Natural gas currently satisfies more than 24 percent of worldwide, and 25 percent of North American primary energy consumption. Natural gas has an advantage over other primary energy sources such as oil and coal because it is clean burning and therefore more environmentally friendly. Its share of the world's energy requirements will continue to increase.

More than 35 percent of the world's natural gas reserves are located in countries that have low energy consumption and are far from major demand centers. In contrast, supplies close to major markets are facing declines in mature basins. In order for natural gas to be effectively transported by sea, it must be liquefied to condense its volume. Liquefied natural gas, or LNG, is therefore becoming an increasingly significant means of distributing natural gas from remote supply areas to key consuming centers.

Although LNG has been used commercially in the U.S. since the 1940s, its role was limited to meeting demand peaks caused by seasonal variations. Historically, abundant supplies of domestically sourced, low-cost, piped natural gas kept pace with demand, making the need for LNG imports minimal and sporadic. We believe the era of inexpensive North American natural gas is over. The average wellhead price of natural gas produced in the U.S. has more than doubled in the last five years, indicating a maturing domestic resource base and supporting the economic viability of marginal drilling and imports from distant places.

Imports can only increase significantly if new LNG receiving capacity is constructed. Former Chairman of the Federal Reserve, Alan Greenspan, stated that greater access to global natural gas reserves is required for North American natural gas markets "to be able to adjust effectively to unexpected shortfalls in domestic supply [and that] access to world natural gas supplies will require a major expansion of LNG terminal import capacity." Ben Bernanke, the current Federal Reserve Chairman, reaffirmed this view in February 2006, when he said, "building LNG terminals is one thing that we can do and we should continue to do to create a more global market for natural gas."

The emergence of North America as a major LNG importer in the next few years will trigger fundamental changes in the LNG business. Several developments in the LNG trade over the past year are evidence that a paradigm shift is already underway, and will become more pronounced as large new LNG supply projects start production.

Over the past year seasonality of consumption in the key gas markets has emerged as a major driver of LNG flows. European and Asian buyers registered record levels of LNG imports during a prolonged cold spell in the first three months of 2006, and saw prices for spot cargoes spike to over $20/MMBtu. As demand in Europe and Asia leveled off throughout summer, several LNG ships were idling fully laden at various locations around the world awaiting an upturn in markets. As more supply comes online, the swing between peak and trough demand for LNG is poised to increase with growing LNG volumes seeking a home in summer months.

A second key characteristic of the LNG trade in 2006 was its visible flexibility. As a growing share of LNG production is acquired by portfolio-buyers under contracts without destination restrictions, LNG chases those markets where price is highest, in novel routes and under creative arbitrage arrangements. Cargoes from Trinidad and Nigeria moved half-way around the world to satisfy demand in Japan and Taiwan; some producers even engaged in creative swap agreements with multiple partners in Europe and Asia to optimize contracts and reduce shipping costs.

Finally, Atlantic Basin LNG flows have been reflected in the differential between its two main gas price indexes – the NYMEX Henry Hub price in the U.S. and the NBP price in the U.K. The NBP price spike in the first quarter of 2006 gave way to a dramatic price erosion for the remainder of the year, as two large new pipelines from Norway and the Netherlands were commissioned. As the Henry Hub premium over NBP widened, LNG cargoes – which, compared to pipeline gas are the flexible portion of the global gas trade – changed course and headed to the U.S., leading to record North American import levels and terminal utilization rates in the first quarter of 2007. This trend of diversions is expected to strengthen through the summer, and underpin a seasonal pattern that foreshadows the LNG trade of the future.

As these trends are strengthened in the coming years, the U.S. Gulf Coast is poised to become a magnet for LNG volumes that seek access to a market with adequate demand, infrastructure and liquidity. Through its Gulf Coast LNG receiving and marketing network, Cheniere is well-positioned to take advantage of the fundamental changes in LNG trade and ensure that North America’s need for safe, affordable and environmentally-friendly energy supply is adequately met.