Awash in natural gas

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Natural gas is a relatively clean-burning fossil fuel, and for years its price was relatively cheap compared to the prices of other energy sources. For these reasons, the United States became increasingly dependent upon natural gas to generate electricity, to heat homes and businesses, to power factories (including oil refineries), to cook meals and to serve as an important feedstock for major industries ranging from chemicals to pharmaceuticals. Natural gas truly has come a very long way since the days when it was considered such a useless byproduct of oil-well drilling that it was burned off onsite.

For decades, the United States has depended almost exclusively on Canada to fill the gap between U.S. production and consumption. In recent years, it had become increasingly clear that Canadian gas would not be readily available in sufficient quantities to bridge the U.S. demand-and-supply imbalance. "Our inability to increase [natural gas] imports to close a modest gap between North American demand and supply," Federal Reserve Chairman Alan Greenspan told the House Energy and Commerce Committee in June 2003, "is largely responsible for the marked rise in natural-gas prices over the past year." In 2003, when Mr. Greenspan alarmingly informed the committee that the price of natural gas had just reached $6.31 per million Btu, U.S. net imports of natural gas that year totaled 3.3 trillion cubic feet (15 percent of our consumption), 97 percent of which arrived by pipeline from Canada.

Canadian imports roughly equal the annual natural-gas output in the Gulf of Mexico, which is the largest production source of natural gas in the United States. In the wake of Hurricanes Katrina and Rita, nearly 60 percent of natural-gas output capacity in the Gulf of Mexico remains off-line. As of last week, 20 huge natural-gas processing plants in Louisiana, Mississippi and Texas remained inactive. As a result, the price of natural gas on NYMEX has soared to the $13-$14 per million Btu range, more than double the price level that concerned Mr. Greenspan two years ago.

As it happens, the world is awash in natural-gas reserves. Outside of Canada, which has 60 trillion cubic feet of reserves, and the Untied States, which has nearly 200 trillion cubic feet, the rest of the world has more than 5,250 trillion cubic feet of reserves. That's 1,600 times normal U.S. annual imports, according to the authoritative Oil and Gas Journal. By contrast, world oil reserves represent about 250 times annual U.S. oil imports.

However, for all practical purposes, as far as U.S. needs are concerned, foreign natural-gas reserves outside of Canada might as well be nonexistent. Non-Canadian net imports of natural gas amounted to less than 1 percent of total U.S. natural-gas consumption last year.

It doesn't have to be this way. But the United States cannot tap these vast overseas reserves until it drastically increases its ability to import liquefied natural gas. At its overseas production source, gas is cooled to minus 260 degrees Fahrenheit, when it becomes liquid. LNG can then be transported by ship to terminals where it can be converted to gas and shipped via pipeline. Presently, the United States has four LNG terminals. Many more will be needed to accommodate the level of imported LNG that the Energy Information Administration says will be necessary to meet its projected U.S. demand for natural gas in 2025. U.S. natural-gas consumption is expected to increase from 22.4 trillion cubic feet last year to 31.6 trillion cubic feet in 2025. The EIA expects LNG imports to satisfy about two-thirds of this net increase in demand. That means LNG imports will have to increase from their negligible level today to 6.4 trillion cubic feet per year 20 years from now. That level is twice what we currently import by pipeline from Canada, whose exports to the United Sates are expected to decline in coming years as Canada uses its natural-gas reserves in its energy-intensive efforts to develop oil from tar sands.

Because natural gas is expensive to transport long distances via pipeline, LNG terminals will have to be built near coastal urban populations where it is demanded. However, environmentalists and local groups in Maine, North Carolina and California have recently thwarted such projects. Two years ago, presciently contemplating an event comparable to the current natural-gas disaster, Mr. Greenspan clearly outlined the options. "[U]nlimited access to the vast world reserves of gas is required," he told Congress. "Markets need to be able to effectively adjust to unexpected shortfalls in domestic supply. Access to world natural gas supplies will require a major expansion of LNG terminal import capacity. Without the flexibility such facilities will impart ... imbalances in supply and demand inevitably engender price volatility." With natural gas now fetching nearly seven times its average price throughout the 1990s, households will soon experience the upward "volatility" in their winter-heating bills that Mr. Greenspan predicted.