First of all I would like to thank the staff and the management of SMi for inviting me at this conference. My special thanks go to Ms Jen Lynch who has been very helpful for the preparation of my presentation to address the following issues on LNG, which includes Supply sources, Market, Safety Regulations, environmental regulations, transportation, impact of storage regulation, especially in California and profitability.

Liquefied natural gas, or LNG, is natural gas in its liquid form. When natural gas is cooled to minus 259 degrees Fahrenheit (-161 degrees Celsius), it becomes a clear, colorless, odorless liquid. LNG is neither corrosive nor toxic. Natural gas is primarily methane, with low concentrations of other hydrocarbons, water, carbon dioxide, nitrogen, oxygen and some sulfur compounds. During the process known as liquefaction, natural gas is cooled below its boiling point, removing most of these compounds. The remaining natural gas is primarily methane with only small amounts of other hydrocarbons. LNG weighs less than half the weight of water so it will float if spilled on water

Over the past few years, we have seen an increase in demand of LNG in many countries, especially in the western world which includes UK, France and the United Sates.

If we look at the past and compare its demand today, with the help of new technology the cost of the building of the LNG trains and the transportation has been reduced to almost 50%. The improvement in Technology has also improved the competitiveness of LNG producers in the International market. This low cost fuel is not only cheap but also environmental friendly. As a result LNG/ Natural gas and CNG have become more popular with the demand growing at the rate of more than 10-15% per year.

LNG industry which started its origin on experiment basis from the USA in 1950 with its first cargo delivered in the United Kingdom in 1959. The commercial deliveries started from Algeria to the UK and France between 1964 and 1965. The oil embargo of 1973 lead to the further development of LNG supply and the market. The supply of the LNG increased from Alaska, Brunei and later from Indonesia, Malaysia and Australia to Japan and Korea.

In 1972 the USA started its import of LNG from Algeria, but despite the building of four receiving facilities the market of LNG in the USA collapsed. The market of LNG in the USA remained weak until the start of year 2000 when it started to improve with its demand to a nearly a level of 1979.

During the period of 1980's and early 1990's the market of LNG grew rapidly in Europe, Korea, Taiwan and later in the countries like Spain, Portugal and Greece with new productions and supplies from Oman, Qatar, Nigeria and Trinidad.

Despite marginal gas productions growth for natural gas in 2002, LNG's share of the world market in natural gas set a world record. During that year the world gas production increased only 1% to 2,580 billion cubic meter (BCM: 1cbm=37.3 bcf and 0.73 million tons of LNG). This shows a slow down in economic growth in some countries. However, the export and imports of gas rose 2.6% to 697 bcm, while LNG shipment increased to a record of 4.3 % (I.e 430 bcm).

In the first half of 2002, demand of LNG was sluggish, but improved and rose to a level of 8% during the second half. There was an increase in the spot and short term sales of LNG which showed a volume increase of 9% of the total volume traded. The international traded volume of LNG accounts for more than 27.5% with a market production level of more than 5.8%.

Many more expansions and new projects are being studied at this time not only by the countries which at present time supplying LNG but also those which would like to become the major suppliers of LNG in the future. This includes Iran, Peru, Angola, Russia, Bolivia and Equatorial Guinea.

When the LNG industry started in 1960's, it was market driven; however, with not too much encouragement from the market players, later it became a supplement source for the energy sector.

Supply Sources:

Natural gas, one of the largest sources of energy, can be found all over the world. LNG comes from countries with large natural gas reservoirs which includes countries like Algeria, Australia, Brunei, Indonesia, Libya, Malaysia, Nigeria, Oman, Qatar, and Trinidad and Tobago. With the latest study the largest gas reserves can be found in central Asia, Afghanistan and some of the countries in the Middle East.

Most of the natural gas reserves found in various parts of the world are separate from oil and as new reserves are found and utilized, the growth in the LNG industry will continue to increase.

Proven Natural Gas Reserves:

LNG Importing Countries in the year 2002

(Source: Groupe Internationale des importateurs Du gaz naturel Liquefie)

JAPAN

According to the U.S. Department of Energy's Energy Information Administration (EIA), Japan has about 1.4 trillion cubic feet (Tcf) in proven natural gas reserves and because domestic natural gas production is minimal, Japan imports about 97 percent of its natural gas, all in the form of LNG. This accounts for a majority of global trade in LNG, making Japan the world's largest importer of LNG. Since Japan has very little of its own natural gas reserves and no pipelines to supply gas from other countries, it relies heavily on imported natural gas to meet its needs. Japans LNG supply is imported from the Southeast Asian countries of Malaysia and Indonesia. A small amount of their LNG supply comes from Alaska.

EIA also states that city gas consumption in Japan has increased by more than 70 percent in the last decade due to a 25 percent increase in natural gas customers and also to a large rise in consumption by industry. The Japanese government has plans to deregulate the retail natural gas sector over the next several years to promote increased competition and lower prices. Almost all of the LNG currently imported into Japan is used in the electric power and gas utility industries.

