The United States is considering fundamental changes in its natural gas supply policy. Facedwith rising natural gas demand and perceived limitations in North American gas production, manyin government and industry are encouraging greater U.S. imports of liquefied natural gas (LNG). Recent activities by Congress, the Federal Energy Regulatory Commission, the Department ofEnergy, and other federal agencies to promote greater LNG supplies have included changingregulations, clarifying regulatory authorities, and streamlining the approval process for new LNGimport terminals. While forecasts vary, many analysts expect LNG to account for 12% to 21% oftotal U.S. gas supply by 2025, up from approximately 3% in 2005. If these forecasts are correct, U.S.natural gas consumers will become increasingly dependent upon LNG imports to supplement NorthAmerican pipeline gas supplies. Recent measures before Congress seek to encourage both domestic gas supply and newLNG terminal construction. The Alaska Natural Gas Pipeline Act of 2004 (15 U.S.C. Â§ 720, et seq . )provides loan guarantees (Sec. 116) and other incentives for an Alaska gas pipeline. The EnergyPolicy Act of 2005 ( P.L. 109-58 ) includes various incentives for domestic natural gas producers(Title III, Subtitle E). The act also amends Section 3 of the Natural Gas Act of 1938, granting theFederal Energy Regulatory Commission (FERC) explicit and "exclusive" authority to approveonshore LNG terminal siting applications (Sec. 311c) among other provisions. Other proposals inthe 109th Congress, including H.R. 4318 , H.R. 3918 , and H.R. 3811 would lift federal restrictions on natural gas exploration and production on federal submergedlands of the Outer Continental Shelf. S. 1310 would authorize the expansion of a naturalgas transmission pipeline on federal lands in the Northeast. While an increase in LNG imports is already underway, federal officials and Members ofCongress have been debating the merits and risks of U.S. LNG dependency. In April, 2005, forexample, President Bush stated that "One of the great sources of energy for the future is liquefiednatural gas.... We need more terminals to receive liquefied natural gas...." (1) In June, 2005 Department ofEnergy Secretary Samuel Bodman remarked that "LNG seems to offer a solution to ... the growingdemand for natural gas that we will see all around the globe." (2) In November, 2005 FederalReserve Chairman Alan Greenspan testified before Congress that "severe reaction of natural gasprices to the production setbacks that have occurred in the Gulf highlights again the need to ... importlarge quantities of far cheaper, liquefied natural gas (LNG) from other parts of the world." (3) Some in Congress havequestioned the implications of such a policy, however, drawing analogies to the consequences ofU.S. dependency on foreign oil and citing potential instability among foreign LNG suppliers. (4) Others have expressedconcern about LNG safety and vulnerability to terrorism. (5) Specific questions are emerging about the implications of greater LNG imports to the UnitedStates. LNG has substantial physical infrastructure requirements and there are uncertainties abouthow this infrastructure would be integrated into North America's existing gas network. The potentialeffects of larger LNG imports on U.S. natural gas prices will be driven by the global LNG marketstructure, although that market structure is still evolving. Political relationships among countries inthe LNG trade may also change as LNG becomes increasingly important to their economies. This report will review the status of U.S. LNG imports, including projections of future U.S.LNG demand within the growing international LNG market. The report will summarize recentpolicy activities related to LNG among U.S. federal agencies, as well as private sector plans for LNGinfrastructure development. The report also will introduce key policy considerations in LNGinfrastructure and market structure, highlighting current market information and key uncertainties. Finally, the report will identify key questions in LNG import policy development. Natural gas is widely used in the United States for heating, electricity generation, industrialprocesses, and other applications. In 2005, U.S. natural gas consumption was 22 trillion cubic feet(Tcf), accounting for 23% of total U.S. energy consumption. (6) Until recently, nearly all U.S.natural gas was supplied from North American wells and transported through the continent's vastpipeline network to regional markets. In 2003, however, due to constraints in North Americannatural gas production, the United States sharply increased imports of natural gas from overseas inthe form of liquefied