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Executive Summary 1

This briefing paper is the first in a series of articles that describe the liquefied natural gas (LNG) industry and the growing role LNG may play in the U.S. energy future. The first edition of this paper was released in January 2003. The second and third papers, LNG Safety and Security and The Role of LNG in North American Natural Gas Supply and Demand, followed in October 2003 and September 2004 accordingly. All of these reports, along with supplemental information and resource links, are available as part of the online Guide to LNG in North America published by the Center for Energy Economics (CEE), Bureau of Economic Geology, Jackson School of Geosciences, The University of Texas at Austin, www.beg.utexas.edu/energyecon/lng.

LNG is the liquid form of the natural gas people use in their homes for cooking and heating. According to the U.S. Energy Information Administration (U.S.EIA), the U.S. could face a gap in supply of natural gas of about six trillion cubic feet (Tcf) by 2030. Canada, which has been supplying up to 16 percent of natural gas supply to the U.S. "Lower 48" states may not be able to sustain much less grow these exports due to Canada's own increasing demand for natural gas. Consequently, increased imports of LNG will be required to meet future shortfalls. The U.S.EIA expects LNG imports to reach 4.36 Tcf a year by 2030, or about sixteen percent of our total consumption.

To make LNG available for use in the U.S., energy companies must invest in the LNG value chain, which consists of a number of different operations that are highly linked and dependent upon one another. Natural gas can be economically produced and delivered to the U.S. as LNG within a price range of about $2.60-$4.20 per million Btu (MMBtu) at Henry Hub in Louisiana, depending largely on economics for exploration and production (E&P; including financial terms offered by producing and exporting countries) and shipping cost (primarily a function of distance).2 This price range incorporates an estimated 30 percent escalation over CEE's 2003 estimate of $2.00-3.70/MMBtu, a consequence of cost pressure in recent years associated with higher energy and commodity prices.

LNG has been safely handled for many years. The industry is not without incidents but it has maintained an enviable safety record, especially over the last 40 years. Worldwide, there are 23 LNG export (liquefaction) terminals, 58 import (regasification) terminals, and 224 LNG ships altogether handling approximately 142 million metric tons of LNG every year. There are currently over 2403 peakshaving and LNG storage facilities worldwide, some operating since the mid-60s. The U.S. has the largest number of LNG facilities in the worldó113 active LNG facilities spread across the country with a higher concentration of the peak shaving and satellite facilities in the northeastern region. As of this update, a number of new LNG import receiving terminals have been approved in the Lower 48. Four onshore terminals are under construction along the U.S. Gulf Coast (with expansions proposed) in Freeport and Port Arthur, Texas and Cameron Parish, Louisiana; one offshore ship-based import/regasification terminal is in operation; one new onshore terminal is in operation on Mexico's upper Gulf Coast (Altamira, near Tampico, Tamaulipas State) and another is under construction in Mexico's Baja California Norte; and one onshore import receiving terminal is under construction in New Brunswick, Canada (with an expansion already announced). Two existing import receiving terminals, Lake Charles, Louisiana and Cove Point, Maryland are undergoing expansion and an expansion for the existing terminal at Elba Island, Georgia has been approved.

The need for additional natural gas supplies and new LNG import receiving capacity, including the reopening of and proposed expansions to existing LNG facilities at Cove Point, Maryland and Elba Island, Georgia has focused public attention on the safety and security of LNG facilities in the U.S. The safe and environmentally sound operation of all LNG facilities and the protection of these facilities from terrorist activities or other forms of accident or injury are a concern and responsibility shared by operators as well as federal, state and local jurisdictions across the U.S. Onshore LNG facilities are industrial sites and, as such, are subject to all rules, regulations and environmental standards imposed by the various jurisdictions. These same or similar concerns apply to natural gas storage and pipeline transportation and distribution and our daily use of natural gas, as well as to all energy fuels and infrastructure and critical industrial and public infrastructure throughout the United States, North America and the world.

1 This report was prepared by the Center for Energy Economics (CEE) through a research and public education consortium, Commercial Frameworks for LNG in North America. Sponsors of the consortium are BP Energy Company-Global LNG, BG LNG Services, ChevronTexaco Global LNG, ConocoPhillips Worldwide LNG, El Paso Global LNG, ExxonMobil Gas Marketing Company, SUEZ LNG North America/Distrigas of Massachusetts. Shell LNG North America participated in the initial phase of the consortium. The U.S. Department of Energy-Office of Fossil Energy provided critical support and the Ministry of Energy and Industry, Trinidad & Tobago and Nigerian National Petroleum Corporation (NNPC) participate as observers. This report was prepared by Dr. Michelle Michot Foss, Chief Energy Economist and Head of CEE; Mr. Dmitry Volkov, Energy Analyst, CEE; Dr. Mariano Gurfinkel, Project Manager and Associate Head of CEE; and Engr. Fisoye Delano, Managing Director, Nigerian Petroleum Development Company Ltd., Nigerian National Petroleum Corporation Group (previously a Senior Researcher at CEE-UT). The views expressed in this paper are those of the authors and not necessarily those of the University of Texas at Austin. Peer reviews were provided by a number of outside experts and organizations.

2 In this document, the cost term "$/MMBtu" or dollars per million British thermal unit, is a standard measure of heat content in energy fuels. See Appendix 3. The price range presented here includes both existing and new LNG import terminals. One such basis is $1.68/MMBtu freight rate from Malaysia (Bintulu) to Lake Charles, Louisiana (round trip 51 days; source, European Waterborne LNG Report, May 2005). The cost/price range for new import terminals and locations may vary. Comparisons to CEE's estimate include: California Energy Commission NARG model assumptions (2006) of $1.67-3.83/MMBtu for transport to Mid-Atlantic U.S. from South America, with East Coast costs at the lower end, and $2.97-5.59/MMBtu for transport to the Northeast U.S. from Asia/Pacific region (one of the longer shipping routes). CEDIGAZ ( www.cedigaz.com ) in July 2005 estimated $2.70-3.30/MMBtu (as compared to their estimate of $3.50 -- 4.10/MMBtu in the 1990s) for the Middle East - Far East value chain. The July 2005 estimate incorporates the same exploration and production and receiving and regasification cost components, slightly reduces liquefaction and abruptly drops shipping costs by approximately 25-30 percent.

3 See http://www.shell-usgp.com/lngsashas.asp.