№ 3 (March 2006)
Update on the United States LNG Market
At least significant portions of the gas from Russia's Shtokman project (above the Arctic Circle in the Barents Sea) are targeted for export in the form of liquefied natural gas (LNG) to the United States of America.
By J. Patrick Nevins
At least significant portions of the gas from Russia's Shtokman project (above the Arctic Circle in the Barents Sea) are targeted for export in the form of liquefied natural gas (LNG) to the United States of America. The prospect of increased LNG imports remains a hot and booming topic in America. The American LNG market remains small and concentrated, with expectations of significant growth but little certainty. The national government remains a booster of increasing LNG imports, with the Congress encouraging the trend with provisions of its 2005 energy legislation and the Federal Energy Regulatory Commission (or "FERC") continuing to approve new regasification facilities. Still, the regulatory process remains complicated and challenging, and States in large parts of the country still resist, and prevent, the construction of new facilities. Moreover, additional complications continue to arise with even the best of projects.
The Energy Policy Act of 2005 and LNG
A policy of increasing American LNG imports enjoys support at the highest levels of the U.S. government. The joint statement in February of President Bush and President Putin, for instance, emphasized the aim of increasing LNG deliveries to U.S. markets, along with the goal of Russian exports. The outgoing Federal Reserve Chairman Alan Greenspan also made several influential public statements advocating the economic need for increased American LNG imports. More important than words, the American government took action, enacting a series of LNG-related provisions in the Energy Policy Act of 2005. Taken together, those provisions help bring certainty and structure to the regulatory process for approving new LNG import projects.
The new legislation confirmed the FERC's exclusive authority to approve, deny, or condition the siting, construction, expansion, or operation of LNG terminals on-shore and in State waters - ending a jurisdictional challenge by California. More importantly, the legislation confirms FERC's role as the lead agency with new authority to schedule all necessary Federal authorizations and to maintain a single consolidated record for all related Federal and State decisions under delegated Federal authority, and streamlines the process for any judicial review of agency decisions.
The 2005 legislation also codified FERC's 2002 Hackberry decision, which essentially deregulated the economic aspects of import terminals, allowing developers to use facilities for their own use or to contract exclusively with others of their choosing, eliminating the need for FERC approval of the economic terms and conditions of contracts. The new law ensures that FERC - a politically-appointed body whose members change over time - cannot reverse that policy before 2015.
The new law does leave in place States' delegated authority to administer the federal Coastal Zone Management Act, Clean Water Act, and Clean Air Act, all of which can present challenges for LNG import projects. The act also provides the States with new roles in the areas of safety and "Emergency Response Plans," but largely just as consultants advising the FERC.
The Act also requires the Department of Energy to hold three forums around the country within a year to identify and develop LNG-related best practices. Finally, the Act requires FERC to enter into a Memorandum of Understanding with the Department of Defense and secure the concurrence of the Secretary of Defense for new LNG facilities - a largely symbolic requirement since FERC always would be very unlikely to take action opposed by the Defense Department.
The American LNG Import Market in 2005
The policy focus on LNG imports is driven by near-universal recognition of an economic need. The American market consumes approximately 22 trillion cubic feet (Tcf) of natural gas per year, and official government projections expect demand to surpass 30 tcf before 2025. With traditional North American production projected to remain flat or decline over time, growth will depend on non-conventional production, Alaskan gas, and increasing imports of LNG. The U.S. government projects that by 2025 LNG will account for as much as 21 percent of total U.S. natural gas supply, equating to daily regasification send-out of about 17.5 Billion cubic feet per day (bcf/d).
Only four major LNG import terminals exist in America: the Distrigas terminal in Massachusetts, Dominion Cove Point in Maryland, El Paso's Elba Island, Georgia facility and Southern Union's Lake Charles, Louisiana terminal. The facilities' combined send-out capacity is some 4 Bcf/d, with expansions planned for the latter three terminals to increase the send-out by almost another 2 bcf/d. This year also marked the addition of Excelerate Energy's deepwater port over 100 miles off the Louisiana coast, with its unique reliance on on-ship regasification, but it had very little market impact (with only two cargos landed through October).
The LNG importers are a similarly exclusive club, limited to BG, Distrigas, BP, Shell, and Statoil. While other producers sell LNG into the market, all must work through one of those five companies, which control all the regasification capacity. Among companies short-listed for Shtokman, only Statoil has American regasification capacity, with one-third of the current capacity at Cove Point and rights to the entire large expansion slated for 2008. Chevron and Total have contracted for capacity at the Sabine Pass terminal being constructed in Louisiana, while ConocoPhillips has capacity at the Freeport, Texas facility also under-construction. Chevron and ConocoPhillips are also sponsors of their own proposed new projects.
