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Does the U.S. Need LNG? 7

The demand for natural gas in the U.S. was boosted in the late 1970s and early 1980s in part by the desire to diversify energy resources in the wake of global oil shocks8. Demand for natural gas was sustained due to the clear environmental advantages of natural gas over other fossil fuels and its superior thermal efficiency when used in power generation. Based on U.S. Energy Information Administration (U.S.EIA) data for 2006, the most recent available, the U.S. used just under 22 Tcf of gas. U.S. dry gas production9 was about 18.5 Tcf, with the balance comprising mainly exports from Canada (about 16 percent of total consumption) and LNG (just over 2.5 percent of total natural gas consumed). According to the U.S.EIA, dry natural gas production in the U.S. is predicted to grow from 18.8 trillion cubic feet (Tcf) in 2004 to 20.5 Tcf in 2030.10 The total U.S. demand for natural gas is expected to rise from 22.4 Tcf in 2004 to about 26 Tcf by 2030 (including forecasted gains in energy efficiency and conservation). These projections suggest that the U.S. could face a gap between total supply and total consumption of about six Tcf by 2030.

The bulk of the natural gas used in the U.S. comes from domestic production, in many cases from fields that are several decades old and that are beginning to decline rapidly. New natural gas fields and reserves are constantly being discovered, but with new challenges in production and technology, as reflected recently in higher costs and prices. Consequently, increased imports of natural gas may be required to meet future shortfalls.

Most of the imported natural gas used by U.S. customers - indeed, most of the total energy (including also crude oil and petroleum products like gasoline and electric power) - comes from Canada. Canada is the single largest exporter of crude oil, natural gas, and electric power to the U.S. In recent years, pipeline imports of natural gas from Canada have constituted 15-17 percent of total U.S. consumption. Canada may not be able to sustain current or increasing volumes of exports to the U.S. due to Canada's own growing demand for natural gas and the maturation of the Western Canada Sedimentary Basin (WCSB). Recent trends suggest that due to decreasing initial gas well productivities and high production decline rates in the WSCB,11 higher levels of drilling activity are necessary to maintain current production levels. Alternative sources of domestic natural gas supply for both Canada and the U.S. include building pipelines to carry natural gas produced on the North Slope of Alaska and from Arctic gas production in Canada's far north ("mega" projects that entail intensive engineering feasibility and design and that require sound investment and regulatory frameworks for cost recovery); developing onshore natural gas resources in the Rocky Mountain region and other key "unconventional"12 supply basins in the Lower 48 as well as Canada's WCSB; and developing offshore resources along the North American continental margins in the Pacific, the Atlantic and the Eastern Gulf of Mexico Outer Continental Shelf (OCS). Natural gas from Alaska, an alluring prospect, will require robust natural gas market conditions (demand and pricing) in Canada and the Lower 48 states. Additionally, some projections indicate that a gap in supply could remain even if the delivery of Alaskan gas commences, unless federal and state laws and regulations that constrain access to much of the offshore resources in the eastern Gulf of Mexico and the onshore Rocky Mountain region are altered.13

Currently, LNG imports account for slightly less than three percent of the total U.S. consumption of natural gas. The U.S. EIA expects LNG imports to reach 4.5 Tcf a year by 2030, or about 17 percent of our total consumption. Although many factors can alter this outlook, the demand for LNG is expected to grow.

There are 113 active LNG facilities in the United States, including four existing onshore marine import terminals, peak shaving and satellite storage facilities, and operations involved in niche markets such as vehicular fuel as shown in the figure below. Most of these facilities were constructed between 1965 and 1975 and were dedicated to meeting the supply and storage needs of local utilities. Approximately 55 local utilities own and operate domestic natural gas liquefaction and storage facilities as part of their distribution networks.14

Figure 1 . U.S. LNG Facilities15

7 A full analysis of the U.S. supply and demand balance is available in the third CEE LNG briefing paper in the online Guide to LNG in North America.

8 Schleede, Glenn R., Why Would an Electric Utility Want to Increase Dependence on Natural Gas, contributed paper in The Case for Natural Gas, edited by Jacqueline Weaver, The Natural Gas Project, University of Houston, 1991.

9 Dry gas production is natural gas that is almost entirely methane, produced from "wet" gas that is stripped of other molecules during processing or that is produced from non-associated gas fields as "dry" gas.

10 U.S. EIA, Annual Energy Outlook 2007 with Projections to 2030.

11 Jim Delay, Alberta Energy & Utilities Board, Alberta Natural Gas Outlook, Calgary, October 2002.

12 We use the term "unconventional" to refer to those natural gas producing reservoirs that must be treated for natural gas to flow in sufficient volumes to ensure that a field is commercially viable at a given natural gas price.

13 U.S. EIA, Mid-Term Natural Gas Supply: Analysis of Federal Access Restrictions, December 2001.

14 U.S.EIA, U.S. LNG Markets and Uses, November 2002.

15 U.S.EIA, U.S. LNG Markets and Users, June 2004 update.