natural gas (LNG). While absolute levels remain limited today, growth in LNGimports to the United States is expected by many analysts to accelerate over the next 20 years,reflecting growing domestic demand and expectations for a global expansion in LNG trade. When natural gas is cooled to temperatures below minus 260Â°F it condenses into liquefiednatural gas, or "LNG." As a liquid, natural gas occupies only 1/600th the volume of its gaseous state,so it is stored more effectively in a limited space and is more readily transported by tanker ship. Atypical tanker, for example, can carry 138,000 cubic meters of LNG -- enough to supply the dailyenergy needs of over 10 million homes. (7) When LNG is warmed, it "regasifies" and can be used for the samepurposes as conventional natural gas. The physical infrastructure of LNG includes several interconnected elements as illustratedin Figure 1 . In producing countries, natural gas is extracted from gas fields and transported bypipeline to central liquefaction plants where it is converted to LNG and stored. Liquefaction plantsare built at marine terminals so the LNG can be loaded onto special tanker ships for transportoverseas. Tankers deliver their LNG cargo to import terminals in other countries where the LNGcan again be stored or regasified and injected into pipeline systems for delivery to end users. ThisLNG infrastructure requires large capital investments. In addition to gas field development costs,a new liquefaction plant costs approximately $2-$3 billion, and an import terminal costs $500million to $1 billion. One LNG tanker costs $150-$200 million. (8) Figure 1: LNG Supply Chain Source: Oil & Gas Journal. Nov. 10, 2003. p64. Due to the high capital costs of LNG infrastructure, LNG trade has traditionally relied uponlong-term fuel purchase agreements in order to secure project financing for the entire supply chain. Of over 160 major LNG supply contracts in force around the world as of June 2005, well over 90%had a contract term of 15 years or longer. (9) While these contracts have increasingly incorporated someflexibility by accommodating extra LNG deliveries, for example, or allowing shipments to bediverted, they have only allowed for a limited supply-demand response compared to other globalcommodities markets. The United States has used LNG commercially since the1940s. Initially, LNG facilitiesstored domestically produced natural gas to supplement pipeline supplies during times of high gasdemand. In the 1970's LNG imports began to supplement domestic gas production. Between 1971and 1981, developers built four U.S. import terminals: in Massachusetts, Maryland, Georgia, andLouisiana. (10) Dueprimarily to a drop in domestic gas prices, however, two of these terminals quickly closed. Importsto the other two terminals remained small for the next 30 years. In 2002, U.S. LNG imports wereonly 0.17 Tcf, less than 1% of U.S. natural gas supply. (11) Figure 2: U.S. Natural Gas Wellhead Price ($/Mcf) Source: Energy Information Administration. Natural Gas Weekly Update . Jan. 19, 2006. United States demand for LNG has been increasing dramatically since 2003. This growthin LNG demand has been occurring in part because North American natural gas production appearsto have plateaued, so it has not been able to keep pace with growth in demand. As a result, U.S.natural gas prices have become higher and more volatile. As Figure 2 shows, gas prices at thewellhead have risen from around $2.00/Mcf through most of the 1990s to an average above$6.00/Mcf and a peak above $10.00/Mcf in 2005. (12) At the same time, international prices for LNG have fallenbecause of increased supplies and lower production and transportation costs, making LNG morecompetitive with domestic natural gas. (13) While cost estimation is speculative, some industry analystsbelieve that LNG can be economically delivered to U.S. pipelines for approximately $2.50 to$3.50/Mcf. (14) Forecasts by the Energy Information Administration (EIA), National Petroleum Council, andother groups project expansion in U.S. LNG imports over the next 20 years. Specific LNG forecastsvary based on methodology and market assumptions, but most expect LNG to account for 12% to21% of U.S. natural gas supplies by 2025. (15) EIA's reference forecast projects U.S. LNG imports to reach 4.13Tcf in 2025, which equates to approximately 16% of total U.S. gas supply for that year, upsubstantially from the 2005 market share of about 3%. (16) Figure 3 details projected U.S. LNG imports relative to othernatural gas supplies in EIA's forecast. Figure 3: Projected U.S. Natural Gas Production and Imports (Tcf) Source: Energy Information Administration. Annual Energy Outlook 2006. Dec. 2005. Table A13.