Economics may keep liquefied gas deals off solid ground

Jennifer A. DlouhyThe New York Times
Ricky Carioti

WASHINGTON -- Natural gas enthusiasts from Texas to Capitol Hill insist the world is clamoring to buy American supplies of the fuel and the only major obstacle is the federal government.

But there's an even bigger economic reality standing in the way: The facilities to super-chill gas for transport cost billions to build, and even with permits, few will ever make it past the drawing board.

"It's very easy for us in this country to blame everything on our regulators, but economics are the biggest driver here," said Joe Fagan, a partner at Day Pitney LLP who advises clients on liquefied natural gas import and export matters.

"Even if you took the regulatory issues out of the equation, it takes a long time to build these projects. The contracts can take many months -- if not years -- to negotiate. And there's only so many buyers willing to purchase LNG from the U.S."

The most likely -- and profitable -- market for American liquefied natural gas is Asia, where utilities want gas to replace nuclear power. Because the price of natural gas from other sources on the world market is often linked to the price of oil, it can be several times the cost of U.S. supplies.

But energy analysts say the Asian demand for U.S. supplies is limited, perhaps only sufficient to sustain five or fewer of the dozens of large-scale export facilities proposed along the Gulf Coast and in other parts of the country.

Economist Kenneth Medlock, senior director of the Center for Energy Studies at Rice University, estimates the market pull is about 6 billion cubic feet per day.

Cheniere's Sabine Pass LNG project, now under construction in Western Louisiana, alone could supply more than a third of that. It is the only new export facility in the contiguous United States that has all required permits.

The others are still waiting in line for government reviews at the Federal Energy Regulatory Commission, which vets the physical plans, and the Energy Department, which must affirm that proposed exports to non-free-trade partners are in the public interest.

Exports to countries with which the U.S. has free trade agreements are approved almost automatically, but demand from those countries is relatively low.

The Energy Department has been ticking through a backlog of non-free trade export applications following a 16-month-old order of precedence that gave priority to proposals that had begun a pre-filing process at the Federal Energy Regulatory Commission.

Subsequent filings simply have gone to the back of the line. But natural gas export boosters -- who worry about a narrow window for locking in overseas customers for U.S. supplies -- say that process is slow and unfair, resulting in export licenses for just five projects since Cheniere got its permit in August 2012.

David Goldwyn, a consultant who previously coordinated energy affairs for the State Department, noted that some of the projects toward the back of the line may be more commercially viable or easier to put online than others higher in the queue, because they would be built onto existing LNG import terminals or be located offshore.

"The length of time between permits creates this kind of discontinuity where the projects that may be the most commercially mature may not be eligible for consideration for years, whereas others that may take years to become mature have their permit," Goldwyn said.

The House of Representatives is likely next month to debate legislation that would accelerate the process by making LNG export approvals nearly automatic for members of the World Trade Organization -- a measure propelled by fears Russia will cut off natural gas flows to European nations.

Similar legislation is pending in the Senate, but neither would change the broad economic forces that will dictate which projects get built.

One of the biggest constraints is the amount of capital investment that can be lured to the high-stakes ventures.

In cases where large, well-capitalized oil companies are project partners -- such as Cameron LNG in Louisiana, Golden Pass LNG in Texas and Southern LNG in Georgia -- it may be relatively easy to amass the billions needed to build the facilities.

But other project developers have their hats in hand, looking to line up funding from a relatively small pool of cautious would-be investors.

"Everybody's out there trying to raise money," said Michelle Michot Foss, chief energy economist at the University of Texas' Center for Energy Economics.

Potential investors have to assess risks, she said, and it may be harder for developers to defend projects that would come online after Cheniere's Sabine Pass.

"That's one of the biggest uncertainties," Foss said. "What other projects might be able to win financing, especially given all the uncertainty in capital markets?"

The linchpin to financing deals may be locking in customers, including utilities and gas companies in Asia. At least five planned facilities have subscribed some or all of their liquefaction capacity.

But Fagan, the Day Pitney lawyer, notes the dwindling number of would-be consumers willing to sign 20-year contracts for U.S. gas when cheaper, closer alternatives may be on the horizon.

China is working on tapping its shale gas reserves, and at least seven large LNG projects are under construction in Australia, though both nations face some impediments to bringing projects online.

"There are only so many big, well-capitalized buyers of LNG who are in the market, and you really have to land one of those big whales," Fagan said. "The projections for these projects are based on a level of pricing that may not be there down the road."

In the short term, the price advantage is relatively clear, as natural gas has been selling for $14 more per million British thermal units in Asia than the United States -- a margin big enough to make up for expected costs of liquefying it, transporting it in tankers and regasifying it overseas.

But transportation costs could rise because of new rates for traversing the Panama Canal after an expansion is complete in 2016.

And events in the United States could cause natural gas price spikes.

Either development would eat into the potential margins.

Also figuring in the longer-term calculations: Economists expect natural gas prices to drop in Asia, as supplies from the United States and other countries reach the market.

"People look at the price in Asia and the price here, and they think, wow, there's this massive disconnect, we should be exporting lots and lots of gas," Medlock said. "What they fail to realize is that if we start exporting, the price there is going to fall."

Domestic market uncertainties also complicate the issue. The much-touted abundance of natural gas under U.S. soil does not mean the country has sufficient pipeline or storage capacity to ensure it is readily and inexpensively available when demand spikes. That was illustrated in mid-February, when frigid temperatures strained stockpiles, sending the price to $6.50 per million British thermal units, nearly $2 higher than it is now.

Foss cautions that questions about U.S. natural gas demand growth and the ability to balance the market could upend export plans going forward.

Another challenge, she said, may be building needed pipeline capacity in the Marcellus Shale spanning Pennsylvania, New York and Ohio.

"Everybody just looks at the numbers," Foss said. "They don't really always think about what's behind them and what has to happen."

Noting the constraints -- and the fears about pricing -- some congressional Democrats and large industrial users of natural gas have urged caution. Rep. Henry Waxman, D-Calif., warns that once erected, multibillion-dollar export facilities will stand on the nation's coastlines for decades, whether or not they get used.

Just as the transformation in domestic energy production made a previous generation of LNG import terminals obsolete, Waxman says, unforeseen market and technological developments could do the same thing to the planned export facilities.

A coalition of manufacturers, led by the Dow Chemical Co., also has pleaded with the Obama administration to move more cautiously, suggesting the Energy Department halt processing new applications and conduct a new study of the economics surrounding natural gas exports.

At the IHS CERAWeek conference earlier this year in Houston, Dow CEO Andrew Liveris said energy-intensive manufacturing industries are undergoing "a tectonic shift" because natural gas supplies are abundant and affordable -- prompting $100 billion in investments on the Gulf Coast and elsewhere.

"We shouldn't put that at risk," he said, "by exporting more than half the production."

Houston Chronicle