NA LNG looks to exporting to survive

In a change from a decade ago, the North American liquefied natural gas industry is now gearing up to export billions of cubic feet

Bill White

Researcher/writer for the Office of the Federal Coordinator

North America’s liquefied natural gas industry is gearing up to shift into reverse.

Normally a business in reverse connotes retreat and possibly doom. But LNG ports hope just the opposite will be true, that they will find their future and salvation.

A decade ago the industry was certain North America would be importing billions of cubic feet of gas a day to slake consumers’ growing thirst for the fuel in an era of declining domestic production.

Executives of major oil and gas companies hopped on board. Bankers got in line. Politicians pressed regulators to speed up approvals. Even the chairman of the Federal Reserve Board rattled cages about the need for LNG.

And from all that commotion, LNG-import proposals sprang up and multiplied. (Also during this time, 30-year-old plans were revived for an Alaska North Slope pipeline to flow gas to a continent believed to be on the brink of a new energy crisis.)

Before 2000, North American had just two operating LNG-import terminals. But in the next 11 years, two mothballed import terminals restarted and expanded, and eight new terminals were built in the United States, plus one in Canada and two in Mexico.

Collectively, the terminals can feed about 20 billion cubic feet a day of natural gas into the North American pipeline grid, enough to satisfy one-third of U.S. consumption on an average day.

But mostly those terminals are idle, as obsolete as a Rust Belt factory. At least five of them didn’t import a droplet of LNG in 2012 through November.

All the executives, bankers and politicians were wrong. U.S. gas production didn’t decline, it grew astoundingly thanks to new techniques to blast oil and gas from stingy strata of shale deep underground.

Now the North American LNG industry’s new vision involves exporting that overabundance of gas. It’s a radical redirection. It’s like Sir Edmund Hillary, part way up Mount Everest, deciding to become a deep-sea diver instead.

The LNG industry’s about-face is part of a larger upheaval that the shale oil and gas boom has sparked. Many power plants that once burned coal now favor natural gas. Former oil pipelines plan to carry gas. And, as supply and demand adjust to the new world of shale-gas production, pipelines that once flowed methane south or east now aim to push it north or west.

For the LNG industry, the question has become: Can it pull off its audacious reversal?

Export mania

Cheniere hopes to produce its first batch of LNG in 2015.

As of mid-January 2013, 16 other U.S. proposals exist at least on paper, based on filings with the U.S. Department of Energy. Department approval is required before gas can go to Japan, China, India, Europe or any of the other countries targeted by the applications.

Three of the 16 have applied to the Federal Energy Regulatory Commission for permission to build liquefaction facilities. Five more are doing preliminary work with FERC in advance of applying for authority to build and operate export plants.

In Canada, at least six projects are under active consideration. Five are proposed for the nation’s West Coast and one for the East Coast.

All together, the U.S. and Canada projects propose to export up to 30 billion cubic feet a day. That’s a breathtaking quantity — equal to roughly a third of all gas production from the two countries in 2012.

No one thinks that much gas will exit North America. Some proposals will remain nothing more than ideas. Some will get approved but never built for lack of financing or customers.

But the global gas industry abounds in frenzied fascination over the possibility of North American LNG exports. Such exports, especially if sizable, could shake up how gas is bought, sold and priced across the world.

Global LNG consumption averaged about 30 billion to 35 billion cubic feet a day in 2012. That quantity is predicted to grow strongly in coming years as gas demand from China, India and other developing economies blossoms.

Most speculation on how much North America LNG actually gets shipped generally ranges from 5 billion to 10 billion cubic feet a day — or the output from four to six projects.

Two U.S. energy consultancies in October 2012 jointly predicted foreign buyers would want about 10 bcf a day. LCI Energy Insight and Energy Ventures Analysis Inc. were more specific: The winners would be two Lower 48 projects, one in Alaska and three on Canada’s West Coast.

As for the predicted winners: “It was deemed that the combination of their transportation advantage (nearness to market), (oil and natural gas) liquids revenues and partnership with either foreign partners or the majors, would provide them with a competitive advantage ... in what appears to be an intensely competitive market,” they said.

Separately in October, a Shell executive predicted about 8 bcf a day of exports.

More recently, Kenneth B. Medlock III, an energy economist at Rice University in Houston, said: “I doubt we’ll see more than 6 billion.”

Brownfield vs. greenfield

The projects are either “brownfield” or “greenfield.”

Brownfield is an industry term for projects where some, if not much, of the infrastructure already is in place. Export projects proposed for sites where import terminals stand are brownfield.

By contrast, greenfield projects start from scratch, developing a new site.

If you’re trying to play in the LNG export game, you’ve got a big advantage if you propose a brownfield project.

Brownfield proposals already have expensive tanker berths, high-tech LNG storage tanks, pipeline connections, roads and utilities installed. The major extra infrastructure they need is muscular machinery that superchills methane to minus 260 until the vapor becomes liquid. Liquid gas takes up less space than a vapor, making it easier to ship in bulk across oceans.

Lower 48 brownfield projects might cost half as much to build as greenfield — perhaps $5 billion to $10 billion for big brownfield projects, compared with possibly $20 billion and up for big greenfield LNG terminals.

Another real advantage in a world where time is money: Typically brownfield can be permitted more quickly than greenfield.

