June 2012 Vol. 239 No. 6

From the Burner Tip

New, Important Energy Move Awaits Government Approval

Lightening does strike twice at times! First bolt was the Keystone XL pipeline to bring crude oil from the Canadian tar sands down to the Gulf Coast for refining and marketing. Now, the new bolt is a decision to allow domestic natural gas producers to turn surplus natural gas into liquefied natural gas (LNG) for export shipment.

Again, there must be government approval before industry can go full blast. And again, like Keystone and its favorable side for helping the economy and energy independence, government approval is blocking the LNG export program.

Some history is important. Just a few years ago the concern was where would natural gas come from to supply this country’s need for the cleanest burning fossil fuel? Natural gas was touted as the fuel of the future, but where was the supply? Planners looked to world supplies of LNG to supplement our own production.

Government approval was sought and obtained for building nine terminals to supplement the three existing sites already receiving LNG supplies for domestic use. The 12 terminals, including one in Puerto Rico, were to ensure future supply. No small feat as each terminal is a multibillion-dollar facility.

There has been one exporting facility in place since 1969 in Kenai, Alaska, moving natural gas to Japan. The contract with a Tokyo power company ended in March and the facility operators, ConocoPhillips and Marathon Oil Corp., plan to shut the plant down shortly.

In addition, three of the receiving LNG facilities are authorized to re-export delivered LNG. Two are located in Louisiana and one in Texas. One more import plant has requested authorization for reshipment of imports as exports.

This is all capital that has never seen a good return on investment. While the terminals were being built, improvements in drilling techniques were completed and a “revolution” in the natural gas business occurred.

Supply is plentiful. Reserves of economically available gas have multiplied many fold. With the readily available supply, a warm winter and a down economy hurting demand, gas is in surplus. The large surplus inventory in storage is reflected in today’s price for natural gas. Working natural gas storage on May 4 was a record 2,606 Bcf with volumes 799 Bcf above last year’s levels.

With supply in excess, U.S. natural gas prices are at low levels, falling below $2/MMBtu only recently rising to the $2.4/MMBtu range. A comparison of the low domestic prices with international prices shows why interest in exporting LNG is so high. The Energy Information Agency (EIA) estimated in May natural gas prices of $1.78/MMBtu at Lake Charles, LA while European gas was running $9.17/MMBtu in the UK and Belgium and $11.50 in Spain. Asian prices were much higher with Japan and Korea at $16.65/MMBtu and India at $13.65/MMBtu.

The Asian and European prices are a result of a shortage of gas and high demand. Gas marketing is good in these areas as the nuclear problems in Japan has made it more dependent on natural gas for electricity and the move by European countries to go from nuclear and coal have also helped demand. Asian natural gas prices are a reflection of world crude oil prices while Europe reflects market conditions in that area.

Current U.S. gas prices are too low for the investment needed to produce the shale based supplies. Current low prices are supplemented by the components in the natural gas streams that are liquids-rich. As much as $2-4/MMBtu of gas can be realized from the liquids-rich streams. This is affected by slightly lower prices recently for natural gas liquids (NGLs) but liquid-rich streams help the economics of gas production immensely.

To begin the export operations, including the modification of existing importing facilities, requires various government agency approvals.

So far, only one facility has received government approval to proceed; Cheniere Energy Partners, L.P. subsidiaries Sabine Pass Liquefaction, LLC and Sabine Pass LNG, L.P. received authorization from the Federal Energy Regulatory Commission (FERC) to site, construct and operate facilities for the liquefaction and export of domestically produced natural gas from their Sabine Pass LNG Terminal in Cameron Parish, LA.

Sabine has entered into a contract with Bechtel Engineering for two of four approved liquefaction trains, each with a nominal capacity of 4.5 million tons per year (mtpa) or about 0.64-0.68 Bcf/d. The start of construction of the first two trains is dependent on Cheniere getting final financing and then making a final investment decision.

Two other import facilities that are well along in making applications to build export facilities are Cove Point, MD and Freeport, TX. A total of eight companies are seeking permission to export domestic gas as LNG. The government is doing an extensive study to evaluate the impact of exports on U.S. natural gas prices and has said it will not issue any additional permits until the study is completed.

Originally the study was to be completed in March but this was moved to later in the year. Some do not expect the report and further authorizations until after the November elections. Total LNG export projects now in progress would call for exporting a total of about 12 Bcf/d, or roughly 18% of current U.S. gas consumption of about 65 Bcf/d.

There are two small companies that have existing exporting permits. Both are trying to develop the necessary businesses to exploit these existing permits but are small compared to the Chenieres and other large LNG import terminal owners.

Much like the Keystone project, the potential benefits and disadvantages of exports are many. In addition to the benefits from the increased volume of natural gas sold and the higher prices, there are other economics advantages such as more employment and improving the country’s trade balance. With the economy lagging, the improved conditions from the export project are substantial and important.

Concern against exporting is based on two major reasons; the impact on pricing of U.S. gas as exports tighten the domestic supply and potential environmental concerns. Environmental worry goes all the way back to gas production and includes the release of additional carbon dioxide into the atmosphere and its perceived effect on global warming.

When the Cheniere license was in process, the trade association Industrial Energy Consumers of America (IECA) voiced opposition to the Department of Energy. They cited the potential price increase for U.S. natural gas and the impact on manufacturing companies dependent on gas for fuel and feedstock.

In their objections, they included environmental concerns, loss of U.S. energy security, as well as the most obvious, increased U.S. gas prices. In a recent report on the U.S. exports of natural gas, the Canadian market research firm, Ziff Energy estimated that U.S. natural gas prices could escalate 22-23 cents per MMBtu for every Bcf/d of gas exports. The agency granted the license to Cheniere but the government is now doing its own study as stated earlier. The already-granted license carries the provision it can be rescinded or modified at a later date.

Environmental questions generate even more opposition, especially in regard to the production methods where fracking is a procedure for releasing the gas from the ground. Even though a recent government study showed no danger of groundwater contamination, environmentalists are still fighting the fracking process. They also feel in natural gas production, the methane that is released should be considered a global warming agent as is carbon dioxide. So, the less gas produced the better and it does not deserve going into export markets.

One of the strongest protesters is the Sierra Club which is suing the Department of Energy to stop further licensing and is using existing statutes to stop the Cove Point receiving facility from converting to export capability. All of the Sierra’s thrusts are for environmental reasons, especially the release of believed temperature-moderating combustion gases.

Others expressing doubt to exporting are two lawmakers: U.S. Rep. Edward Markey, D-MA and U.S. Sen. Ron Wyden, D-OR. The ever-present fossil fuel dislike and the overzealous environmental concern is interfering with sound economic judgment. Markey has introduced legislation to limit gas exports. In a report from Markey’s staff, it was pointed out that U.S. gas prices are lower than foreign ones which benefits the U.S. fertilizer, chemicals, and plastics industries.

Wyden has said the U.S. should only export if it would not increase U.S. prices for consumers or harm U.S. energy security. Wyden is the second ranking member of the Senate energy panel and could become chairman in 2013 when the current chairman retires.

These legislators and some others are against exporting natural gas. Supply-demand economics should be the controller and government action favoring different groups should not be allowed to interfere with fair trade, commercial practices.

The road to completing this new business venture with its basketful of opportunities is not without difficulty. A natural gas export ban would have far-reaching implications affecting more than just the natural gas industry. Exporting natural gas will help the country’s entire economy as building the new infrastructure and running the business will increase jobs, revenues and taxes. Today’s very low natural gas prices are an abnormality. But if not changed, they could end up damaging the business so severely that not only will prices ultimately rise but supply will decrease as well.