Remarks by Mark Maddox
Principal Deputy Assistant Secretary for Fossil Energy
at the
Seminar on Developing and Financing U.S. LNG Receiving Terminals
New York, New York
October 7, 2004

Thank you and good morning.

I’m pleased to be here in America’s financial capital to talk with you about the present and future of the Liquefied Natural Gas industry.

I appreciate the opportunity to participate in a meeting that brings together the science and engineering, finance, business and government sectors that are vital to realizing the enormous growth potential of LNG. In recent years, LNG imports have grown quietly and rapidly to become an important contributor to meeting today’s natural gas demand.

It’s especially appropriate that SAIC is hosting this meeting because our nation’s hopes for LNG’s success are based on SAIC’s specialty: advanced technology. Advanced technology is, in fact, the basis of President Bush’s comprehensive national energy policy.

Technology is fundamental to our practical and visionary programs to ensure a secure energy future centered on a diverse energy portfolio that includes clean coal, advanced nuclear power, natural gas, renewable energy, and the hydrogen fuel of the future.

Thanks to the work of SAIC and many other private companies and public agencies and laboratories, we can count on the technology advances that will bring about a future of dependable, affordable and environmentally sound energy.

America’s scientists and engineers, along with dynamic entrepreneurs, far-sighted investors and a supportive government, have brought us the remarkable energy system we have today. There is every reason to expect that we will do even better in years to come.

We are already off to a good start with LNG, which today accounts for a relatively small but important and rapidly growing segment of our natural gas sector – which in turn is a large and rapidly growing segment of our overall energy sector.

Historically, low natural gas prices in the United States, combined with the relatively high cost of LNG, kept LNG’s share of our natural gas market low.

But technological advances that have lowered the cost of making and transporting LNG, combined with rising exploration and production costs for natural gas in the United States, have made LNG price competitive.

According to Energy Information Administration forecasts, that price environment will not change in the years and decades to come, and we expect LNG to be a significant part of America’s natural gas market.

Growing supplies of natural gas are critical to the energy security that is the basis for President Bush’s goal of continued economic growth and prosperity.

Financing the growth of the LNG sector represents a great opportunity for investors looking for an existing, technologically mature, environmentally appealing industry in the "takeoff" phase and on the way to delivering an attractive return on investment for many decades to come.

There are obstacles to be overcome, of course. And that is expected when developing an immense and complex global market. But we know the market for competitively priced LNG exists and that it is growing larger every day.

We know the owners and producers of natural gas around the world have long experience processing natural gas into LNG and marketing it to consumers – and we know that they are eager to increase their operations.

We know the transporters of LNG have been making use of advanced technology to deliver it safely and reliably for decades.

We know that the technology employed at every step in the LNG chain – from production to liquefaction to transportation to re-gasification – is continually improving.

And we know – and your presence here this morning confirms it – that we also have in place the last piece of the LNG puzzle: far-sighted investors who know an opportunity for long-term profitability when they see it.

I’d like this morning to give you the federal government’s perspective on the state of the LNG industry today, its future growth potential, and some of the obstacles the industry, with government’s help, must overcome – and is overcoming – in order to fulfill that potential and ensure the investment stream needed to fund the growth of a truly global market in LNG.

Let’s begin with the here and now.

In 2002, LNG imports to the U.S. totaled 229 Bcf, or 6 percent of imported gas. Last year, imports totaled 506 Bcf, or 13 percent of all imported gas – more than doubling 2002’s total. In the first half of this year, imports averaged 1.7 billion cubic feet a day, on pace to reach 600 Bcf for the year and a 20 percent increase over last year.

There is good reason for this rapid growth: domestic natural gas production has been flat, imports by pipeline from our continental neighbors have been declining, and natural gas demand continues to increase.

Thanks to LNG we were able to meet our gas storage requirements going into the last heating season, averting a gas shortage. And thanks to LNG we are on track today for another year of solid storage numbers.

Today, explorers around the world continue to discover new reserves of natural gas. Reserves this year hit a total of 6,000 trillion cubic feet, a 10 percent increase over last year. Nearly all of that increase came in non-industrial countries, two-thirds of it in Qatar alone.

Almost three quarters of the world’s proved natural gas reserves are located in the Middle East, Eastern Europe and the Former Soviet Union, and much of it will be without value to these nations – "stranded" – unless it can be converted to LNG and shipped over water to waiting markets.

Today, four re-gasification terminals – in Massachusetts, Maryland, Georgia and Louisiana – serve the U.S market. The terminals have an estimated base load capacity of 880 Bcf a year, and a combined peak capacity of about 1.2 Tcf a year. All four terminals have FERC-approved expansion plans that will bring their total capacity to more than 1.6 Tcf.

