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Email this citationCIAO DATE: 10/05
Dawning of a New Era: The LNG Story
Henry Lee
April 2005
Belfer Center for Science and International Affairs (BCSIA), Harvard University
Executive Summary
Spurred on by higher natural gas prices and a growing demand for cleaner fuels, interest in new liquefied natural gas (LNG) facilities has mushroomed. At the end of 2004, over forty new receiving and regasification stations were being proposed in the United States, and another ten were seeking siting approvals in Mexico and Canada. Even if less than ten percent of these projects are approved and built, more than twenty percent of United States gas demand may be supplied by LNG facilities by 2012. On the production side, the number of countries contemplating the construction of liquefaction facilities has doubled, and existing producers are scurrying to build more and larger facilities.
A glance at the economics shows why. Since the mid 1990s the costs of every stage of the LNG chain—gas production, liquefaction, shipping, and regasification—have dropped substantially. Today LNG costs have fallen below those of domestic pipeline gas in both the United States and Europe. Actual LNG costs depend on many variables, but range from as low as $2.50 per Mcf to approximately $3.50 per Mcf (as compared with the price of pipeline gas in the United States of $7.00 per Mcf). Industry experts believe that improvements in technology, especially for tankers, could lower these costs still further.
While costs have dropped, the price paid by consumers is likely to track the price of pipeline gas. Hence, the profits from LNG trade may be considerable, given the gap between the domestic price of natural gas and the cost of importing LNG. The competition to capture these profits will be fierce, but if history is any judge, most will be retined upstream—in the hands of the producers and their host governments.
This paper addresses two important questions:
1) Will competitive pressures change the structure of today's LNG markets?
2) As more LNG is traded, will the national security concerns that have characterized oil markets over the past thirty years also begin to characterize gas markets?
