Over the years liquefied natural gas, or LNG, has been anything but a Steady Eddie market in terms of price, demand, and investment in production capacity. The LNG market has behaved more like the Incredible Hulk, roiled by sharply contrasting stop-and-go, boom-or-bust, feast-or-famine forces. When natural-gas prices and demand are high, LNG production capacity tends to grow. When prices and demand are low, additions to production capacity tend to taper off.

Currently LNG is in a stop/bust/famine phase of its cycle, inasmuch as natural-gas prices have declined more than 50% over the past 12 months, to about $4.20 per million British thermal units. With the economy in a recession, demand is soft, domestic drilling activity has been cut back, and plans to build some LNG plants in the U.S. have been tabled. Today the U.S. actually has something of a glut of natural gas; stored supplies should total 1.6 trillion cubic feet at the end of the winter, more than 10% above the average of the past five years, the ISI economic-research firm estimates.

But we think that glut won’t be the norm going forward. As the economy revives, LNG is likely to enter its next go/boom/feast phase, with demand picking up possibly as soon as next year. That in turn should boost LNG prices and provide the industry with an economic incentive to add more production capacity over time. As The Wall Street Journal observed about the fickle nature of LNG, "Forecasts can swing abruptly when it comes to figuring out where natural gas is needed and how much."

LNG furnishes only about 2-3% of the natural gas that the U.S. consumes, but we conservatively estimate it could provide 17% by 2030. We have been, and continue to be, long-term bulls about LNG. Demand for LNG, despite its inevitable slumps periodically, has grown robustly in the past 10 years, and we estimate it should expand at least 10% annually on average over the next two decades.

Indeed, we think it’s only a matter of time until the U.S. becomes the world’s largest LNG market. To fully meet its needs in good times, the U.S. will likely need to draw from tight supplies of both traditional and alternative sources of energy, relying not only on LNG but domestically produced natural gas, oil, coal, biofuels, fuel cells, and nuclear, solar, and wind power as well. The bottom line: for decades to come, the U.S. will need all the energy it can get from all sources, including LNG shipped from all over the world.

To us, the balance of overall energy supply and demand seems as delicately precarious as an assayer’s scales, and the reduced LNG imports lately have the potential to suddenly tip the scales toward a natural-gas shortage when the economy revives, the U.S. is hit with a colder-than-average winter, or a harsh hurricane season disrupts the energy infrastructure of the Gulf Coast. And in the long term, a healthy market for LNG is probable because LNG is competitively priced, relatively abundant (the Energy Information Administration estimates that the world’s reserves of recoverable natural gas total 6,079 trillion cubic feet, about 60 times the annual volume now consumed), and relatively clean burning (LNG produces 40% less carbon content than coal).

Some industry observers say in the decades ahead the U.S. will be "a global sink" for LNG -- a basin into which excess supplies of LNG are poured by the world’s producers. LNG prices have traditionally been highest in Europe, and producers are wary of sending too much gas to Europe because it might depress prices there. Nevertheless, we think natural-gas prices globally should continue to moderate, and as U.S. demand increases, more gas is likely to be shipped to the U.S. What’s more, even in the short term, the U.S. has become a more attractive LNG market, as global prices have fallen faster than domestic prices, making sales here more profitable for foreign producers. Although this recession has been exceptionally harsh and has slowed investment recently, the U.S. is adding LNG importing capacity that was initiated during the energy boom and has more solid economic prospects over the next 12 months than many other countries do, further heightening its appeal as a market, in our analysis.

Among the major LNG exporters to the U.S. and elsewhere are Qatar and Australia, which are expected to account for 50% of all new supplies by 2020, according to Wood Mackenzie, a commodities-research firm. Other big producers include Trinidad, Algeria, Nigeria, Russia, and Iran.

Consistent with the stop-and-go nature of the market, U.S. importing capacity of LNG has grown in fits and starts. Seven LNG regasification terminals now operate on the East Coast, the Gulf Coast, and Alaska, and six additional regasification terminals are now under construction. (At these terminals, LNG is converted from an extremely condensed liquid into a volume of natural gas that’s 600 times larger. Natural gas is shrunk into LNG by chilling it to minus 260 degrees Fahrenheit, a process that makes for easier storage and transportation.) Currently about 40 proposed LNG terminals are on hold in North America. We think that most of those terminals won’t ever be built, mainly because they will be vetoed by consumers, environmental groups, and government officials who harbor safety and environmental concerns about LNG. But we think there will be enough new terminals to accommodate much greater shipments of LNG to the U.S. in the years ahead; altogether, global investment in LNG production and shipping may total more than $250 billion between now and 2030, the International Energy Agency estimates.