Even though Japan is one of the most seismically active areas in the world, 24 of the existing 40 LNG import terminals are found near highly populated major cities in Japan.

Negishi was Japan's first LNG terminal, and was completed in 1969. The Negishi facility received its first shipment of LNG from Kenai, Alaska in 1969 to supply two of Japan's largest utilities, Tokyo Gas and Tokyo Electric Power Company.

Six import terminals were built and began operation in Japan during the 1970s. During this decade, Japan also began receiving shipments of LNG from Brunei. In the 1980s another six receiving terminals were added along with additional LNG shipments from Malaysia and Australia. Ten more terminals started up during the 1990s bringing the total to 23 LNG import terminals in Japan. The 24th terminal in Japan began operation in 2001.

SOUTH KOREA

South Korea is the second largest importer of LNG in the world, according to the EIA. South Korea depends on imports for 95 percent of its natural gas needs and has been importing LNG since 1986. Currently most of its LNG comes from Indonesia, Malaysia, and Qatar, with a small amount from Brunei and Oman. Though South Korea currently relies on imported liquefied natural gas (LNG) to meet its demand for natural gas, they are currently working on a project to develop a natural gas deposit offshore to supplement their own natural gas supplies. Natural gas in South Korea is mainly used for electricity and residential heating.

Two LNG receiving terminals currently exist in South Korea, one in Pyongtaek and the other in Inchon. Construction on a third facility at Kwangyang was begun mid-2002 with plans for completion in 2005. Asian imports rose 2% in year 2002 to 77.5 million tons per year with a total of 68.5%. Japan remained the leading importer of LNG with an import of 43.3 tpy, but its import declined 2.2% for the second time. (Previous decline was in 1998). This decline was due to the falling economic growth. The decline of import of LNG in Japan could have been higher if Tokyo Electric Power Company had not closed its Nuclear plants because it could not meet the requirements to maintain those plants. This resulted an increase in demand of LNG by Tokyo Electric Power Company.

The import of Korea was increased by 11%. The opening of Korea's third terminal at Tong Yeong in September 2002 resulted an increase in the receiving capacity of LNG. Korea received 40 Cargoes of LNG in the winter season which ended by February 2003. This also included its first cargo from Algeria.

Taiwan's import of LNG doubles to 13%. China is moving ahead with its plans to build its LNG terminals at Guangdong and Fujian. India is looking to build its LNG terminal at Dabhol.

EUROPE

Several countries in Europe that currently have operating LNG import terminals including Belgium (one terminal), France (two terminals), Greece (one terminal), Italy (one terminal), Spain (three terminals) and Turkey (one terminal). Europe imports most of its LNG supply from Algeria, but also receives LNG shipments from Africa, the Middle East and Trinidad and Tobago.

EIA indicates that France, which imports the most LNG in Europe due to having limited natural gas resources, receives its LNG from Nigeria. A substantial portion of this LNG is piped into Italy from France. Portugal, which has no LNG import terminals, receives piped natural gas from Spain. A number of additional projects are proposed in these European countries. The United Kingdom (UK) has a large natural gas reserve in the Southern Gas Basin, although production has been declining. The UK currently has no LNG import terminals, but several have been proposed.

In Europe, the LNG import rose 19.4% to 30.2 Million tpy with regions share of global imports rose to 26.7 from 23.7%. The higher prices at the beginning of the year diverted spot cargoes to Europe which were initially heading for the USA market. The feasible policies of European energy market will create more opportunities for the LNG business which would result the development and building of new terminals at various European ports.

Spain's import rose more than 30% to 10.30 million tpy as Gross Domestic Product grew 2.4% in 2002 which is nearly twice the growth of Europe's economic growth. In France, Gaz de France is building a new terminal at Fos-Cavaou which will start receiving LNG from Egypt by year 2006. At the same time Exxon-Mobil has also indicated that the company will build an LNG terminal to import LNG from Qatar by 2009 at Fossure-Mer near its Oil refinery. There has been a plan to build 10 terminals in Italy but it seems like that only two will be build. BG has been able to make arrangements to build LNG terminal at Brindisi to initially receive a quantity of 3 million tpy from Egypt by year 2006.

Even though UK was the first country to import LNG, it dismantled its operation after the discovery of the North sea Oil. However, with the shortfall of the oil supply UK is now looking at LNG imports. An LNG terminal has been proposed to be build at Isle of Grain. Exxon-Mobil has been also been looking to build one terminal which could receive 200,000 cu-m tankers at nearby or suitable location.

Worlds LNG Production Capacity as of April 2002

North America

LNG imports provided about 1% of America's natural gas in 2002. Yet Cambridge Energy Research Associates forecasts exponential growth to reach 10% (Lower 48) of demand by 2010.