Press Action ::: LNG Export Debate Heats Up

Friday, June 03, 2011

LNG Export Debate Heats Up

By Press Action

The battle over whether U.S. liquefied natural gas terminal owners should be allowed to export domestically produced natural gas is heating up.

Several LNG terminal owners have filed applications with the U.S. Department of Energy for authorization to export natural gas produced in the United States from their facilities, many of which were built last decade with the intent of importing — not exporting — LNG to meet what was perceived at the time as a growing demand for natural gas in the U.S.

But times have changed, mainly as a result of the tremendous growth of production from shale gas plays across North America. “We now have estimations that total gas resources can meet current demand levels for at least 100 years,” Dave McCurdy, the American Gas Association’s president and CEO, said in a recent statement announcing the release of a new study on U.S. gas supply.

A separate report, released April 27 by the Potential Gas Committee, says the United States possesses an undiscovered natural gas resource potential of 1,898 Tcf, the highest resource evaluation in the PGC’s 46 year history. “New and advanced exploration, well drilling, completion and stimulation technologies are allowing us increasingly better access to domestic gas resources—especially ‘unconventional’ gas—which, not all that long ago, were considered impractical or uneconomical to pursue,” said John Curtis, professor of geology and geological engineering at the Colorado School of Mines and director of the Potential Gas Agency.

These reports—and many others released in the past couple years—suggest a consensus has developed around the belief that North America is awash in natural gas supplies. The dramatic loosening of the supply-and-demand balance is the prime reason natural gas price volatility vanished from U.S. gas markets three years ago. During the spring and summer of 2008, natural gas futures prices on the New York Mercantile Exchange spiked in tandem with crude oil, ultimately peaking above $13/MMBtu in July of that year. But now, many industry officials believe natural gas markets are in store for a long period of price tranquility.

Instead of taking this large domestic resource base and marshaling it in a way to greatly reduce the nation’s dependence on oil, LNG import terminal owners, with the blessing of regulators and the support of natural gas producers, are pushing forward with their plans to export natural gas.

The Department of Energy, for example, is unlikely to reject an application to export natural gas because, as analysts at FBR Capital Markets explained, the department “tends to put a high value on promoting free trade and competition in the marketplace” when reviewing energy import and export applications.

In fact, two weeks ago, DOE granted Cheniere Energy Partners subsidiary Sabine Pass Liquefaction LLC permission to export natural gas from its Sabine Pass LNG terminal in Cameron Parish, La., to any country not prohibited by U.S. law, the first such authorization granted in more than 40 years.

Energy independence or free trade?

Many countries around the world rely almost exclusively on LNG to meet their natural gas needs because they do not produce much, if any, natural gas of their own. Because of its limited natural gas resources, Japan, the world’s largest buyer of LNG, must rely on imports. The country began importing LNG from the Kenai LNG facility in Alaska in 1969, making it a pioneer in the global LNG trade. Whether Japan boosts its LNG imports in the wake of the disaster at the Fukushima Dai-ichi nuclear complex will depend on how quickly the nation’s economy recovers from the catastrophic earthquake and tsunami.

U.S. LNG import terminal owners and marketers view non-resource-rich nations, including many emerging economies, as ripe markets for their terminal services. This new way of thinking emerged as the U.S. exploration and production sector began striking gold in the shale gas plays. LNG import terminals reversed course and began applying for permission to build facilities at their terminals that could liquefy natural gas, instead of only vaporizing it.

Along with LNG exports from Alaska, U.S. companies engage in cross-border trade with Canada through pipeline imports and exports. The U.S. also moves smaller amounts of natural gas to Mexico by pipeline. There is no vocal opposition to the longstanding cross-border natural gas trade relationships with either Canada or Mexico.

But not everyone in the natural gas industry favors exporting natural gas produced in the Lower 48 states in the form of LNG. While the odds are stacked against them, the opponents of LNG exports are not going down without a fight. The American Public Gas Association and the Industrial Energy Consumers of America, for example, are protesting Cheniere Energy Inc., owner of the Sabine Pass LNG import terminal on the coast of Louisiana, in its attempt to obtain regulatory approval that would allow the company to export domestically produced natural gas.

In a March 4 protest with DOE, APGA emphasized that if the U.S. “makes wise policy choices now, this domestically available and low carbon emission fuel will be available to satisfy U.S. energy needs and to end our nation’s dangerous reliance on imported petroleum products—today we import approximately 50% of our petroleum needs. Exportation of substantial quantities of natural gas may have significant adverse implications for domestic consumers of natural gas, for U.S. energy supply, and national security. Therefore, Sabine Pass’s request for authority to export domestically produced LNG is inconsistent with the public interest and should be denied.”

Marvin Odum, president of U.S. operations for Shell, believes the United States is not ready yet for a debate on exporting shale gas. Speaking at a recent U.S. Energy Information Administration conference, Odum said the U.S. is “still waking up to the fact that we have this enormous energy resource in our backyard.”

