Is LNG the Answer?
Mitsubishi is apparently going to build a terminal to receive liquified natural gas (LNG) in Southern California. A quick look at recent prices for US gas makes it easy to see why this might be attractive. In fact, there's been quite a PR push lately, touting LNG as a way to reduce and stabilize prices and improve reliability of supply. It all sounds wonderful, and we're pretty much stuck increasing our imports, since the US must be running low on natural gas, just as we are on crude oil, right?
While LNG needs to be part of the future energy mix of this country to a greater degree than it has been, it's not at all clear that it has to grow to 15% of our supply, as some forecasts suggest. The US natural gas situation is actually very different from the sad state of our oil reserves, from which we've probably already pumped out 80 or 90% of the original oil that we could get with current technology. In contrast, the DOE reports proved natural gas reserves of 186 trillion cubic feet, some 13% larger than they were in 1992. In fact, they are the second largest outside the middle east.
As is usually the case for natural gas, the issue is not so much one of resources but of infrastructure and investment, complicated by restrictions on access. The US is not short of gas, but rather the US gas industry has been starved of investment dollars for the infrastructure needed to bring more gas to market. This is an oversimplification, but it would be very interesting to see what could be done to bring more domestic gas to market if the investment that is being targeted for the all the LNG terminals under discussion were redirected to revitalizing the domestic infrastructure instead.
Why should any of this matter? Won't the market simply sort out which projects should be built, based on the most attractive returns?
The incentive to rethink the rush to LNG comes from taking another look at long-term US natural gas prices. Although prices are high today (over $6/million BTUs), and forecast to be high as far as the eye can see, and while LNG should be able to come in well below this, perhaps at $4/million BTUs or less, it is still double the typical historical price of about $2. As a result, LNG can cap the current market below the peaks we've experienced in the last two years, but it can't do anything to address the problems of global competitiveness that our industries built on $2 gas are facing. That includes fertilizer and chemical plants, as well as energy-intensive industries that were counting on cheap electricity generated by cheap gas.
Becoming dependent on LNG imports will probably spell the end (or offshoring) for any of these industries that manage to survive the current high prices, by ensuring that prices never return to their historical level.
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