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

Japanese, Korean and Taiwanese officials told foreign LNG makers in September 2012 that their prices are out of whack given what’s going on in North America. Japan is enduring its first trade deficit since the early 1980s in part due to paying high LNG prices.

Some think today’s price gap could narrow quickly.

As one former Energy Department official told The New York Times recently, “I know the pitch about our price differentials will justify the high costs of LNG. We will see. Gas by pipeline is a good deal. LNG? Not so clear.”

Medlock, the Rice University energy economist, published a paper in 2012 predicting North American LNG exports will lose money.

Today’s extremely low North America prices are an aberration due to the new-found glut of shale gas, Medlock argued. Producers and markets will adjust, prompting the price to rise.

Today’s extremely high prices elsewhere, especially in Japan, the world’s top LNG buyer, also are an aberration due LNG prices linked to soaring oil prices, exacerbated by a demand spike after Japan’s Fukushima nuclear power plant disaster in 2011, Medlock said.

Today’s extremes cannot last. Other countries will start producing shale gas. More pipelines will get built to supply China, freeing more LNG for Japan and South Korea. New liquefaction projects could sprout in Russia, East Africa and elsewhere besides North America.

When prices migrate to more reasonable and sustainable levels, the arbitrage opportunity will vanish, he said.

The global gas price differences will not be “sufficient to support long-term baseload LNG exports from the U.S. Gulf Coast to these regions (Asia and Europe),” he said.

North American export sites could be profitable as seasonal suppliers or as providers of storage capacity for European and Asian markets. “In fact, it would not be surprising to see Asian utilities taking storage positions in the U.S. to hedge seasonal price fluctuations. ... This is a distinctly different type of arrangement from a baseload LNG supply deal,” Medlock said.

Cheniere Energy, the first mover to add liquefaction to its Louisiana import terminal, has found buyers for all of its 2-bcf-a-day output. British trader BG Group, Spain’s Gas Natural Fenosa, Korea Gas Corp. and GAIL (India) have signed 20-year contracts.

Cheniere’s 2011 annual financial report says that collectively the four companies have committed to pay $2.3 billion annually for liquefaction services.

For Charif Souki, Cheniere CEO, to shift to liquefaction is an act of survival.

The company was near bankruptcy, he told a London gas conference in October 2012. He needed to find a way to salvage Cheniere’s investment in storage tanks, tanker berths and the rest.

“For us it was a matter of life and death,” Souki said.

Import mania

They were joining the stampede to build or expand LNG import terminals.

“At one point in the early 2000s there were over 47 regasification (import) terminals with certification for construction, which was a clear signal regarding industrywide expectations for significant declines in future U.S. production,” Medlock said.

U.S. production did drop. From 2001 to 2005, production fell 8 percent, the equivalent of 4.3 bcf a day.

The pressure was on to bring more supply to U.S. consumers.

In late 2002, while considering an application for the Cameron LNG terminal eventually built in Hackberry, La., FERC made a significant decision: It would not take into consideration the financial viability of LNG projects brought to the commission. The project developer and its customers would bear the “economic risk.” FERC would focus on environmental impacts, operational safety and other matters. The new policy lowered the hurdle a project needed to clear to get FERC’s blessing.

Applications to build or expand LNG import terminals flooded in. Big names backed some of them: producer ExxonMobil; global gas trader BG Group; pipeline companies Veresen, Trunkline and El Paso; gas utility Sempra Energy.

In a 2004 letter to FERC’s chairman, U.S. Sen. James Inhofe, R-Okla., chairman of the Committee on Environment and Public Works, urged quick action in the face of a looming “energy crisis” from falling gas production and rising demand. “The government can help the country meet its energy challenges by increasing access to new LNG sources and permitting new LNG receiving terminals in the communities that want them,” he wrote.

Federal Reserve Chairman Alan Greenspan said “our limited capacity to import LNG effectively restricts our access to the world’s abundant supplies of natural gas,” and that “we need to get in place, as soon as we can, the capability of fairly substantial imports that enable our manufacturers who use natural gas to compete internationally.”

In 2006, a FERC official reported to the commission that the agency had approved 14 projects — 11 new terminals and three expansions — that could supply North American consumers with up to 25 bcf a day of imported LNG.

That wasn’t all. FERC had pending applications for 10 more new terminals and two expansions, with nine other sites in preliminary planning for terminals. Another federal agency that oversees offshore LNG terminals was considering eight proposals.

LNG started pouring into the United States. Imports more than tripled from 2002 to 2007, when they reached more than 2 bcf a day — averaging about a ship every other day.

Import terminal construction continued with a rose-tinted view of the future. It turned out the optimism was misguided. Unfortunately for investors, import terminals take years to build and the momentum was too strong for some projects to stop work even when it became clear the market was changing.

