The Increased Tradability of Natural Gas

Abstract

role in modern economies. Firms use natural gas as fuel for heating throughout production processes and as an input in the production of chemicals and fertilizers. Many households also use natural gas for cooking and heating. While most countries need natural gas to various degrees, not all of them have sources of natural gas to supply their domestic economies. These countries face a few alternatives. One option is to rely on alternative sources of fuel that might substitute for natural gas; but for some uses there are no close substitutes. In such cases, international trade can often come to the rescue, by allowing countries without natural gas sources to either (1) purchase gasdependent goods from countries with those sources or (2) purchase natural gas across borders. Until recently, international trade of natural gas had been largely restricted to the use of cross-country pipelines. While expanding access for countries without sources of natural gas, pipelines require costly investments and limit the countries from which gas can be purchased to those that are relatively close in proximity. The physical properties of gas make it otherwise hard to store or move in its natural state. However, over the past 30 years, technological developments have increased the tradability of natural gas by making it easier to turn it into liquid form. The shipping industry has taken advantage of such developments by increasingly using liquefied natural gas (LNG) fleets and terminals. The logistics involved are starkly different from those involved in the conventional trade of goods. To be shipped overseas, natural gas is first liquefied at the source port and then stored in liquid form with an LNG fleet that will carry it to a destination. At its destination port, the natural gas is “regasified” at a dedicated terminal. Each step of this process is necessary and costly, often involving large-scale, long-term investments. We document recent developments in the tradability of natural gas and investigate potential bottlenecks that may limit the development of this growing market. The Increased Tradability of Natural Gas