Ukraine and Terminal Applications

The annexation of Crimea by Russia is strengthening the case for U.S. companies exporting liquefied natural gas (LNG) to beef up Ukraine’s -- and U.S. allies’ -- energy security.  For all the hot air expended in mainstream media and at Congressional hearings this month, however, it will take time before significant new quantities of LNG start flowing from the U.S. terminals awaiting approvals -- and thus yet to be built -- (see map) credibly boost energy security for would-be buyers in Ukraine, elsewhere in Eastern Europe or even Asia.

ImageU.S. exports can begin to have a psychological effect on how Vladimir Putin conditions and prices the sales of Russia’s plentiful supplies of natural gas. That is best done with a steady, two-stage process whereby the Obama Administration through the Department of Energy (DOE) authorizes sales to non-free trade partners and the Federal Energy Regulatory Commission (FERC) grants the required permit.

The oil and natural gas industry is using the latest sequence of events to criticize the amount of time consumed by both steps.  To the industry, I say back let each application work its way through the requisite steps. This way, each approval will stand up to a possible legal challenge and allow developers to start shipping LNG as quickly as they can complete the terminals, build the required infrastructure and secured space on LNG tankers.

Mind you, the cost to build an LNG export terminal according to a variety of estimates is at least $5 billion, trending toward $10 billion; and it typically requires 3-4 years. That’s just in the U.S.  Would-be buyers of U.S. natural gas abo4ad face more daunting hurdles: not only do they need terminals to receive LNG, they need to find a way to pay for it.

On March 24, DOE authorized the Jordan Cove Energy Project in Coos Bay, OR to export LNG. It is the seventh permit granted by the administration since an economic impact study by NERA Economic Consulting for DOE concluded LNG exports would not harm the U.S. economy and would likely help it. (Jordan Cove still needs a license from the FERC.)

With the first of those seven conditional approvals occurring last May, the rate at which at least DOE is deciding on whether to give a green light to applications is roughly one every seven weeks.   Not exactly a snail’s pace.

The novelty of the United States becoming a bonafide player in global energy markets, and the politics that come along with it, is the most important game-changing global energy dynamic so far of this century. Less than 10 years ago, U.S. industrial leaders were begging for import terminals because America’s demand for natural gas far out-stripped domestic supplies.

How times have changed. With the huge stakes involved, we need to be careful how we reverse course.

Today, natural gas-dependent companies such as Dow Chemical argue the U.S. should keep domestic natural gas at home to boost industry productivity and power the revival of U.S. manufacturing.  On a parallel path, environmental activists are attacking LNG terminals almost with as much vigor as they are trying to stop the southern northern leg of the Keystone XL pipeline.

Environmentalists such as the Sierra Club contend the whole process by which natural gas exports are considered should be reviewed and debated publicly in part because existing policy is based on America’s natural gas needs of more than 30 years ago.  More localized efforts such as the Chesapeake Climate Action Coalition, which opposes a terminal planned for coastal Virginia, assert the risks of ‘fracked gas’ overtake any economic benefits.

That is countered by appeals from deep-pocketed trade associations such as the American Petroleum Institute and America’s Natural Gas Alliance (ANGA) and a contingent in the Republican-controlled U.S. House of Representatives. A bill in the House, H.R. 6, reportedly would grant permits to all remaining 23 proposed LNG export facilities -- get this -- “without delay or modification.” That seems preposterous on its face and cannot be taken seriously.

As often is the case, the most prudent choice lies somewhere in between. Dare I say this is one instance where the process by which the federal government is handling a controversial issue reflects the proper balance. I’ll speculate that under a fine tooth comb the process could be improved, but not measurably quickened. It shouldn’t be short-circuited.

ImageLet’s not forget that U.S. LNG export terminals (see illustrative photo, right) are private – not public – projects. Their owners will sell LNG for the biggest return on their investment.  If that means selling LNG to Japan, which desperately needs gas as it recovers from Fukushima, or China, which just as desperately needs to minimize its dependence on more polluting coal for power generation, then exporters will quickly bypass Ukraine and Eastern Europe, politics be dammed.

PHOTO: The first terminal in the U.S. set to begin exporting LNG later this year from Sabine Pass on the Texas - Louisiana border owned by Cheniere Energy, Inc.

How these various game-changing scenarios play out will be intriguing to watch.

All this reminds me of the adage that one knows a policy strikes a reasonable middle ground when credible voices are arguing both for something and other credible voices are arguing against it. At the risk of oversimplification, that’s what we have with the licensing and approval processes for LNG export terminals.  

So, I say let the chips fall where they may. Don’t speed up the process unless we find something egregiously wrong   Let’s maintain the integrity of both the trade authorizaton and the FERC licensing. This way, years from now we’ll all be able to look back,  hopefully with confidence, that each application was handled prudently without too much self-dealing or political influence.

If you want to drill down on the economics and metrics that play a role in the evolving global natural gas business, I recommend reading: