Path cleared for LNG exports

04 18, 2012 by The Advocate

Federal regulators have approved the first large-scale natural gas export facility in the U.S. located in southwest Louisiana, signifying the rapid shift under way for a country suddenly rich in the natural resource.

A local economist and an energy industry watcher said the key will be whether the price of natural gas rises enough to help the state’s extraction industries without hurting the petrochemical industry, which has a major presence in and around Baton Rouge.

The Federal Energy Regulatory Commission cleared Cheniere Energy Inc.’s construction of the Sabine Pass LNG terminal in Cameron Parish. The facility, which will chill natural gas into a liquid that can be shipped on tankers, will allow U.S. producers to export natural gas overseas for potentially huge profits.

An existing LNG import facility at the site will be converted to also handle exports.

Other companies are proposing similar facilities.

On Tuesday, Sempra Energy Inc. said it will develop a $6 billion LNG export terminal at its existing import terminal at Hackberry in southwestern Louisiana, with Mitsubishi Corp. and Mitsui & Co. Ltd. signing on as partners to develop and market the facility.

Energy Transfer Equity LP has already told U.S. regulators that it wants to build an export facility at its import terminal at Lake Charles.

U.S. energy companies will compete with major LNG exporters like Qatar, which can charge customers in Asia much higher prices compared with prices in the U.S. That is largely because of the massive glut of supply in the United States, where drillers have freed enormous amounts of natural gas using new technology.

So much natural gas has been captured that there are concerns the country is reaching its storage capacity, and prices have been driven to 10-year lows. Prices fell below $2 per 1,000 cubic feet Tuesday.

But the shift to exporting natural gas has divided the country on numerous levels, from Washington to chemical manufacturers, many of whom fear that prices will rise when the U.S. begins exporting to Asia and other developing regions.

David Dismukes, associate director of the LSU Center for Energy Studies, and local economist Loren Scott both said the announcements signal a boon for Louisiana in the short term.

“Either one of these two projects would be the largest single investment in southwest Louisiana history,” Scott said of Cheniere and Sempra.

Dismukes and Scott said the export facilities and liquefaction plants are generally more labor- and capital-intensive to build than the import and regasification terminals, though neither could say for certain how many construction and permanent jobs will be created.

Scott said the jobs will likely be very high-paying.

“It’s not one of those deals where you build a plant and it’s going to employ eight people,” he said.

Scott also said this is good news for the Haynesville Shale in northwest Louisiana and offshore drilling, where the rig count has fallen from a peak of 142 in 2010 down to about 45 now.

“You’ve got to get some increase in demand for natural gas to get the price high enough for operators to stay in the Haynesville Shale,” he said.

But low prices have been a boon to the chemical industry, which uses natural gas as a fuel and feedstock for making products. The recent run of low prices has helped domestic producers gain market share in Europe, where natural gas is more expensive.

“The tricky thing for Louisiana is that you want the price to be boosted enough because of LNG exports to keep our producers healthy, but not destroy the market advantage that the chemical industry has in Europe,” Scott said.

Scott pointed out that the chemical industry still had the market advantage when gas was closer to $3 per 1,000 cubic feet, so it could probably absorb a little upward pressure.

“That’s the balancing act that’s in play here,” he said.

Dismukes isn’t ringing any alarm bells yet.

“How that all plays out is uncertain,” he said. “I’d argue right now we’re still looking at very limited number of export facilities … but it is something to keep an eye on.”

Dismukes said any Louisiana facilities will have to compete in a global market where natural gas is even cheaper in some places than it is here — Russia, Qatar and Iran, for example.

“It’s not a done deal that this stuff is going to go rushing out of the country,” he said.

Back on the national level, Sierra Club executive director Michael Brune criticized the decision, saying that exporting natural gas would encourage more use of hydraulic fracturing, the technology that has freed copious amounts of natural gas from shale deposits. It’s a technique that environmentalists say may be polluting ground water, among other things. He said FERC was “willfully ignoring the health of millions of Americans who will be affected by reckless fracking.”

Brune said the company’s exporting license cannot be finalized until the Energy Department reviews the potential dangers of the relatively new drilling technique.

Congressional reaction was mixed. Rep. Ed Markey, D-Mass., called Cheniere’s plans an “export tax” that will increase electricity and heating prices for consumers and increase gas costs for such industries as steel, plastics and fertilizer.

But Rep. Charles Boustany, R-Lafayette, said the terminal could create thousands of jobs ranging from construction work to additional employment in natural gas extraction.

Beyond debate is just how much things have changed for Cheniere in less than one year.

Last month, S&P raised its ratings on the company in anticipation of the construction of the Sabine Pass facility and removed Cheniere from Creditwatch.

“The execution of 16 million tons per year of 20-year, take-or-pay LNG sale and purchase agreements with creditworthy counterparties increases the likelihood of improved cash flows beginning in 2016,” S&P wrote in February, two months after it had put the company on watch. S&P called Cheniere’s outlook “positive.”

Company shares, which could be bought for $4 as recently as September, are now selling for more than four times that amount. They hit another four-year high Tuesday after the Sabine Pass announcement from the company late Monday.

Construction is expected to begin this year and partial operations should come online between 2015 and 2016. Cheniere has lined up $4 billion in loans to help pay for the project.

When finished, Cheniere will be able to export 876.6 billion cubic feet of natural gas per year.