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Sunday, March 5, 2006 - Page updated at 12:00 AM

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Natural-gas imports rise with U.S. needs

The Associated Press

WASHINGTON — The United States is increasingly going overseas to meet its natural-gas needs, setting in motion a significant shift with a familiar, if unpleasant, side effect for the world's largest energy user.

As the U.S. becomes a bigger player in the global natural-gas trade, its vulnerability to distant production snags and price gyrations will rise, as will its dependence on the Mideast and other volatile regions.

Unlike oil, natural gas has had the advantage of being a local energy source. It either came from within the United States or by pipeline from Canada.

But as North American supplies dwindle, the energy industry is investing billions to ship the fuel across oceans as liquefied natural gas, or LNG.

Use of LNG is still relatively small in the U.S.

But imports are expected to rise fivefold over the next decade, intensifying competition with Europe and Asia for natural gas coming primarily from the Middle East, West Africa and parts of the former Soviet Union.

Factor similar to oil

"There's a geopolitical overlay that's going to look similar to oil," said Michael Zenker, managing director of the global natural-gas team at Cambridge Energy Research Associates.

Which means the price that American homeowners, manufacturers and power plants pay for natural gas will increasingly be linked to the weather in Europe and the pace of economic growth in Asia, not to mention the political stability of countries such as Russia, Iran and Qatar, which combined hold more than half of the world's natural-gas reserves.

The reverse is also true. "A surge in U.S. demand could effectively raise the price for spot LNG cargoes, affecting the price in Japan and other countries," said George Beranek, a manager in the global gas group at PFC Energy in Washington.

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Fuel-hungry America is already the third-largest LNG importer behind South Korea and Japan, according to Energy Department statistics.

Until recently, the North American natural-gas market was an island unto itself with an abundant resource, and prices were relatively cheap.

The fact that natural gas is cleaner-burning than heating oil and coal only burnished its public image, and demand grew rapidly during the 1990s as it became the fuel of choice for new homes and new power plants.

Gradually, though, U.S. and Canadian output began to taper off.

Producers drilled many more wells, but they still could not offset the depletion of existing wells while satisfying rising demand.

To bridge the gap, LNG imports tripled in the '90s, rising to 226 billion cubic feet per year by 2000.

They nearly tripled again by 2004, climbing to 652 billion cubic feet, or 3 percent of the country's total natural-gas consumption.

But there is still not much of a supply cushion in the U.S. natural-gas market, which is a major reason why prices climbed steadily in recent years, and then skyrocketed after Hurricane Katrina disrupted output in the Gulf of Mexico.

Meeting the country's anticipated demand by 2015 could require the U.S. to import more than 10 billion cubic feet per day of LNG, according to government and industry statistics.

That's greater than the amount of gas it will get from Canada via pipeline.

The competition for LNG will be most pronounced in the spot market, a small piece of the global trade in which tankers are directed on short notice to wherever the price is highest.

But analysts said it could also affect long-term supply contracts because those deals are benchmarked to futures prices, which rise and fall based on short-term events.

The U.S. buys LNG primarily on the spot market.

The industry prefers to sell at least a portion of its LNG through long-term agreements to help pay for the large capital investments needed to build critical infrastructure, including plants to liquefy the natural gas, refrigerated double-hulled ships to transport it and terminals on the receiving end to regasify the fuel.

Companies such as Exxon Mobil, Royal Dutch Shell and BG Group are making multibillion-dollar investments up and down the LNG supply chain.

The U.S. has five LNG import terminals today, with four more under construction and dozens more proposed.

Some analysts say the U.S. is already feeling the impact of global events that a decade ago would not have registered the slightest ripple in its natural-gas market.

"When things go bad, the U.S. is currently the one that suffers worst because it's mostly a spot market. It's the market of last resort," said Gavin Law, head of the global LNG practice at consultant Wood Mackenzie in Houston.

Copyright © 2006 The Seattle Times Company

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