Liquefied Natural Gas (LNG) in U.S. Energy Policy: Infrastructure and Market Issues

Publication Date: February 2005

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Energy

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Abstract:

Liquefied natural gas (LNG) imports to the United States are increasing to supplement domestic gas production. Government officials such as the Federal Reserve Chairman and the Secretary of Energy have spoken in favor of LNG imports to mitigate high energy prices. Through regulatory and administrative actions, federal agencies are trying to attract private capital for LNG infrastructure, streamline the LNG terminal approval process, and promote LNG trade. Were these policies to continue and gas demand to grow, LNG might account for as much as 21% of U.S. gas supply by 2025, up from 3% in 2004. Congress is examining the infrastructure and market implications of greater U.S. LNG demand.

There are concerns about how LNG capacity additions would be integrated into the nation's gas infrastructure. Meeting projected U.S. LNG demand would require six to ten new import terminals in addition to expansion of four existing terminals. Five new terminals in the Gulf of Mexico are approved, but public opposition has blocked near-to-market terminals which might save billions of dollars in gas transportation costs. New LNG terminals can also require more regional pipeline capacity to transport their supply, although this capacity may not be available in key markets. Securing LNG infrastructure against accidents and terrorist attacks may also be a challenge to public agencies. Since import terminals process large volumes of LNG, a breakdown at any facility has the potential to bottleneck supply.

LNG's effectiveness in moderating U.S. gas prices will be determined by global LNG supply, the development of a "spot" market, potential market concentration, and evolving trading relationships. There appears to be sufficient interest among LNG exporters to meet global demand projections, although it remains to be seen which new export projects will be built. An LNG spot market, which may help U.S. companies import LNG cost-effectively, also appears to be growing. Although some industry analysts believe the future LNG market may be influenced by a natural gas cartel, the potential effectiveness of a such a cartel is unclear. Whether exporters cooperate or not, an integrated global LNG market may change trading and political relationships. In a global market, individual country energy polices may affect LNG price and availability worldwide. Trade with LNG exporters perceived as politically unstable or inhospitable to U.S. interests may raise concerns about supply reliability.

Recent measures before Congress (H.R. 4413 in the 109th Congress, S. 2095 in the 108th Congress, and P.L. 108-199) would affect LNG imports by encouraging domestic gas production and new LNG terminal construction, although Congress has not been explicit about the desirability of imported LNG overall. As Congress debates U.S. natural gas policy, three questions emerge: (1) Is expanding LNG imports the best option for meeting natural gas demand in the United States? (2) What role, if any, should the federal government play in facilitating the development of LNG infrastructure domestically and abroad? (3) How might Congress mitigate the risks of the global LNG trade within the context of national energy policy?

This report will be updated as events warrant.