Today, there are over 40 proposals on the drawing boards for new LNG re-gasification terminals in North America. In addition to the potentially huge market it offers, one of the prime attractions of the United States for producers is the ease of access to the entire U.S. gas market from any direction. New LNG terminals have been proposed for the East, West and Gulf Coasts of North America, shortening transportation routes, reducing costs and making the U.S. the future hub of a worldwide LNG market.

The United States is a more attractive customer for producers and marketers of natural gas than any other LNG-consuming country in the world.

We offer an established, reliable, continent-spanning free market in natural gas unlike that found anyplace else. The American natural gas market is well regulated and its activities are transparent.

People in the energy industry see the need for a worldwide LNG market; they see the U.S. as central to the market, and they see an opportunity to meet that need with a reasonable rate of return.

The size and wealth of the U.S. market will drive development of the LNG industry, not just here at home but all along a worldwide supply chain. Coordinated development of exploration and production, liquefaction, transportation and re-gasification infrastructure will become increasingly important.

Investors in LNG terminals here in the U.S. will want to be confident that the development of infrastructure elsewhere to supply those terminals is proceeding apace.

Government also has an important role to play in making development of this much-needed market possible. With U.S. natural gas demand projected to increase by 40 percent over the next two decades and LNG forecast to account for fully 15 percent of that demand (a ten-fold increase in imports from today’s volume), this Administration has been working hard to remove legislative and regulatory obstacles to the importation of LNG.

Let me give you a couple of examples:

• For offshore natural gas facilities, Congress in 2002 amended the deepwater port act to include natural gas leaving the program jointly administered by the Maritime Administration and Coast Guard. Maritime continues its role as the permitter, and the Coast Guard continues its role evaluating safety, security and environmental aspects of projects.
  
  The result is streamlined regulatory processes, a one-year time limit on the approvals process, and elimination of the open access requirement for new terminals.

• Likewise, the Federal Energy Regulatory Commission, which is responsible for onshore facilities, in 2002 handed down the "Hackberry Decision," which – subject to certain requirements – exempts new LNG re-gasification terminals from domestic open access and tariff posting, and sets a goal of one year for shepherding proposals through the approvals process.

Before these legislative and regulatory actions, the government had received exactly one filing for a proposed LNG terminal.

Since then, FERC and the Coast Guard have received 19 filings for terminals. Four have been approved – the Cameron and Freeport onshore facilities and the Port Pelican and Energy Bridge projects offshore. We expect several more approvals in the next year.

Action is also required at the state level to encourage the development of new LNG facilities, and the industry is getting it. Just two months ago, for example, the California Public Utility Commission approved an open access policy assuring LNG developers that California utilities will interconnect with them.

That’s where we are today, and if we take a look at where we will be in just a few years we can clearly see the reason for this groundswell of activity. We are witnessing the beginnings of something big and irreversible – a growing global market in LNG centered on the United States.

The Energy Information Administration forecasts that by 2010, barely six years from now, imported natural gas will account for 21 percent of U.S. natural gas consumption, up from 15 percent today – and LNG will supply nearly all of the increase.

LNG is expected to account for 39 percent of our natural gas imports in 2010, up from five percent in 2002. In fact, the EIA projects a 16 percent per year increase in LNG imports through the year 2025, when we could be importing as much as 5 Tcf of natural gas in the form of LNG. That will require the construction of six to eight new LNG terminals to serve the U.S., in addition to our four existing facilities.

Our rapidly growing demand for natural gas, and our receptivity to LNG as a source of supply, will help drive the development of a global LNG market, but we will have plenty of help.

Economic growth is the engine that powers the worldwide push for improved standards of living and greater prosperity – and energy fuels the growth engine.

In the case of natural gas, consumption worldwide is expected to nearly double by 2025, to more than 175 Tcf. Demand is growing fast but, as I mentioned earlier, supply tends to be confined to just a few areas of the world. LNG will have a large role to play in bridging the gap between producer and consumer.

On the consumer side, three countries – the UK, China and India – will shortly join the 12 current LNG importers, and at least seven more countries, including Canada, Mexico, Indonesia, the Netherlands and New Zealand, are actively planning to meet demand with LNG imports.

On the producer side, 12 countries are active LNG exporters today, and another 10 – among them Russia, Norway, Iran and Venezuela – have seen the wealth-creating potential of their natural gas reserves and lined up as entrants, or potential entrants, to the LNG market.

The Department of Energy has been working aggressively to encourage the development of a global LNG market, and cooperation among producers and consumers. Last year, for example, the Department hosted the first International Ministerial LNG Summit, with representatives from 18 producing or potential producing countries. In addition, we are engaged in numerous bi-lateral discussions with producing countries.

The stakes are high: We estimate that we will need more than $100 billion invested in the LNG value chain, from liquefaction plants to ships to receiving facilities, in order to construct a system capable of delivering 15 billion cubic feet of LNG to North American terminals every day in 2025.

All the actors in the LNG sector have accomplished a great deal and set the stage for the debut of a new global industry and market – but there is still a great deal of work to do, particularly in the area of risk mitigation.

