LNG has been around for years; Japan relies upon it for almost all of its gas needs. However, North American reserves have always enjoyed a significant cost advantage so LNG has only been nominally imported for the past 30 years. Historically, the U.S. has relied upon Canadian imports to cover the supply/demand gap, but with Canadian imports expected to slow, LNG will be needed to fill that gap. We don't, however, expect to LNG to make a major splash domestically until 2008-2009 when the next wave of regasification terminals, like the ones being built by Cheniere Energy LNG and Sempra SRE, begin importing LNG. Although LNG could displace high-cost domestic producers, we think that it should improve the reliability of supply--helping to stabilize gas prices near our midcycle price, rather than creating a glut of low-cost gas.
Some natural-gas bears point to declining industrial demand as a catalyst for lower prices. Industrial firms who consume large quantities of natural gas like the chemical and aluminum industry are concentrating new capacity in areas like Trinidad and the Middle East, where reserves are plentiful and prices are cheap. But, declining industrial demand is more of a long-term issue for a couple of reasons. One, there are long lead times required to build new facilities. Two, there is a significant amount of capacity in the United States, and despite robust gas prices these facilities remain competitive at prices well above historical levels due to transportation costs.
Natural gas also faces pressure on the electrical generation front from coal and nuclear energy; both are viable long-term substitutes. The biggest problems facing these two fuel sources is the environmental concerns and high up-front capital costs for new plants. Conse ...