Remarks by Mark Maddox
Principal Deputy Assistant Secretary for Fossil Energy
to the
U.S.-Russia Energy Symposium
Houston, Texas
October 25, 2005

Thank you and good morning.  It’s a pleasure to be here with you to discuss our national energy policy, with particular reference to liquefied natural gas, and to the role Russia could play in meeting U.S. and world energy needs over the next 20 years. 

With Russia’s vast natural gas resources, 30.5% of world reserves, she is well positioned to potentially become a key participant in the global LNG market.  In 2004, Russia was the world’s largest natural gas producer (22.4 Tcf/y), as well as the world’s largest exporter (7.1 Tcf/y). Gazprom’s recent entrance into the US LNG market and projects such as Sakhalin and Shtokman further illustrate the potential role Russia and her resources will play as this market further develops.

No discussion of the US energy markets can begin without looking first at the world’s growing appetite for energy, especially for natural gas. Using 2002 as a baseline, the Energy Information Administration projects world total energy consumption should grow by about 35 percent by the year 2015, and by 57 percent by 2025.

Natural gas is the world’s fastest growing energy source, with projected average annual consumption growth of 2.5 percent through 2025. That will take us from total consumption of 92 trillion cubic feet of gas to 156 Tcf, a 70 percent increase.

Much of the world’s enormous natural gas resource is “strande.”  That is, it is located in places where it is difficult, if not impossible, to transport it by pipeline to a customer.  The solution is to ship it by tanker in the form of LNG, a solution that has been around for 40 years.

The overall picture can be summed up in a few words: The world’s energy consumers – and potential consumers – want and need natural gas, and a global market in LNG is developing to supply them.

The Department of Energy has been promoting the growth of a global market in LNG since the First International LNG Summit we hosted in 2003 attracted hundreds of representatives from nearly two dozen producing and consuming nations, and from industry.
 
Since that meeting, developments in the LNG market have all been in the direction of growth and development, and the Department of Energy’s views and activities on behalf of a global LNG market have only strengthened.

Globally, we have seen major projects come on line and heard even more announcements of planned developments and partnerships.   For example, Australia recently announced they are on track to triple their LNG exports by 2020 with 5 new projects in the works for the next six years.  Shell and ConocoPhillips are in talks to deliver Australian LNG to India, who has an unmet demand of 50 million cubic meters per day of natural gas. The Chinese government recently announced it will allow three domestic oil majors to build up to eleven LNG importing terminals along the coast with total capacity of around 30 million metric tons by 2010. They have also announced they will build at least 30 LNG tankers over the next decade to ship LNG from abroad.  In addition, in September Chinese Petroleum Corporation signed an LNG contract with Qatar to purchase 3 million tons of LNG annually for 25 years starting in 2008. Egypt is also positioning itself to be a major player in the global market.  They are currently in discussions with Eni SpA and BG Group to build three new trains at two new liquefaction terminals along their northern coast.  Egypt aims to become the world’s sixth largest exporter of LNG by 2007 and is currently the second-largest gas producer in Africa after Algeria.  As evident by these projects just mentioned, the world’s natural gas rich countries are wasting no time as they work to establish themselves as significant participants in the LNG market. 

As we see increased investment and infrastructure development, we are also beginning to see the market develop and mature with the emergence of a spot market.  While still relatively underdeveloped, higher spot prices in Europe (relative to the US prices) throughout 2005 have diverted spot cargos to European terminals.  For the remainder of 2005, however, Nymex futures contracts compare favorably with European futures, which will drive arbitrage opportunities towards U.S. terminals.

While the United States will not be the only market for LNG in the world, it is potentially largest, and the most convenient to suppliers, accessible from the Pacific Ocean, the Gulf of Mexico and the Atlantic.

The U.S. market can provide the base load guarantees needed by governments and industry in the Americas to finance the development of natural gas and LNG infrastructure throughout the hemisphere.

And it is not just the amount of LNG the United States expects to import that will make it so important to the world LNG market. We are, and intend to remain, a more attractive customer for producers and marketers of natural gas than any other consuming nation in the world. We offer an established, reliable, continent-spanning free market in natural gas unlike that found anyplace else.  Our natural gas market is well regulated and its activities are transparent.

The United States will be a valued customer and trading partner to producing countries and all the other participants in this huge global trading system of the near future.
LNG has already grown to become an integral contributor to meeting U.S. energy demand – and we are on course and moving fast toward becoming the center of a global LNG market.

The numbers prove it.

In 2002, LNG imports to the U.S. totaled 229 Bcf, a mere one percent of natural gas consumption and 6 percent of imported gas. In 2003, imports totaled 506 Bcf, or 13 percent of all imported gas – more than doubling 2002’s total. In 2004, LNG accounted for 15 percent of total imports, reaching 650 Bcf, nearly tripling in volume in just two years.

The LNG numbers are relatively flat so far this year, due to some slowness in infrastructure development on the production side, but with a large market filled with impatient consumers demanding more gas, those glitches should prove temporary. In fact, we estimate that LNG imports will reach well over 4 Tcf by 2015, accounting for 15 percent of total natural gas consumption, and 6.5 Tcf by 2025 – 10 times 2004’s volume and more than 20 percent of total consumption.

LNG’s growth in the United States is so rapid we’re having trouble keeping track of it. In 2003 the EIA forecast 13 Bcf a day of LNG would be needed to supply U.S. demand in 2025. Last year, the forecast rose to15 Bcf, and the latest energy outlook has raised the ante to 17 Bcf.

Today, five re-gasification terminals – in Massachusetts, Maryland, Georgia and onshore and offshore Louisiana – serve the U.S. market. Several new Gulf area terminals are under construction, and nearly two dozen more have been proposed for the area. The Gulf is so hospitable to LNG that as much as 70 percent of all LNG imports to the U.S. could enter the country via the Gulf in 2025.

However, there are clouds: natural gas use has been flat the last several years, averaging at 23 bcf and high prices have resulted in demand destruction.  These same high prices are pushing many customers to look to alternatives such as coal gasification which can compete environmentally. You are also seeing a renewed push for nuclear fuel, high prices do change behavior.

Finally, a note of caution: Yes, Russia controls 30% of the world’s reserves, which also means 70% of the reserves lay outside of Russia.  Yes, there are projects proposed but the market will only support 8 – 12. 

The recently enacted energy bill includes a provision that should help improve the procedures for the siting of LNG terminals by affirming FERC’s exclusive authority to authorize new LNG import terminals while leaving intact the considerable authority states already enjoy in reviewing LNG import terminal proposals, and giving the states new authority to conduct safety inspections.     

The United States is eager to work with our neighbors to promote the formation of partnerships in an expanded energy trade network.  It is a key element in our overall energy policy. We are continually working to initiate and improve energy cooperation and trade relationships bi-laterally and multilaterally through regional agreements.

The importance of trade and the bonds of cooperation, understanding and friendship forged by the pursuit of shared interests cannot be overestimated. Improved and expanded energy trade relations among nations will underpin and fuel economic growth and development.

The growing LNG market can help accomplish these things. We believe current and future LNG-exporting nations will recognize and capitalize on this opportunity, hitching their energy and natural gas development needs to the engine of U.S. LNG demand and realizing the economic benefits of rapid development.

And with that, I will close and turn the podium over to the next speaker.  Thank you very much for your time and attention.