does not need into the U.S. market. But as Spanish utilities required more LNG to help fuel power plants, fewer shipments were available to the U.S.

“When things go bad, the U.S. is currently the one that suffers worst because it’s mostly a spot market. It’s the market of last resort,” said Gavin Law, head of the global LNG practice at consultant Wood Mackenzie in Houston.

But Cambridge Energy’s Zenker said there’s another way to look at the situation, one that underscores how the booming LNG business is rapidly connecting natural gas consumers around the globe like never before.

In order to lure back LNG cargoes from the U.S., Spanish utilities paid a premium to the already soaring market price at the Henry Hub, a key Gulf Coast delivery point.

“One could say the Spaniards are paying a price for U.S. hurricanes,” Zenker said.