North America's liquefied natural gas (LNG) industry is emerging from two decades in the shadow of pipeline gas supplies. As this process unfolds it will irrevocably change natural gas markets in North America and beyond. World interest in importing LNG to North America-a gold rush of sorts-has been inspired by high gas prices, the likelihood high prices will persist given declining production, joined by rising power-plant demand, and a deep, wealthy market replete with creditworthy buyers. North America has long accounted for about a third of the world's natural gas consumption (28.6% in 2003). Thus, from an international LNG industry perspective, the big enchilada has finally come to market. For 20 years, all the necessary ingredients were present to attract LNG to North American shores, with one important exception-price. Following an abortive start in the early 1980s in which four LNG receiving terminals were completed in the U.S.-but then largely ignored-gas prices languished in the range of $1 to $3 per million Btu, well below levels needed to sustain LNG imports. Since 2000, however, gas markets have experienced a succession of price spikes to beyond $9 per million Btu on Nymex. Spot gas, currently inflated in the aftermath of Hurricane Katrina, cost more than $11 on Nymex at press time; perhaps more significantly, gas prices have exceeded $4 every month since September 2002. Futures prices for both gas and oil portend continued market strength. Despite some likely decreases, gas futures remained above $6 for the next 72 months of trade on Nymex. North America's high gas prices are underpinned by two basic market forces: supply and demand. On one hand, gas supplies are plentiful in North America, but production costs are rising as increasing amounts must come from unconventional resources that require more expensive extraction and production methods. Examples of these sources are coalbed methane, gas from tight sands and shales, and deep offshore gas. On the other hand, demand is rising, especially for the 139 gigawatts of generating capacity in hundreds of new gas-fired generating plants completed since 1990. There is an increasing tendency for gas and oil prices to correlate with one another in North America, as they have long done elsewhere. In the 1980s and 1990s, the two fuel prices bore no direct relationship, which contributed to a sense of uncertainly-indeed, mystery-in international gas and LNG circles about just what drives North American gas prices-that is, how to predict them. More recently, however, North American gas prices have trued up to oil, although for entirely different reasons than on other continents. In the industrialized gas markets of Europe and Asia, gas prices mirror oil prices through explicit indexation provisions in long-term take-or-pay sales and purchase agreements. In North America's vast spot and futures markets, however, gas prices increasingly correlate to oil because traders feel that demand-side competition between the fuels will persist in the future. Thus, while North American gas prices rise high and higher, they also bear an increasingly strong correlation to world crude oil prices. So, how will all the new LNG supply change North American gas markets? Just as world crude oil markets tie regions together, increasing volumes of LNG imports will tie North American gas markets more and more closely to Europe and Asia. In particular, rising LNG traffic across the Atlantic Ocean has already begun to induce price competition between European gas markets and those in North America. Indeed, evidence has been clear that Nymex prices have been used to establish pricing of LNG to a number of prospective European customers. Intercontinental gas dependence will mean that high-priced gas markets in Europe will sometimes siphon some LNG away from North America, and sometimes the other way around, thus tending to equalize gas prices-possibly subject to a plus-or-minus technical correction relating to maritime transportation costs. Consequently, it makes sense to suggest that, with European and Asian gas markets priced firmly to oil and petroleum products, the North American linkage to fuel-oil prices will strengthen. Supply expansion As the reality of higher North American gas prices has sunk in, the race is on to propose LNG receiving/regasification terminals. The U.S. mainland currently has five operating LNG receiving terminals. Two are on the Gulf of Mexico coast-Southern Union's Lake Charles and Excelerate's Gulf Gateway-and three are found along the Atlantic coast-El Paso's Elba Island, Dominion's Cove Point and Suez's Everett. These have a combined capacity to deliver 4.2 billion cubic feet (Bcf) of regasified LNG to markets on an average day. Construction of