Greenspan Sees LNG as Market Safety Valve

Tue June 10, 2003 06:46 PM ET By Chris Baltimore

WASHINGTON (<a href=reuters.com>Reuters) - Federal Reserve Chairman Alan Greenspan said Tuesday shrinking supplies of U.S. natural gas mean the nation must build more gas import terminals to create a "safety valve" that will help stabilize prices.

An unusually low stockpile of natural gas has grabbed the attention of the Bush administration and lawmakers. Greenspan, who usually appears on Capitol Hill to discuss broad economic trends, was asked to testify at the House Energy and Commerce Committee on the impact of high gas prices.

Natural gas costs $6 per one million British thermal units (Btu) in the spot market, double the level of one year ago.

If natural gas prices remain high, Greenspan said there eventually could be "some erosion" in the U.S. economy.

While energy industry experts urged the panel to open more federal lands to drilling, Greenspan focused on the role that liquefied natural gas (LNG) imports could play.

LNG is "a crucial safety valve in maintaining price stability in oil, and it could be in gas as well," he said.

LNG is natural gas cooled to minus 259 degrees Fahrenheit, which converts it to a liquid for shipment. After arriving at a terminal, it is converted into dry gas for conventional uses.

"Access to world natural gas supplies will require a major expansion of LNG terminal import capacity," he said. "Without the flexibility such facilities will impart, imbalances in supply and demand must inevitably engender price volatility."

Building new U.S. LNG terminals often faces resistance from environmental groups concerned about the potential for an explosive accident or sabotage of an LNG tanker.

Several LNG projects have been proposed in recent months, including the expansion of Georgia's Elba Island terminal and new facilities off Louisiana, Texas, California, the Bahamas and Mexico. LNG terminals now exist in Cove Point, Maryland, Everett Massachusetts and Lake Charles, Louisiana.

ChevronTexaco Corp. CVX.N , ConocoPhillips COP.N , Marathon Oil Corp. MRO.N , and Exxon Mobil Corp. XOM.N have announced plans to make LNG a bigger part of future operations.

Algeria, Nigeria, Trinidad, Russia and Venezuela are among the potential exporters of LNG to the U.S. market.

Earlier, energy industry executives urged the House panel to ease gas supplies by lifting drilling restrictions on federal lands in the Rocky Mountains and some offshore areas.

Greenspan sidestepped the politically volatile issue, saying he could not judge the environmental trade-offs.

"I'm an economist. My view is if you're looking for natural gas you've got to know whether it's there," he said. "The only way to find out is to drill a hole."

U.S. gas supplies are 29 percent below the five-year average. Demand has soared as consumers and industry find more uses for gas.

"We see a storm brewing on the horizon and we need to prepare for it," said committee chairman Rep. Billy Tauzin, a Louisiana Republican. "Drilling companies are at work everywhere they are allowed to go," he said, but "vast areas of land" are off-limits in the Rocky Mountains and offshore.

In the Senate, which is debating a broad energy bill this week, a fight looms over a Republican demand for an inventory of natural gas deposits in the Outer Continental Shelf -- including Florida and California, where drilling is banned.

Environmental groups contend plenty of land is already available, and restricted areas protect fragile habitats and national parks. The Interior Department reported two-thirds of 59 million acres of federal land in Colorado, Utah, Wyoming, Montana and New Mexico were available for drilling.

Guy Caruso, head of the U.S. Energy Information Administration, said gas supplies should be adequate this summer if temperatures are in the normal range. Prices are forecast at $5 to $6 per million Btu this year, and longer term are likely to fall to $3 to $4 per million Btu, he said.

Demand for natural gas is forecast to top 35 trillion cubic feet (Tcf) by 2025, a jump of 52 percent from this year. If the drilling ban in offshore waters was lifted, an extra 58 Tcf of gas could be produced, Caruso said. Ending restrictions in the Rocky Mountains would add an estimated 70 Tcf of gas, he said.