“If you look at it from a pure commercial global gas business perspective, it could make some good sense,” he said. “I just recognize we haven’t had that debate.”

Federal lawmakers silent in export debate

Federal lawmakers have not made any public statements against Sabine’s export applications, or the applications of the other companies seeking export licenses. However, three years ago, when the owners of the Kenai LNG facility in Alaska were seeking a two-year license extension from DOE to export domestically produced natural gas, one lawmaker made a stink about the application.

Sen. Ron Wyden, D-Ore., urged then-U.S. Energy Secretary Samuel Bodman to revoke an order allowing natural gas produced in Alaska to be exported to Japan and other countries in the Pacific Rim. DOE’s order failed the public interest test required by the Natural Gas Act, Wyden said. DOE also failed to consider the various options of delivery of Alaska natural gas to the Lower 48 states, he said.

“The administration is trying to have it both ways—arguing that we need to drill everywhere because we don’t have adequate energy supplies, while finding that we have so much energy that big oil companies can export it overseas and keep prices here at home higher than they would otherwise be,” Wyden wrote.

At the time, Wyden said he was concerned about Cheniere Marketing and Freeport LNG Development LP applying for LNG export authority. “If America is really so short of energy that we need to drill in national wildlife refuges and other sensitive areas, why should energy supplies, sitting in U.S. terminals—roughly equivalent to what an additional 1.1 million families would use in a year—be sent back out of the country simply because these energy companies can get a higher price from a foreign buyer?” Wyden said in his letter to Bodman.

Rather than touting the concept of energy independence, certain segments of the natural gas industry are now employing another catchword—jobs—in their quest to export domestically produced gas on LNG tankers.

For example, in response to a motion filed by the Industrial Energy Consumers of America in opposition to its export applications, Cheniere Energy argued that the Sabine Pass export project “will significantly benefit the U.S. economy, including through the maintenance and creation of tens of thousands of jobs.”

While it has not filed any protests against Cheniere’s proposal or any other export plan, AGA appears to be keeping a close eye on the shifting winds in the domestic gas market and how regulators rule in these LNG export cases. In a recent market analysis, AGA noted that the Federal Energy Regulatory Commission has stated that there will be no review of how Cheniere Energy’s Sabine Pass export project may impact domestic natural gas markets outside of the traditional examination of environmental impacts, the project feasibility, and normal jurisdictional issues.

“This treatment of LNG facilities is a legacy approach dating back to 2002 when FERC was encouraging the development of import capacity in the face of expectations of declining gas supply in the United States,” AGA said.

In fact, if you had visited the page on FERC’s website dedicated to LNG, up until about a month ago you would have noticed that the federal agency still had not updated it to reflect the shale gas revolution—which has now been going on for more than five years. Before updating the page in recent weeks, FERC was still explaining that “the demand for natural gas in the US has been exceeding supply for most of the decade. In fact, natural gas usage is increasing while US production is falling. LNG is considered a key supply source to offset near term demand for natural gas.”

In the recent update to its website, FERC inserted this qualifier: “However, with the increases in US production due to the shale gas and the continued Canadian and LNG imports, supplies of natural gas should be able to meet the demand.”

FERC is the federal agency responsible for ensuring LNG terminal projects meet certain environmental and safety standards. In the 2000s, the agency was under congressional pressure to approve as many LNG import terminals as possible in order to address this supposed supply-and-demand imbalance. The primary obstacles to LNG import terminal development were not found at the federal level, but could be seen at the state and local levels, primarily in the Northeast and Pacific Northwest, where officials have been extremely active in opposing projects.

As for the Sabine Pass facility, the company’s application represented the first opportunity for DOE to exercise its policymaking discretion regarding the export of a significant quantity of domestically produced natural gas from the lower 48 states in the form of LNG.

Natural gas as a transportation fuel?

The export of natural gas in the form of LNG is inconsistent with a policy of energy independence, APGA said in its protest of the Sabine Pass export application at DOE. “Instead of exporting domestic natural gas, the United States should maximize its use domestically in order to displace the current reliance on imported petroleum products and carbon-intensive coal,” APGA said. “For instance, domestic natural gas should play a larger role as a transportation fuel. Currently, the U.S. imports billions of dollars’ worth of oil (over half its total consumption) from around the globe, much of which is used for gasoline to fuel vehicles. The replacement of current gasoline-powered fleets and passenger vehicles with natural gas vehicles (and support infrastructure) would significantly reduce U.S. dependence on foreign oil, and thereby enhance U.S. security and strategic interests.”

APGA noted in its protest that Sabine Pass’ major complaint with the domestic natural gas market is that demand is too low, resulting in low commodity prices. Sabine Pass’ proposed solution, according to APGA, is to inflate demand and prices through exports of LNG to nations willing to pay more for natural gas. “This would incontrovertibly increase the price for natural gas in the domestic market but not in a manner calculated to foster energy independence,” APGA said.