The last two terminals started up in 2011: The Qatar Petroleum/Exxon Golden Pass project at Sabine Pass, Texas, (practically next door to Cheniere’s terminal) and the Kinder Morgan/GE Energy terminal at Pascagoula, Miss. Neither of those terminals received any LNG in 2012. Both have applied to add export capability.

Some projects, however, do have cash flow, despite little or no gas moving through the plant. Customers have reserved import capacity whether or not they use it. Those contracts allowed developers to obtain construction money.

For example, Chevron and Total each are obligated to pay Cheniere $125 million a year to 2029 for rights to its Louisiana plant, according to Cheniere’s annual financial report.

But mostly Cheniere’s and the other plants stand idle.

As it turned out, 2007 was the peak year for LNG imports — at roughly 4 percent of U.S. supply.

In 2012, net LNG imports averaged about 0.4 bcf a day, or less than 1 percent of supply. Half went to New England, where gas-pipeline constraints cause a bigger demand for LNG.

A future of exports?

Soon thereafter, sponsors of other proposed Louisiana plants as well as some targeted for Texas, Maryland and Oregon hope to start up.

First they’ll need regulatory approval.

The Department of Energy, which authorizes exports, expects to be busy this year processing applications now that its economic impact studies of exports are drafted. The reports concluded exports would cause U.S. consumers to pay somewhat more for natural gas but that virtually any amount of exports would boost the nation’s economy more than they would hurt.

FERC authorizes LNG plant construction and operation. As of early January it had formal environmental reviews under way for three proposed projects and preliminary environmental work begun on a handful of others.

Authorizations take a project only so far, however. Projects need customers so they can convince the financial community to lend or invest the billions needed for construction.

Cheniere’s Louisiana project is the sole terminal to have customers locked in.

Some proposals have struck tentative deals with possible buyers, for example a Freeport, Texas, project with two Japanese utilities, and a Hackberry, La., project with multinational Japanese and French trading companies.

Separately, Japanese, Korean, Chinese and Malaysian companies have talked of investing in West Coast Canada export proposals.

North American projects, including one under consideration in Alaska, aren’t alone in believing there’s money to be made supplying the world with LNG.

Projects proposed in East Africa, Israel and Russia are getting at least preliminary looks, adding to the seven export terminals under development in Australia.

As with the plethora of North American projects, handicappers don’t believe all can proceed in the next decade.

Meanwhile, in the United States, a diverse set of groups oppose LNG exports.

Environmental groups say exports will encourage more shale-gas drilling, leading to the potential for greater air and water pollution. They oppose individual projects on specific grounds. For example, before FERC authorized Cheniere’s construction, two groups attacked from 360 degrees: They said tanker ballast water will harm aquatic life, construction will throw dust into the air, wastewater will impair drinking-water quality, air emissions will worsen atmospheric ozone formation, hurricane storm surges will flood the site, and LNG-tanker traffic will tax Coast Guard resources.

Terminal neighbors worry about industrial activity worsening their quality of life.

Gas utilities warn that exporting domestic gas will raise U.S. prices and burden consumers.

The chemical industry cautions that higher prices for its gas feedstock could dampen their desire to expand U.S. operations.

For the Cheniere project, FERC considered all of the concerns before approving the project. The commission generally held that the environmentalist concerns were ill-founded or speculative. The commission did acknowledge that if a cluster of neighboring LNG projects all apply, they could have a collective environmental impact that FERC needs to consider.

At least four other proposed export projects lie in the same “air quality control region” as Cheniere’s plant, the commission said. But none had applied to FERC for a construction certificate when the commission sanctioned the terminal.

“The project sponsors have not yet filed an application or started the pre-filing process at the commission, and construction timelines and in-service dates are unknown,” FERC said in its Cheniere order. “It is speculative to assume construction emissions would overlap. In addition, each facility can vary by size and proposed power source for the liquefaction equipment, which can greatly vary the resulting operating emissions of criteria and greenhouse gas pollutants.

“Thus, without additional information regarding equipment sizes and fuel sources, we are unable to identify these other facilities’ operating impact on air quality or climate change.”

For LNG export entrepreneurs, the stakes of their new direction are big — multibillion-dollar big.

A decade ago they looked out over the horizon and saw a fantastic future of inbound LNG tankers queued up to deliver liquid methane to needy North American consumers. The fleet never set sail, and nothing but blue breakers came to shore.

The vision was a chimera, but it left room for a new vision, one of outbound tankers, laden with North American LNG, steaming to distant ports to help feed the world’s growing appetite for natural gas.

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 1 of this story appeared in the Feb. 3 issue of Petroleum News.