another eight terminals has now begun. This includes five terminals at new sites plus three expansions at existing sites-Cove Point, Elba Island and Lake Charles. The five new LNG terminals under construction include Shell's Altamira terminal on the Mexican Gulf Coast and the Sempra-Shell Energia Costa Azul terminal in Baja California. Another two are under construction on the U.S. Gulf Coast sponsored by Cheniere Energy, and one in Nova Scotia is sponsored by Anadarko Petroleum. Altogether, the five existing terminals, three current expansions, and five under construction will nearly triple North American LNG import capacity to 12.4 Bcf per day. If they all operate at average capacity, these eight terminals' output could represent 18% of current North American gas supply. But the interest hardly stops there. Another 10 LNG terminals have been approved by governmental authorities but construction has not yet begun. Eight are in the U.S., one is in Canada (Canaport) and one is an undersea pipeline from a new terminal in the Bahamas. If completed and placed into service, the currently approved terminals would add 13 Bcf per day of LNG import capacity, thus bringing the total daily regasified LNG supply to 25.4 Bcf. There's more. Sponsors of another 18 LNG import terminals have filed for governmental approval (12 in the U.S. and six elsewhere), and another 13 LNG import terminals are somewhere in planning but regulatory approval has not been sought yet. Not all of this 57 Bcf per day of LNG receiving capacity will be built. But, in fact, many of them will proceed to construction and eventual operation, and more capacity will be built than will actually be needed for some years. This is not surprising because, indeed, some degree of overbuild inevitably accompanies most major new infrastructure development projects, at least initially. By 2015 or 2020, North America will wind up with at least 23 Bcf per day of LNG receiving capacity, possibly as follows: existing terminal capacity, 100% likely; terminals under construction, 75% likely to be completed at planned capacity; approved terminals not yet under construction, 50% likely to be completed; other filed terminals, 25% likely. The Energy Act While most of the Energy Policy Act of 2005 deals with reform in the electricity- and energy-trading spheres, one provision relates directly to siting LNG terminals. It seeks to resolve state-federal jurisdictional disputes that have arisen in California and elsewhere. The California Public Utilities Commission has asserted regulatory approval authority over the Mitsubishi and ConocoPhillips proposed LNG receiving terminal at Long Beach, known as the Sound Energy Solutions (SES) project. The Federal Energy Regulatory Commission (FERC) has disputed the jurisdiction claim and the matter is being adjudicated. Under the Energy Act, however, final siting approval authority over onshore LNG terminals rests with FERC. In addition, the act codifies and extends for 10 years FERC's "Hackberry precedent" that largely exempts LNG terminals from open-access requirements, rate-making and affiliate transaction limitations otherwise in place for natural gas infrastructure in the U.S. The impact of the new law on LNG terminal siting will not be massive, but it may be important. FERC and the U.S. Department of Transportation, respectively, had been approving onshore and offshore Gulf of Mexico terminal applications in large number before the Energy Act was passed. These terminals will account for most new North American LNG receiving capacity commissioned in the next decade. If there is any effect, the Energy Act may enable some stalled non-Gulf terminals to proceed, such as the Long Beach terminal, BP's Crown Landing and potentially others. If built, these would account for approximately 2- to 4 Bcf per day of added capacity away from the Gulf of Mexico, which accounts for 77% of all U.S. LNG receiving capacity pending or so far approved. The Energy Act may be significant in dispersing LNG receiving capacity. Daily gas production in the U.S. Gulf region has declined by approximately 12 Bcf since 1975. Physical long-line pipeline capacity will probably be sufficient to deliver comparable volumes of regasified LNG from Gulf-area terminals to markets, before major capacity expansions are needed. Yet, when regasified LNG from Gulf-area terminals rises to approach and eventually surpass the 10- to 14-Bcf-per-day level, noticeable increases in pipeline congestion are likely to develop. If the Energy Act encourages more LNG to enter the U.S. through terminals in the Northeast and California, basis differentials from the Gulf will be lower and less long-distance pipeline construction will be necessary, potentially saving billions of dollars.