Over the past several months, we’ve explored the supply and demand dynamics of the US natural gas market in a fair amount of detail.

The April 28 installment of The Energy Letter, Why Some Natural Gas is Worth $7.28, and the Sept. 2 issue, Pugh Clauses and Shale-Gas Activity, focused on the supply side, explaining why producers continue to drill at a frenzied pace despite depressed prices.

A few weeks ago my colleague Elliott H. Gue focused on the demand side of the equation, noting that industrial demand continues to improve as the economy recovers from recession and that low prices are prompting some US power companies to switch from coal to natural gas. These improvements, coupled with high demand during an unusually hot summer, should ensure that the domestic supply doesn’t exceed storage capacity–a real risk in 2009. (See Short-Term Outlook for Natural Gas).

But the US shale-gas revolution and expansion of global capacity for liquefied natural gas (LNG) are quickly changing the supply and demand dynamics in local markets worldwide. A recent announcement from Cheniere Energy Partners LP (NYSE: CQP) underscores these shifts.

US natural gas prices in the range of $6 to $9 per million British thermal units (BTU) from 2003-08, a product of dwindling output from conventional fields, drove two important changes: Independent operators invested heavily in efforts to develop technology and process that would make shale-gas production commercially viable, while equally enterprising firms built almost 15 billion cubic feet (bcf) worth of regasification terminals to accept imported LNG.

Today, domestic supply presents a different kind of issue. The biggest problem isn’t how to import more gas but what to do with the growing oversupply. In 2009 record output from shale-gas plays enable the US to unseat Russia as the world’s top producer.

Formerly high-flying Cheniere Energy (AMEX: LNG) is one firm that was burned by this outcome; not only did the stock plummet from highs of $44 in 2006 to less than $3 today, but the firm’s financial situation is also precarious at best. The company’s master limited partnership (MLP) has fared better, thanks to long-term contracts at its Sabine Pass LNG import terminal in Louisiana, but offered scant upside–until recently.

Cheniere Energy Partners popped up on Jim Cramer and other investors’ radars in July when it announced that it would apply for regulatory approval to add liquefaction capabilities to its Sabine Pass facility. Earlier this month the Dept of Energy approved the MLP’s application to export LNG to any country with which the US has a Fair Trade Agreement, provided the nation also has the wherewithal to import the fuel.

Cheniere Energy Partners still needs approval from the Federal Energy Regulatory Commission to construct the liquefaction facilities, but the news featured prominently in the Wall Street Journal and other publications. If approved and completed, the export facility would be the first in the Lower 48 states and would provide a new outlet for the glut of US natural gas. Currently, Alaska’s Kenai LNG terminal, owned by ConocoPhillips (NYSE: COP) and Marathon Oil Corp (NYSE: MRO), is the only location in North America permitted to export LNG.

But investors shouldn’t regard a bi-directional Sabine Pass as a slam dunk, especially at this stage in the game. Although it’s not a surprise that leading shale-gas operator Chesapeake Energy Corp (NYSE: CHK) has expressed public support for the project, questions remain about whether the liquefaction fees Cheniere expects to charge will fly.

Canada offers a better bet on North American LNG exports. A joint venture between Canadian subsidiaries of EOG Resources (NYSE: EOG) and Apache Corp (NYSE: APC), Kitimat LNG Terminal is slated to begin operations in 2014, with a focus on shipping natural gas to Asia. Although the duo faces higher construction costs than Cheniere, the Kitimat facility’s location in British Columbia reduces shipping times, while the region also has a strong history of trade with Asia.

Better yet, the joint venture has already inked agreements with importers in key markets. For example, Korea Gas Corp, the world’s largest LNG importer, signed a memorandum of understanding that it will acquire 40 percent (2 million tonnes per annum) of Kitimat’s output over the next 20 years.

The world’s top three LNG importers include the island nations of Taiwan and Japan, both of which lack access to pipeline supplies. Although South Korea isn’t an island, the border with North Korea effectively isolates it from the pipeline system.

Demand from India and China also appears poised to increase. The China National Development and Reform Commission approved higher natural gas prices, a move that should mitigate embarrassing supply shortfalls.

Natural gas has been growing in popularity in China, particularly in power-generation facilities located near major cities. Concerns about air quality mean that many of the high-rise residences constructed during China’s recent housing boom are equipped for piped gas.

Pricing concerns on imported gas still remain, but the government’s long-term plans call for natural gas to account for 10 percent of the country’s energy mix, one-third of which will come from LNG and pipeline gas. At present, LNG imports account for 5 percent of China’s natural gas supply, but this amount should increase to 20 to 25 percent of the country’s annual gas consumption.

Imports should ramp up substantially over the next few years as new regasification terminals come online. CNOOC (HK: 0883, NYSE: CEO) has three new facilities slated for completion in 2012 that will import 10 million tonnes of LNG, while the country’s other major energy companies also have projects in the works. It’s estimated that if nine or more of the proposed facilities are constructed, China’s LNG imports will more than double over the next five years (in 2009 this total amounted to 4.6 billion cubic meters).

Investors seeking leverage to this trend should consider EOG Resources and Apache Corp, both of which have plenty of other upside drivers, or names involved in LNG projects in Australia, the only country besides the US that’s producing natural gas from unconventional fields on a commercial scale. Many of these joint ventures have already booked long-term contracts with Asian customers. In Australia, we would focus on names that trade at attractive valuations or offer exposure to other upside catalysts.

Energy Investing

Elliott H. Gue, editor of The Energy Strategist, has over 10 years of experience analyzing global energy markets and picking the best stocks to play near- and long-term trends. Click here to sign up for a free 30-day trial of the service.