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US cautiously pushes LNG exports as terminal approved

The US government’s approval of a second liquefied natural gas (LNG) export terminal in Texas is a sign that the world’s largest natural gas producer is on its way to becoming a global LNG exporter

On 17 May the US Department of Energy (DOE) granted Freeport LNG conditional permission to export 1.4 billion cubic feet per day (cf/d) of natural gas to non-free trade countries from the Quintana Island terminal on the Gulf Coast starting in 2017. The application is still subject environmental review and final approval from the Federal Energy Regulatory Commission.

The decision follows a similar approval granted by the DOE in May 2011 to Cheniere Energy’s Sabine Pass facility, which will export 2.2bn cf/d from Cameron Parish Louisiana.

Burgeoning supplies of shale gas have led to a glut of the fuel on North American markets, leading many companies that had built LNG import terminals to develop plans to reconfigure their facilities for export. Federal law, though, requires approval of natural gas exports to countries that do not have a free trade agreement with the US – such as major LNG importer Japan.

Japanese utilities Chubu Electric Power and Osaka Gas are partners in the Quintana terminal. Japan has been keen to access US gas exports to help meet surging demand in the wake of the Fukushima disaster and the subsequent shutdown of the country’s nuclear reactors. US LNG also has the advantage of being priced based on the Henry Hub gas benchmark, as opposed to oil prices. Relatively high oil prices and strong demand have seen Japan and other Asian countries pay consistently higher prices for LNG imports than any other region.

The DOE said it conducted “an extensive, careful review” that considered the economic, energy security, and environmental impacts of allowing gas exports – issues which have sparked an intense political debate over the merits of cheaper energy supplies for secondary manufacturing and consumers.

The Freeport LNG decision could open the way for 19 other pending applications for LNG export terminals in the US, which the DOE said would be reviewed on a case-by-case basis.

But the intense debate over whether or not to export its shale bounty will continue to rage. The DOE said that it had received nearly 200,000 public comments both for and against increased LNG exports.

Producers say they need exports to open new markets to absorb increased production. US natural gas output is expected to hit 69 billion cf/d in 2013, according to the Energy Information Administration (EIA), up about 25% from 55bn cf/d in 2008. On 20 May, Henry Hub futures jumped 2% in New York, to $4.14 per million British thermal units (Btu), in the first day of trading following the announcement. But prices are still a long way off of the $12.48/m Btu levels reached in July 2008, prior to the recession.

Petrochemical producers, though, claim cheap feedstocks such as ethane and butane can give US industry a competitive advantage and secure the economic recovery. The petrochemical sector has committed $100bn for new projects to increase capacity, based on the assumption of lower gas prices.

Dow Chemical, one of the US’ largest petrochemical companies, claims that every dollar of natural gas savings creates $8.00 of added value in domestic manufacturing, providing more of an economic benefit than exporting it as a fuel.

Though it signals an overarching shift in policy, the DOE approval for Freeport LNG exports is unlikely to have much immediate effect on natural gas markets. With a combined processing capacity of 3.6bn cf/d, the proposed plants account for less than 5% of projected US production, and can easily be absorbed by the market.

A measured approach to exports appears to be the US administration’s strategy as it seeks to find a balance between encouraging greater development of domestic gas resources while keeping prices low enough for consumers and manufacturers at home to benefit. By keeping its thumb firmly on LNG spigot, it can add new export capacity at a pace it thinks the domestic market can bear.

Dow came out in favour of the DOE’s decision on Freeport LNG. “This incremental, thoughtful approach supports an increased level of natural gas production and adds certainty for domestic manufacturers who seek to invest in the US and grow jobs”, the company said in a statement immediately after the decision. “As the DOE considers remaining requests, it is important we create an environment that fosters production and smart regulation.” Dow owns a minority stake in Freeport LNG, a legacy position from when the facility imported gas, but said that it had not played a role in developing plans to export gas from the terminal.

Likewise the American Petroleum Institute (API), the US’ largest industry association and a frequent critic of the Obama administration’s energy policies, called the decision “a step in the right direction”.

An API-commissioned study by Washington-based ICF International released on 15 May found that LNG exports are projected to have a moderate effect on domestic US natural gas prices between 2016 and 2035. Large-scale exports result in average Henry Hub natural gas price estimates of between $5.03/m Btu and $5.73/m Btu, depending on the amount exported. The study considered scenarios ranging from 4bn cf/d to 16bn cf/d of exports.

With more than 63 LNG projects worldwide awaiting construction, API warned the window for US exporters is closing fast. “DOE has had the remaining applications on its desk for months and should ensure that these applications are approved without any further delay so that the US can achieve its full energy and economic potential,” said Erik Milito, the group’s director of upstream and industry operations.

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