AS prices of oil increase beyond $60 per barrel, industrialized as well as developing countries are looking for alternative energy resources. It is clear that crude oil is impossible to replace completely in today’s economy even in the longer term. What most of the governments are looking for is decreasing their oil import bill and diversifying of their energy resources to increase their tolerance of a major oil disruption.

Alternative sources of energy are diverse, ranging from coal to solar to geothermal. Of these many sources available, natural gas is the only one, which has the realistic potential to take on a portion of world energy requirements. But as oil, natural gas has to be transported to various markets. Few decades ago, it was difficult to transport natural gas but then it became possible to liquefy it and transport it safely in the form of liquefied natural gas (LNG).

World energy markets have now realized the LNG potential. From less than 0.5 Bcf per day supply contract agreements in late nineties, this sector has expanded more than six fold to 3 Bcf per day supply contract agreements.

Several factors have contributed to bring LNG on the radar screen of decision makers. The most important of these factors were increasing natural gas prices and lowering of LNG delivery costs due to technology improvements.

The liquefaction of natural gas, the carriers (tankers) and the re-gasification was a costly process. It didn’t make economic sense for governments or private companies to spend billions of dollars to built LNG import terminals or invest in LNG tankers when natural gas had such a low price.

But recently gas prices began to rise in the wake of tight markets and high oil prices. Moreover, in the last twelve years, according to Hydrocarbon Processing, a respected oil/gas industry journal, there was a forty percent drop in costs. The conflux of these two developments made LNG trade not only economical but profitable. Finally, rising environmental concerns, after Kyoto Protocol, were also helping make natural gas as a fuel of choice.

Even before the current interest in LNG, almost all of the electricity generation in United States was done using natural gas, as it is a much cleaner and environmentally sound fuel than oil or coal.

All the important players now see phenomenal growth in LNG in the medium term. According to International Energy Association (IEA), LNG world capacity will double by 2010 and by 2030 LNG may surpass coal as the second largest energy source after oil. US Department of Energy expects that LNG imports by US will rise from around 200 Bcf in 2002 to 2000 Bcf in 2010.

For Japan, which is the biggest importer of LNG, the prediction is that imports will rise from 2700 Bcf to around 3900 Bcf in 2010. India, which appeared only recently on global LNG map, may also be importing 600 Bcf by 2015. Pakistan is also thinking of importing LNG, if the gas pipeline from Iran didn’t materialize.

LNG prospects are bright but it has to compete with other fuels. As more investment is being done in developing LNG infrastructure, more natural gas pipelines and more clean coal and nuclear plants are also being built.

Countries are keeping all their options open for meeting their future energy requirements. If LNG prices increased beyond a certain point, many countries will shift to other fuels. For example, while India has signed two separate agreements with Qatar and Iran for the import of LNG, it is also trying to build a pipeline from Iran through Pakistan for transporting natural gas.

Moreover, it is also developing its huge domestic coal reserves for use as an energy source. China, a major future market for LNG, has also planned to build 32 new nuclear plants in the next two decades. Chinese energy policy is clear. If LNG didn’t remain economical, the number of nuclear plants can be increased.

Financial investment is another big issue in the growth of LNG as it is a very capital-intensive business. Due to technological improvements and economies of scale, costs are declining across the board in LNG sector but still billions of dollars of investment is necessary, with return many years away.

According to IEA, in the next 25 years, around 250 billion of investment will be required. Financial markets are still not ready to commit to LNG projects in a big way as natural gas prices may fall, leaving them with LNG plants and tankers which nobody wants to use.

Regulatory frameworks for LNG still have to be developed and implemented in individual markets and then harmonization of these across the countries had to be achieved. This will help in reducing safety concerns and developing quality standards for the growth of LNG sector.

Further, regulatory frameworks are also required to establish clear certainty of liberalized gas markets so that long-term investments in LNG projects can be made.

Finally, LNG sector is also constrained by the material and human resource shortages. There are only few thousand people who have experience of working on or building LNG plants. Only four process contractors in the world have experience and the credibility of building a LNG liquefaction plant. Similarly, there are concerns about the critical material availability. Compressors, steel, heat exchangers etc should be available before LNG projects can be started but they are in short supply now.

These issues hinder the growth of LNG sector but most energy market analysts believe that huge future profits will force the governments and markets to resolve these issues and LNG trade will grow exponentially in future.