Construction of LNG terminals has been stymied mainly by fears that LNG is vulnerable to catastrophic explosions, set off either accidentally or by terrorists. Opposition to the terminals has been especially fierce in the Northeast, where utility and energy executives complain that the public mindset has evolved from NIMBY, or Not in My Backyard, to BANANA, or Build Absolutely Nothing Anywhere Near Anything.

LNG isn’t explosive, but it quickly evaporates when spilled, forming a highly combustible vapor. A 2004 study by Sandia National Laboratories, a unit of the Department of Energy, noted that an LNG fire would be hot enough to melt steel at a distance of 1,200 feet and could result in second-degree burns on exposed skin a mile away. In 2005 Good Harbor Consulting, a homeland-security firm, concluded that a terrorist attack on any LNG tanker near Providence, Rhode Island, could result in as many as 8,000 deaths and 20,000 injuries.

As a result of these risks, the process of gaining permission to build LNG terminals has become more costly, time-consuming, and circuitous. As many as 100 permits and approvals may be required from federal and state agencies, including the Coast Guard, the Federal Energy Regulatory Commission, the Maritime Administration, and state environmental departments -- a gauntlet that can take three or more years to run. And The New York Times estimates the cost of building an LNG terminal exceeds $600 million, with a construction timetable of at least three years.

It’s generally agreed that the safest way to receive and handle LNG is offshore rather than on land. As a result, floating LNG terminals, which are boat-like structures located outside shipping lanes and not visible from land, are gaining favor. The terminals process LNG carried by cargo ships, then distribute the expanded volumes of gas onshore via underwater pipelines. As Mariano Gurfinkel, a project manager at the Center for Energy Economics at the University of Texas, explains, "So far no one has been able to crack the nut of getting infrastructure sited in the Northeast, and that’s why you have all these proposals to go offshore and avoid heavily populated areas."

For example, this year ExxonMobil plans to seek permission to build a floating LNG terminal, called BlueOcean Energy, 20 miles off the central New Jersey coast. BlueOcean Energy is designed to supply 1.2 billion cubic feet of natural gas daily, or about 2% of the nation’s gas now used.

Also, to increase the supply and shipping capacity of LNG, public and private firms, most of them based overseas, are building production plants and super-sized LNG tankers. Four of the largest plants are now being developed in Qatar, the Persian Gulf nation about the size of Connecticut that’s ramping up production with the intent to become the world’s largest LNG exporter in the next decade. Qatar’s North Field contains one of the biggest gas deposits on any continent, with a recoverable supply of more than 900 trillion cubic feet. And the new super-sized tankers, called "Q-Max" ships, which are longer than three football fields, can carry more than 260,000 cubic meters of LNG and are expected to cut the cost of transporting LNG by 20-30%.

Even as the LNG market is rocked by its sporadic fluctuations, we think two energy companies are especially well-positioned to roll in that market over time: BG Group (market capitalization: about $48 billion) and Occidental Petroleum (market capitalization: about $41 billion).

BG Group, based in Reading, Berkshire, United Kingdom, operates in 27 countries, with about 70% of its production allocated to natural gas. BG is the largest LNG seller to the U.S., providing 40% of domestic supplies, and the largest Western seller of LNG to the Pacific Basin countries. Altogether, it serves nine of the 17 national markets that import LNG. The company is expanding its fleet of 20 LNG tankers, with at least two more expected to be christened by 2010. The consensus of security analysts is that BG will increase its earnings per share at an 11.8% annualized rate over the next five years, according to Reuters Research.

Occidental Petroleum, headquartered in Los Angeles, is the fourth largest U.S. oil and gas company. The company primarily does business in the U.S., the Middle East/North Africa (which accounts for a growing percentage of the company’s production, currently 25%), and Latin America. Occidental has increased its natural-gas production rate by more than 20% over the past five years. Occidental is now planning the Ingleside Energy Center, a terminal located near Corpus Christi, Texas, that will store nearly 1 billion cubic feet of LNG, and the San Patricio Pipeline, designed to transport the gas from Ingleside to pipelines in the U.S. and Mexico. The company’s earnings per share, although they may be weak in 2009, are expected to grow at a 26.3% annualized rate in the next three years, according to Standard & Poor’s.

The views expressed represent the opinions of Turner Investment Partners as of the date indicated and may change. They are not intended as a forecast, a guarantee of future results, investment recommendations, or an offer to buy or sell any securities. Opinions about individual securities mentioned may change, and there can be no guarantee that Turner will select and hold any particular security for its client portfolios. Earnings growth may not result in an increase in share price. Past performance is no guarantee of future results.

Turner Investment Partners, founded in 1990 and based in Berwyn, Pennsylvania, is an investment firm that manages more than $15 billion in stocks in separately managed accounts and mutual funds for institutions and individuals, as of December 31, 2008.

As of February 28, 2009, Turner held in client accounts 2,260 shares of BG Group and 1.9 million shares of Occidental Petroleum. Turner held no shares of ExxonMobil.