Michigan Green - LNG Concerns

July 7, 2008

Energy prices may be going through the roof. But some plans to add capacity by building liquefied natural gas (LNG) facilities are being driven under.

Will those efforts thwart America's attempt to expand its energy arsenal? Global markets for LNG are escalating, necessitating more investment in production, transportation and re-gasification. The industry is attracting billions from top tier players that weigh their investment decisions. Risks abound. But the overwhelming demand for new natural gas supplies appears to trump other considerations.

"On the siting side, the NIMBY issues are so difficult," says Catherine Little, partner in the international law firm of Hunton & Williams in Atlanta. "We have increasing tensions in this area. I see these things as getting more and more heightened. To work out these issues, it will have to be done out on a site-by-site basis."

At present, five LNG import facilities exist in the United States and one in Puerto Rico. Roughly 40 new re-gasification plants have been approved by U.S. regulators, although no more than a dozen will be constructed. Most of those will get built in the south. Moreover, the additional plants planned for the region would be strategically placed near the Gulf of Mexico as well as key pipelines.

Sempra LNG, for instance, embarked on its first LNG endeavor in late 2000 in Baja California, Mexico. Sempra LNG's West Coast project, Energia Costa Azul was completed in the first quarter of 2008, while Cameron LNG construction is slated for completion in Louisiana in late 2008. Sempra LNG's Texas project, Port Arthur LNG, is permitted but no construction start date has been set.

But winning the necessary permits is no easy task. To do so requires more than 40 approvals from both state and federal agencies. At the federal level, U.S. lawmakers have determined that more LNG projects are a must and as such, have directed the Federal Energy Regulatory Commission to streamline siting protocol. Delays may be in the offing. But FERC says that any interruptions are not because of it. In the end, developers must work with all stakeholders and show that the projects are financially viable.

Globally, the LNG industry constitutes only 6.5 percent of the gas market but is set to attract half of the natural gas sector's investments, say analysts. As far as the United States goes, LNG now provides approximately 2.8 percent, a figure that is predicted to increase to 16 percent by 2030, according to the U.S. Department of Energy. Shell, BP, France's Total, ExxonMobil Corporation, British Gas and Chevron are among the biggest players who are investing about $10 billion in LNG facilities.

Not everyone is enthusiastic about those investments. Environmentalists say that the super-cooling, shipping and subsequent re-gasification is a dirty process. Community organizations, meanwhile, are raising safety considerations.

Tensions High

Those tensions are now being felt in Baltimore. Federal regulators had previously given an LNG project proposed by AES Corp. tentative approval -- a deal which also won the backing of the region's labor movement that would be the beneficiary of 375 new jobs. At a recent hearing there before FERC, however, local officials and community organizers said that the facility would be unsafe and environmentally unsound.

Meanwhile, a ConocoPhillips subsidiary has withdrawn its requests to build an LNG plan at the Port of Long Beach in California. Sound Energy Solutions said that its $750 million investment would have provided southern residents with a rich vein by which to receive its natural gas. Similarly, consumer organizations have stopped a division of Shell and TransCanada from constructing an LNG facility in Long Island Sound. Broadwater Energy, the unit in question, vows to fight on.

"Truly, if there is credit for this victory, it belongs to you," says Connecticut Attorney General Richard Blumenthal, at a press event sponsored by a group that wants to preserve Long Island Sound. The attorney general says that he expects the fight to continue but cautioned citizens of New York and Connecticut to keep their guards up and not to let win "two big companies who sought to profit at your expense."

While those consumer groups raise valid issues, the underlying market fundamentals have not changed. That is, the United States expects the demand for energy to keep rising and current natural gas supply levels are inadequate to meet that challenge. Precisely, the nation produces 83 percent of its own natural gas and it imports roughly 14 percent from Canada. Not only is demand increasing but Canadian supplies are dipping. Therefore, unconventional natural gas fuel such as LNG or shale sources are paramount.

Ultimately, more projects will get built not just here but around the globe. It's the free market at work: Scottish Consultancy Wood Mackenzie says that worldwide LNG demand will triple by 2020. It is predicting consumption will blossom from 7 trillion cubic feet a year now to 25 trillion cubic feet a year in that time frame. By extension, the United States is preparing for that growth.

Toward that end, Northwest Natural Gas in Portland, Ore. has long advocated using LNG as a way to supplement the gas resources it now gets from Canada and the Rocky Mountains. The company has formed a joint venture with TransCanada to build a 211-mile pipeline to serve a proposed LNG terminal in the state. The LNG debate "may not be the best for our reputation in the short term," says Gregg Kantor, head of Northwest Natural Gas. "But we have an obligation to tell the story as we see it."

Many regulators are persuaded. But community activists are a tough sell. The nation then walks the dual course of trying to keep environmental sanity while at the same time meeting the future demand for energy. While the concerns raised must be addressed, the bias is toward using more LNG.

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