I know you will be hearing more about this important subject during the course of the day but I would like to summarize our views on LNG risk mitigation.

Let’s begin with the obvious: LNG is a form of hydrocarbon – and hydrocarbons burn. That is precisely why they are valuable. There is a risk of harm or loss depending on the probability of a threatening event, and on the failure of mitigation measures.

As is true of many industrial processes, the consequences could be serious if precautions are inadequate and an unlikely event occurs.

The purveyors of doom that soak up so much of the attention in our public debates about industrial safety like to concentrate on consequences, no matter how unlikely, and back them up with a raft of questionable, contradictory and inconsistent studies.

They raise public concerns to unreasonable and sometimes irrational levels, ignoring the effect that risk mitigation measures have on the probability, or improbability, of an incident.

It is the LNG industry’s job to alleviate those concerns with an appeal to reason. That means explaining clearly and persuasively the actions that have been and are being taken to reduce the risk of an incident.

As individuals, we take a thousand sensible risks a day to reap a benefit, whether we’re crossing the street or asking the boss for a raise. We act after consciously or unconsciously calculating risks and taking the necessary steps to reduce them to an acceptable level.

The same is true of a healthy, non-neurotic society. Modern societies must and will continue to measure, mitigate and take risks in order to reap an economic benefit and maintain or improve their standard of living, just as they have done throughout history.

It is up to all the parties interested in the future of LNG to explain the enormous benefit a growing LNG supply will deliver to the American people – and the steps we are taking to reduce the associated risk.

It is up to those who understand the importance of LNG to our nation’s energy security to present the industry’s excellent safety record, allaying public concerns about the safety of LNG tankers and onshore facilities. A record of tens of thousands of carrier voyages covering tens of millions of miles for more than 40 years without a major incident is compelling evidence of this energy source’s safety.

We have to explain that this relatively young industry has from the beginning been noted for its obsession with safe equipment, facilities and procedures, from advanced tanker designs that include double hulls, to careful and constantly improving handling techniques and technology.

And we have to explain that the U.S. also has considerable experience – and an excellent safety record -- handling LNG at about 100 small LNG storage and re-gasification facilities located throughout the country as part of our natural gas distribution system.

But no matter how good the record, we can never be complacent about threats to public safety, especially in the face of the new threat of terrorism following the September 11 attacks. Everyone in any way involved with the LNG industry understands the seriousness of this threat. Industry and government have responded vigorously – and all are working every day to improve our equipment, procedures, strategies and tactics.

While people have been quick to acknowledge the changing threat that exists for us all post-9/11, government and the LNG industry have not done a good job of explaining our robust efforts to detect and prevent malevolent acts.

The Coast Guard has taken a number of measures to improve port security, among them:

• Improving control over waterborne traffic;
• Establishing security zones and requiring escorts for tankers;
• Varying shipping schedules and keeping them confidential;
• Pre-screening LNG tanker crews;
• Checking cargo and key safety systems prior to arrival in port; and
• Implementing the procedures contained in the Coast Guard’s Area Maritime Security Plan.

Beyond these actions, the Coast Guard, public safety officials and elected officials are working together closely, bolstering security by continuously analyzing the various levels of risk and devising mitigation strategies specific to their unique circumstances.

The Department of Energy, for example, is today working with private sector safety experts and the National Association of Regulatory Utility Commissioners to ensure even greater safety and security in LNG operations.

The Department has also offered to assist with the industry’s collective international safety effort by making our technical expertise available to interested industry and government participants.

By explaining how LNG will help to fuel America’s economic engine, and by laying out the industry’s aggressive program to reduce the risk of a potential LNG incident, we will answer the questions and alleviate the concerns of the communities located near proposed LNG facilities.

The "not-in-my-back-yard" syndrome comes alive whenever a community hears of plans for almost any new industrial facility. An industrial site is rarely a community’s first choice for a new neighbor – and LNG terminals are no exception.

The successful developers of LNG projects will respond to local concerns in good faith, freely providing information, answering questions, and displaying an overall sensitivity to local concerns. Patient education will be the key to turning fear and suspicion into knowledge and consent.

Let me conclude by saying that the state of the LNG industry is good – and the prognosis for rapid growth is also good. All of the elements required for success are in place. We have:

• Willing buyers and sellers;
• A high-quality, competitively priced product;
• Continuously improving technology that will contribute to greater safety and reduced risk;
• A supportive government working hard both here at home and internationally to foster the growth of a global LNG market ; and
• A general public that will be receptive to an educational campaign that openly and confidently presents the compelling case for LNG.

It all adds up to a source of stable, long-term profits for willing investors.

There is a great deal of work to be done, but we can be sure that we stand on a strong foundation for the creation of a new global market in LNG – and for ensuring LNG’s vital part in meeting America’s long-term energy security requirements.