American LNG imports are relatively small, but have increased sharply in recent years, rising from 229 bcf in 2002, to 506 bcf in 2003, and 652 bcf in 2004. That growth has leveled off in 2005, however, with total imports through the first ten months lagging almost five percent behind 2004 imports. The American LNG import market continues to be dominated by Trinidad, as it has been since 2000. Egyptian imports have been a big new arrival in 2005, surpassing usual second-place finisher Algeria during the second half of the year.
The lack of growth in imports this year is particularly noteworthy given the very high U.S. natural gas prices, especially following the record Atlantic hurricane season that devastated natural gas infrastructure in the Gulf of Mexico: the projected average 2005 Henry Hub price is $8.88 per mcf and prices at year-end are setting record highs. Despite the high prices, a lack of world-wide liquefaction capability and even higher prices in Europe attracting the limited spot cargos have held imports down.
American regasification capacity is clearly not the limiting factor at this time, with all the existing terminals running at less than full capacity. Imports through Lake Charles, in particular, were down in 2005 compared to 2004. Even the most active import terminal, Cove Point, operates at only about eighty percent of baseload capacity. Nevertheless, proposals to construct new import facilities abound.
Regulatory Approvals for New Projects Proceed
The FERC maintains a public list of existing, proposed and potential North American LNG import terminals, and it currently includes sixty projects. That list does not include numerous publicly announced projects that have been abandoned for various reasons. Knowledgeable observers typically guess that between eight to twelve new projects will actually be constructed.
The process for obtaining FERC authority for import projects is working well. FERC leads a comprehensive siting process in which it works closely with the Coast Guard, Department of Transportation, and affected State and local governments, and focuses on safety, security and environmental issues. While the process remains time-consuming and somewhat complex, a good project properly presented should be able to secure FERC approval.
The FERC has now approved ten new import projects, but many of them seem unlikely to be built. Most of the approved projects are closely bunched along a stretch of the Gulf coast in Texas and Louisiana. The Gulf projects that succeed will likely be those that are best able to secure supply; three appear to have done so and have begun construction. FERC has also approved two competing projects to pipe regasified LNG from the Bahamas to Florida, but at most one of those projects will succeed. The only other approved project outside that region, the Weaver's Cove facility in Massachusetts, does not appear viable.
Many States Remain Dubious
From a market perspective, the Atlantic Northeast and California are the ideal locations for new import facilities, placed at the "end of pipelines" where prices tend to be highest. This year's experience with hurricanes emphasizes the need to diversify the geographic sources of supply. Unfortunately, States outside the Gulf Coast continue to resist projects based on inflated safety, terrorism, and environmental worries.
In the American federal system, States retain considerable power to defeat LNG projects. The FERC requires applicants to list all other authorizations, including State and local permits, that must be obtained, and FERC's approval is routinely conditioned upon the sponsor obtaining them all. FERC can "pre-empt" the State or locality if it seeks to prohibit or unreasonably delay construction or operation of an approved project, but will do so only reluctantly. Moreover, FERC cannot pre-empt States when they exercise delegated Federal authorizations under the environmental statutes. While federal or judicial overrides are possible there too, the process is particularly uncertain.
As a result, States generally wield enough power to prevent unwanted projects, often by "death by a thousand cuts" - not holding back one necessary approval but frustrating the progress at every little opportunity. A particularly creative, and effective, example of this process occurred this year when Massachusetts representatives managed to prohibit in the Federal Transportation law the demolition of a pedestrian and bicycle bridge over the Taunton River required for the Weaver's Cove project. As a result of such efforts, the prospects for any new import facility on either U.S. coast appear dim, leading to next best solutions of terminals in Baja, Mexico to serve California and Atlantic Canada to serve New England.
Efforts to increase American LNG imports also confront other obstacles, like concerns with the "interchangeability" of regasified LNG with traditional supplies. Usually, the concern has centered on the richness of some imports (in Btu content and better measured by Wobbe indices) and the need for blending, NGL extraction or injections of inerts for end-use consumption in America. The latest twist comes with claims by the local distribution company serving Washington, D.C. and surrounding suburbs that the low levels of heavy hydrocarbons in the gas stream from Cove Point is causing very old couplings on its system to leak. Cove Point and its import shippers are fighting those claims, but the FERC has not yet acted. Resolution of the claims in favor of the local distributor could present an important new obstacle to increased LNG imports.