Of the pending U.S. export proposals, seven would be brownfield projects. Almost every U.S. import terminal is maneuvering to add export services.

Another nine big U.S. proposals — and all of the Canadian projects — involve greenfield development. (The Canadian West Coast projects, however, lie much closer to Asia’s major LNG markets — Japan, South Korea, China and Taiwan — than the U.S. brownfield projects, all of which lie along the Gulf of Mexico or East Coast. Their advantage lies in that proximity and the resulting lower cost of transporting LNG to Asia.)

Cheniere’s Sabine Pass export project under construction illustrates how a brownfield project can get approvals quickly.

Cheniere obtained FERC permission to build its import terminal in 2004. Years of construction ensued and the terminal took its first LNG cargo in 2008.

But by 2008 it was becoming clear the terminal wouldn’t be very busy. Shale-gas production was catching on and North America needed far less imported LNG than predicted just a couple of years earlier.

Almost immediately, Cheniere applied for and received Energy Department permission to “re-export” LNG. A Sabine Pass customer would buy a cargo of foreign-made LNG, offload it to hold in cold storage, then pipe it back onto a tanker for delivery to a foreign buyer when the price was right.

But occasional re-export cargoes is a poor long-term business strategy for a multibillion-dollar investment.

In 2011, Cheniere took the next step in its evolution. The company asked for permission to liquefy U.S. natural gas for export. In less than nine months, the Energy Department authorized exports anywhere in the world, provided FERC sanctioned construction. FERC gave its OK in 2012, 15 months after getting Cheniere’s application.

Before acting, FERC conducted an environmental assessment. Assessments are less comprehensive and take less time than full-blown environmental impact statements, which can run into the thousands of pages and cost an LNG-project developer hundreds of millions of dollars.

The assessment tallied 142 pages, plus attachments. FERC staff did an assessment instead of an environmental impact statement “because all the proposed facilities would be within the footprint of the existing LNG terminal, which was previously the subject of an EIS, and the relevant issues that needed to be considered were relatively small in number and well-defined,” FERC said.

Other permitting agencies took a similar tack. Because the import terminal was rarely used, the air emissions, ship traffic and other issues for an export terminal would be no greater than allowed already.

In general, with some exceptions, FERC has environmental assessments planned or under way for the proposed brownfield export projects that have applied to the agency so far, and full EISs for the greenfield sites.

Will LNG buyers step up?

LNG can be made cheaply in North America and sold at a profit in Asia and Europe.

That premise is rock solid in describing today’s market and prices. But not everyone believes the premise has staying power.

The raw material of LNG — methane — is available at ultra-low prices right now in North America because so much shale gas is flooding the market. Last year, the market price at the Lower 48’s Henry Hub averaged $2.75 per million Btu (roughly 1,000 cubic feet of methane). That was the lowest average since 1999. (The price has risen in the past several months, reaching $3.50 as of mid-January and climbing to $4 in the futures market for deliveries next winter.)

But overseas, LNG spot market prices are sky high. They average $15 to $18 in Asia at present, according to trade journal Heren Global LNG Markets. Spot gas prices in Europe range from $10 to $12. (Deliveries under long-term contracts can cost less than these prices.)

That gap between low North America prices and high prices elsewhere has created what finance professionals call an “arbitrage opportunity” — profiting when the same commodity fetches different prices in different markets. Profits amass by buying in one market and selling in another.

Even after adding possibly $5 to $7 in cost to liquefy North American gas and ship it long distances from the Lower 48, the arbitrage opportunity remains — at today’s prices.

Unfortunately for those who would like to take this arbitrage profit now, they can’t. The sole working U.S. LNG export plant — ConocoPhillips’ 44-year-old plant at Nikiski, Alaska — is small and winding down operations as its federal export authority expires in March. The only other plant authorized for exports to anywhere in the world is Cheniere’s Sabine Pass site, which is under construction and won’t be ready to ship before 2015.

Cheniere and other LNG export entrepreneurs are gambling that the price gap will remain wide enough, and long enough, to make their industry’s new direction viable. (In all cases, the proposed North American export terminals merely plan to liquefy somebody else’s gas — called “tolling services” within the industry — while the gas sellers and/or buyers would bear risk of guessing wrong on commodity prices.)

But forecasting future natural gas prices is as maddening and impossible as accurately predicting earthquakes.

Since 2000, the average annual U.S. price has been $5.33 per million Btu. Within those years, however, the annual average has swung between an $8.86 high in 2008 to a $2.75 low in 2012. The daily average soared and plunged like a runaway rollercoaster, from a high of $18.48 to a low of $1.69 during that span.

Asian and European price swings have been nearly as wild. For a time in mid-decade, North American prices even exceeded gas prices overseas.

No one forecasted all that price volatility, although thousands of consultants, market watchers, investors and industry professionals tried.

The arbitrage opportunity began opening up around 2009 or 2010.

Asian buyers and others are starting to move on it. Companies from Japan, South Korea, China, India and Malaysia have recently invested in North American gas fields or LNG export plays. It’s partly a matter of protecting themselves against high LNG prices.

Editor’s note: This is a reprint from the Office of the Federal Coordinator, Alaska Natural Gas Transportation Projects, online at www.arcticgas.gov/north-american-lng-industry-looks-survival-through-exports. Note: Part 2 of this story will appear in the Feb. 10 issue of Petroleum News.