APGA also said Sabine Pass has failed to account for the uncertainty that still shadows projections of an exponential increase in recoverable domestic supplies. “Environmental and regulatory issues and local opposition hamper fracking operations and shale gas production,” APGA said. “Safety and environmental concerns and moratoria hinder offshore production. Given these risks, it is still uncertain whether shale and offshore supplies can continue to be recovered economically in significantly increasing quantities.”

Sabine Pass also must get permission from FERC to build liquefaction facilities at its Louisiana terminal to convert natural gas into LNG, thereby allowing the fuel to be transported to overseas markets on super-tankers.

Lawmakers call for greater access to federal lands

Companies are requesting permission to export domestically produced natural gas at the same time that certain members of Congress are ratcheting up calls for expanded domestic oil and gas drilling. But, once again, none of these lawmakers is urging DOE or FERC to reject the LNG import terminals owners’ applications to export domestically produced natural gas as a way to keep energy prices low for U.S. families and businesses.

“Despite rising gasoline prices, the Obama administration continues to slow-walk drilling permits in the Gulf of Mexico. The de facto moratorium has cost thousands of American jobs and 300,000 barrels of oil a day—oil that we are forced to replace with unstable foreign sources,” House Natural Resources Committee Chairman Doc Hastings, R-Wash., said in a March 7 statement.

Despite the calls for opening more federal lands and waters to oil and gas development, the prolific shale gas regions are located on non-federal lands that are generally open to drilling. New York is the lone jurisdiction where drillers have been thwarted in their attempts to tap the Marcellus Shale. But signs are pointing to natural gas development possibly occurring in the state’s portion of the Marcellus Shale in the next couple years under its new governor, Andrew Cuomo. The New York Department of Conservation is nearing completion of a study of the environmental impacts of hydraulic fracturing. Once the study is completed—likely later this year—then the door could be opened to natural gas drilling in the state.

For the past few years, Pennsylvania has been the scene of a mad dash to tap into the huge volumes of natural gas that reside in the state’s portion of the Marcellus Shale formation. With this surge in drilling activity, residents are trying to cope with the industrialization of traditionally rural areas, including drilling accidents on a regular basis.

On April 19, a natural gas drilling mishap disrupted the lives of residents of Pennsylvania when Chesapeake Energy lost control of one of its wells, sending thousands of gallons of hydraulic fracturing fluid into surrounding farmland and nearby streams. Several families in the area were evacuated as Chesapeake, a leading U.S. natural gas producer, attempted to bring the well under control.

America’s Natural Gas Alliance, an industry trade group that represents most of the nation’s top shale gas producers, touts the tremendous level of natural gas reserves located in the United States. On its website, ANGA argues that the drilling of natural gas within U.S. borders will advance “national security and energy independence.” But ANGA’s members also endorse the construction of liquefaction facilities in order to widen the market for their natural gas production beyond North America’s borders.

‘Strong mandate from our CEO to export’

ANGA member Chesapeake Energy, whose drilling activities in Pennsylvania are coming under close scrutiny, is strongly pushing for gas exports in order to boost the company’s bottom line and also push up natural gas prices in the United States.

In November 2010, Chesapeake Energy Chairman and CEO Aubrey McClendon said his company is working with Cheniere Energy Inc., the largest owner of LNG import terminals in the U.S., to begin exporting natural gas in the form of LNG by 2015 or 2016.

During a May 25 industry conference in San Antonio, Texas, Bill Wince, vice president of transportation and business development for Chesapeake Energy, said his company is confident unconventional gas plays, such as shale gas, will support U.S. LNG export projects, according to a Platts report.

“We have a very strong mandate from our CEO to export [LNG from the U.S.],” Wince said, referring to McClendon. “If my colleagues and I don’t get LNG exports done, it will be bad for me.”

Wince said strong shale gas production in the U.S. is sustainable for the foreseeable future. “We have 59 years of drilling years left in Marcellus. It’s similar in all shales,” he said, according to the Platts report.

Natural gas prices have hovered in a range of $4 to $5/MMBtu over the past three years, a price level that has allowed gas production to flourish across the nation but one that has also kept gas supply relatively affordable for end-users. But U.S. gas producers would prefer to see prices climb into a range of $7 to $8/MMBtu, high enough for companies in the sector to dramatically boost their net income but perhaps not so dramatic to force end-users to switch to alternative fuels, practice greater conservation or even move their industrial operations overseas.

Tapping potential markets in the Atlantic basin through the export of natural gas in the form of LNG could easily lead to a tighter supply-and-demand balance in the U.S., thereby sending natural gas prices into the range desired by natural gas producers.

Given the vast resources in the Marcellus Shale, large volumes from the region could be piped to LNG terminals, such as Dominion Resources Inc.’s Cove Point LNG terminal in Maryland, for export to other countries. However, if this scenario plays out, residents who are concerned about the impact of natural gas drilling on their communities may grow even more frustrated.

Natural gas production in the Marcellus region is already controversial, and the industry could become an even bigger lightening rod for criticism if residents learn that drillers are extracting natural gas from their communities and then shipping it overseas to countries such as Spain, Japan or China.