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US backlash against LNG exports despite increased production

Despite increased shale-gas production and slumping prices, the business and environmental opposition against liquefaction plants grows stronger and loude

Despite the rush from overseas buyers to sign supply contracts and invest in US liquefaction facilities, large chemical companies are in the odd position of siding with green groups in the rebellion against liquefied natural gas (LNG) exports.

The US is brimming with gas thanks to the surge in shale extraction over the past few years. US gas prices plummeted to decade lows of under $2/million British thermal units (Btu) at the beginning of the year, and a mild winter has left storage facilities well stocked. They could hit bursting point during the traditional summer injection season.

But the US shale boom has also sparked a renaissance in the industrial sector, fuelled by cheap gas. US industry accounted for 31% of natural-gas demand in 2010, according to the American Gas Association, making it the joint top consumer with electricity generators.

One of the loudest voices against large-volume LNG exports is Dow Chemical, which intends to invest about $4 billion in chemical manufacturing facilities, comprising a new Texas ethylene plant to start-up in 2017, reviving a dormant ethylene unit in Louisiana, and upgrading the ethane feedstock flexibility for another two ethylene crackers in the Gulf Coast region.

Ethylene is used in a variety of products, from plastic bags to anti-freeze, and produced using ethane, which is a byproduct of natural gas. Cheap gas means cheap ethane means cheaper ethylene production.

“We’re all for exporting natural gas. We just want to see it exported in solid form instead of liquid form,” Dow Chemical chief executive Andrew Liveris said recently, referring to the benefits of exporting gas-derived products rather than the gas itself.

He also feared that high volume US LNG exports would raise domestic gas prices to international market levels. “If we allow the world gas price to come to this country by exporting gas then it will destroy the benefits of plentiful cheap gas,” Liveris said. European gas is around four times more expensive than in the US, while Asian LNG importers pay up to eight times more.

In a separate interview with Bloomberg, Liveris said capping LNG exports to around 15% of US production would be “about right”, thought less than 10% “would probably by smart”. The US Energy Information Agency forecast US gas production for 2012 at 64.14bn cubic feet a day (cf/d). This equates to around 714bn cubic metres a year (cm/y) and 15% equals around 77m tonnes a year (t/y) of LNG while 10% is 52m t/y.

“Dow believes natural gas should be treated as a strategic US resource,” the company told Petroleum Economist.

Other companies are also pouring billions of dollars into the US manufacturing sector on the promise of cheap gas.

In February, US firm Formosa Plastics also said it intends to invest more than $1.7bn in the company’s Point Comfort chemical plant in Texas, saying it “will take advantage of the increasingly reliable and low-cost domestic natural gas”. Steel maker Nucor is spending $750m on a new processing facility in Louisiana, which converts natural gas and iron-ore pellets to high quality direct reduced iron, again taking advantage of cheap US gas.

And the growth in manufacturing as a result of the shale-gas boom could go a long way to bringing down unemployment, possibly adding a million jobs by 2025, according to a PriceWaterhouseCoopers report published in December last year. This includes jobs created from manufacturing rigs and pipes to extract unconventional gas as well as gas feedstock industries.

Although the US is slowly climbing out of recession, the country’s unemployment rate has stubbornly stayed above 8% since the start of 2009, strengthening the argument of using gas domestically to stimulate the job market.

A report by the American Chemistry Council (ACC) released last March also estimated a 25% increase in ethane supply would result in 17,000 direct new jobs, 395,000 indirect jobs, and around $44bn in taxes over ten years.

The shale-gas revolution is a boon to the US industrial sector, which was badly affected by rising gas prices at the turn of the millennium as companies believed domestic production was in an irreversible decline. In 2005 – with Brent crude at around $55/barrel and US Henry Hub at $8.5/m Btu – the oil-to-gas-price ratio was about 6:1, below the 7:1 ratio needed to make US petrochemicals globally competitive, according to the ACC. 

But by 2011, after the shale boom took off, the ratio was 24:1 and even higher in 2012 as Brent hit $120/b and US gas plunged below $2/m Btu. This makes US production cheaper than in places like Europe, which uses oil-based naphtha as a feedstock for ethylene.

Another factor that may curtail LNG exports is the environment. Not only are there questions marks over the safety of shale-gas extraction from hydraulic fracturing (fracking) in regards to water contamination and seismic tremors, the Sierra Club green group is also intending to block plans to turn Dominion’s Cove Point in Maryland into an export terminal.

The facilities are located in a sensitive environmental area. But Dominion says the proposed 4.5-5m t/y plant would sit within the footprint of the existing Cove Point import terminal and have minimal impact on its surroundings.

The Sierra Club, though, says it has the authority to block any such development and has rejected the proposal to modify Cove Point for LNG exports.

“Although we have sometimes authorised facility expansions in exchange for enhanced landscape protection elsewhere in the area, we agreed in 2005 that the facility would be used only for imports and would not be expanded again,” the Sierra Group wrote in a letter to Dominion in April. 

