U.S. Dependence on LNG Carries Risks

The United States is increasingly going overseas to meet its natural gas needs, setting in motion a significant shift that could put the world's largest energy consumer in trouble.

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 has, for decades, had the advantage of being a local energy source. It either came from 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 U.S. 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.

The price American homeowners, manufacturers, and power plants pay for natural gas will increasingly be linked 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.

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 temporarily drive up prices, 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
To bridge the gap, LNG imports tripled in the '90s, rising to 226 billion cubic feet per year by 2000. And 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 why prices climbed steadily in recent years _ and 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 via pipeline.