After a record, unexpected drop in LNG output in 2012, production is expected to grow only marginally this year.

Demand, meanwhile, continues to march higher, driven by energy-hungry Asia's rapid economic growth, Japan's near total shutdown of its nuclear industry and a drought in Brazil that has forced the South American nation to buy emergency fuel supplies at high prices.

With 80 percent of global LNG supplies locked up under long-term contracts, it is countries such as Brazil, Argentina, number two economy China and India that rely on short term deals who could face the biggest hit.

LNG helps bridge fuel supply gaps in countries where domestic output fails to keep up with demand. The intricate process of liquefying gas, shipping and regasifying the fuel can also make it more expensive than pipeline supplies.

Spot prices of liquefied natural gas are currently about $18 per million British thermal units (mmBtu), up about $2 from the same time last year, but still lower than record deals above $20 in 2008.

"The supply situation is worse than we thought it would be," said independent LNG analyst Andy Flower, who tracks global export and import volumes. "LNG production declined last year and it doesn't look as though it will increase by much this year."

He added that LNG output has fallen just three other times in the 50 years it has been produced: In 2008 when the global economy was in free fall and in 1980 and 1981 when Algeria halted LNG exports to the United States over a price dispute.

Moreover, the tighter market means that any unforeseen events, such as Japan's Fukishima nuclear disaster, big weather events or sudden plant shutdowns, could push prices even higher. In the wake of Fukushima in March 2011, imports by the world's top consumer of LNG rocketed to meet power needs, pushing Asian prices up 70 percent in the following seven months, according to Reuters data.

Only two of Japan's 50 nuclear plants are back online nearly two years later.

LNG exporters are bracing for a supply glut in the second half of this decade as new supplies arrives from Australia, Africa and the United States. But in the meantime a shortage looms.

FALLING OUTPUT

After production doubled between 2000 and 2011 as a raft of new projects were completed, output fell by a record amount last year because of unforeseen events. Maintenance slowed output in the world's top exporter, Qatar, while rising domestic energy demand in Egypt and Indonesia, once stalwarts of the LNG export market, took supplies off the open market.

Unrest and militant attacks in Yemen also halted output from that country's troubled export project, which began producing in 2009.

Meanwhile, only one major project, in Angola, with a capacity to produce 5.2 million tonnes per year (mtpa) of LNG, is scheduled to start up this year.

"If overall demand is growing and supply is not, and you are relying on the spot market, you are going to have a harder time accessing supply and will have to pay higher prices," said Charles Martin, an analyst of Asian LNG markets for Waterborne Energy in Houston.

Global supply fell about 1.6 percent to 238 million tonnes in 2012, according to Flower's estimates.

This year does not look much better. The security situation in Yemen remains a concern and a source told Reuters in December that Indonesian production will drop nearly 14 percent in 2013 because of declines in domestic gas production.

At the same time, new projects in Asia will suck up what supply they can in 2013. In India, China and Singapore, up to five new import terminals will add nearly 18 million tonnes per year of import capacity, according to Reuters estimates - about 8 percent of last year's supply. The LNG is used in electricity generation, heating and transportation.

That demand is only set to grow. China, which is planning to triple gas use by 2020 to reduce reliance on smog-inducing coal, has nearly 10 mtpa of import projects on the slate for 2013.

ILLIQUID MARKET

Adding to spot supply pressures is a move by Qatar - a crucial balance in the LNG market in recent years - toward longer term contracts with emerging importers. Qatar National Bank forecast in December that the nation's LNG spot sales would fall by at least 40 percent from 2012-2014 as the world's top exporter enters into longer-term supply deals.

The result is a less liquid spot market where the buyer usually willing to pay the highest price set prices and other buyers must pay up or go away empty-handed.

Difficulties have already emerged. Suffering from a severe drought that threatened to crimp hydro electricity output, Brazil paid up to $18 per mmBtu for emergency LNG this month, near the highest price paid for spot LNG in four years.

By comparison, U.S. gas prices, pressured by a glut thanks to the shale drilling boom, languish below $4 per mmBtu.

In Argentina, stiff competition from Brazil and Asia is hindering attempts to secure LNG supplies needed to make up for dwindling domestic oil and gas production. State-run energy company YPF SA opened a tender in December to import a record 83 cargoes for 2013, up slightly from the previous year. So far it has only secured 51 cargoes because of price disputes, sources said.

EASING LONGER TERM

Waterborne's Martin says the spot market's flexibility can increase when new projects first come online with plenty of production to spare and decrease as they attract long term contracts.

In a few years time, the supply picture is more promising for consumers.

The shale gas boom means there will probably be new supplies from the United States on the world market, although a debate is raging between domestic producers and consumers over allowing more than one project to go ahead. There are also new export terminals due to be established in Australia and East Africa by 2020.

Already experts are asking whether there might even be excess supply once these projects are built.

Resentment over costly LNG imports might prompt importers to diversify, analysts said, cutting demand just as producers turn the taps on at new mega-projects.

In 2008, India switched to naphtha when LNG prices hit record highs above $20 per mmBtu. Japan, too, has the nuclear option to fall back on, depending on the political and social appetite for such a move after the accident and subsequent crisis at Fukushima.

"Fuel switching is more likely to happen in Japan. If we see less LNG in 2013, then we could see the Japanese government fast-tracking nuclear reactor restarts," said Societe Generale analyst Thierry Bros.

(Reporting By Edward McAllister in New York and Oleg Vukmanovic in London)

• A Permanent Economic Emergency