“We are therefore writing to inform you that we will not grant Dominion’s request again to expand the facility in order to export LNG.”
The Sierra Group’s determination to stop LNG exports is of a piece with its efforts to halt fracking in nearby Pennsylvania, too. 

Dominion has already sold all of Cove Point’s export capacity, with a 20-year tolling agreement with Japan’s Sumitomo and Tokyo Gas for 2.3m t/y export capacity signed in April. Dominion has agreed with a second party for the rest of the export capacity, but has not named the shipper.

The tolling agreement – where the shipper provides the gas and pays a fee to the terminal owner to liquefy it – suits Sumitomo, which also has interests in US shale plays.

“Sumitomo and Tokyo Gas contemplate that the LNG for import to Japan should be procured from the Marcellus shale-gas field,” the Japanese firm said.  Sumitomo paid Rex Energy $140m for a stake in the Marcellus in 2010, and signed a deal with Carrizo Oil & Gas for part of the Barnett shale in 2009.

Dominion’s Cove Point export plans have also shrunk to 4.5m to 5m t/y from the original 7.8m t/y, with chief executive officer Thomas Farrell saying it was the “optimum size for this site and these parties”.  First exports are expected in 2017.

But leading the pack to export LNG is Cheniere’s project in Louisiana, after US regulators approved plans to build a liquefaction plant at its existing Sabine Pass import terminal. That removed the last major regulatory hurdle for exports.

The US Federal Energy Regulatory Commission (Ferc) approval allows Cheniere to start construction of a 16m t/y production facility, with the US energy firm expecting first shipment in 2015-2016.

Investments into Sabine Pass are also pouring in. Cheniere agreed in May a $468m deal with Singapore-based investment company Temasek and Asia-focused private equity firm RRJ Capital. 

This adds to the $4bn Cheniere also raised with eight financial institutions in April and $2bn of investment already agreed with private equity firm Blackstone. The first phase of the project, comprising two production trains, is estimated to cost $4bn. The second phase will come in at $4.5bn.

"Obtaining approval from the Ferc is one more milestone for our liquefaction project," chairman and chief executive officer Charif Souki said.

Cheniere also is way ahead of its competitors in the race to be first to export LNG to anywhere it wants.  Sabine Pass is the only project with US Department of Energy (DoE) approval to export LNG to non-Free Trade Agreement (FTA) countries and has 16m t/y of supply agreements with BG Group, South Korea’s Kogas, India’s Gail, and Spain’s Natural Gas Fenosa.

Although Ferc has approved 16m t/y of exports, Cheniere still expects full export capacity at Sabine Pass to reach 18m t/y as originally planned.

“Ferc is not that concerned with the volume number but the equipment that was approved, which has not changed. As we provide Ferc with updates, we will adjust the total volume from the trains up to the 18m t/y,” a Cheniere spokeswoman told Petroleum Economist.

Hot on the heels of Cheniere is Sempra Energy’s 12m t/y Cameron LNG project, which has also sold all its export capacity.
Sempra signed a deal with France’s GDF Suez and Japanese trading houses Mitsubishi and Mitsui to develop a $6bn export terminal that gives each investor 4m t/y liquefaction rights over a period of 20 years.  Construction at Cameron, on the Gulf Coast, is expected to start in late 2013 and first exports by late 2016.

“Entering into these commercial development agreements is a major milestone for our project and we look forward to working with these parties toward achieving a final investment decision in late 2013,” Scott Chrisman, vice president of Sempra''s LNG commercial group, said.

Unlike the Cheniere supply deals, where Cheniere buys the feedstock gas to be liquefied, the Sempra deal is also a tolling agreement, and would make the most of Mitsui’s US shale-gas stakes.

“Mitsui participates in the development, production and marketing of shale gas and oil in the Marcellus shale area in Pennsylvania and the Eagle Ford shale area in Texas, with the current natural gas production volume of approximately 150m cubic feet a day (cf/d) (equivalent to approximately 1m t/y of LNG),” the Japanese trading house said.

“Mitsui intends to study the possibility of utilising its own share of natural gas production from these areas, where the production volume is expected to grow in the coming years.”

Although there is significant Japanese interest in Cameron LNG and Cove Point, neither yet has permission from the DoE to export to non-FTA countries. That would bar them from shipments to Japan - the world’s largest LNG importer. But FTA countries include South Korea, which is the second largest LNG importer, giving the trading houses options for swap deals.

Both Cameron and Cove Point have applied to export domestically produced gas to non-FTA countries and are awaiting approval. Separately, the Japanese government is also asking the US to allow LNG exports to Japan to help with the energy crunch after Fukushima.

The DoE is not expected to approve any more non-FTA agreements until a government report studying the price impact of exporting LNG is published in late summer 2012.  So far, separate studies have given varying answers, from a 2% to 11% increase on US domestic gas prices.

The study will be key in shaping US LNG export policy and it all boils down to the effect on price. If it shows US gas prices will rise significantly with LNG exports, then expect DoE approvals to be limited.

If it shows the US gas market can absorb LNG exports without significant price rises, the LNG floodgates may open, and open wide.

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