US LNG Exports: A regulated affair

To indicate the magnitude of the US shale gas revolution’s impact on the country more than one commentator has pointed to the refitting of LNG import terminals as export facilities. In reality however, the anticipated US LNG export renaissance has to date been a modest affair. Despite US gas producers lobbying for the continuation of LNG export licensing as European and Asian gas prices reach multiples of US price levels, fears about the impact of US LNG exports on domestic pricing has kept the US Department of Energy (DOE) from issuing any exporting licenses since May of 2011.

Natural gas exports from the US will inevitably have an impact on domestic prices (c) Dan Picasso / Barron's
When the DOE issued a non-Free Trade Agreement (non-FTA) export license to Texas-based liquefaction project Freeport LNG on May 17 of this year, the nearly two-year old moratorium on export licensing was lifted. While the expectation industry-wide is that after Freeport the regulator will likely accelerate the permitting process, the level at which exports will be capped and which projects will get the go-ahead remain subject to dispute.

The predictability of future licensing requests is largely related to the unanimous congressional confirmation of Ernest Moniz, formerly of Massachusetts Institute of Technology, as US Energy Secretary on May 16. Although the recently approved Freeport LNG’s export application for 9 million metric tonnes per annum (mtpa) was filed with the DOE in December of 2010, the DOE cleared another non-FTA export request on May 20 of 2011 for Cheniere’s Louisiana-based Sabine Pass project (20 mtpa). Non-FTA licensing will now likely gain momentum as industry observers agree that Moniz’s appointment is the final step in accelerating the issue of export licenses, with new ones expected to be approved every two to three months.

There is less unanimity about the level of LNG export caps. Leading energy research consultancies estimate the cap to be anywhere between 40 and 120 mtpa. However the key consideration for the DOE in this respect is to prevent exports leading to higher domestic prices. Thus, it is likely that LNG exports will be capped at the lower end of around 60mtpa or approximately 8 billion cubic feet per day (bcf/d) – an estimate given by both Asia Pacific Energy Consulting and Total SA while slightly above estimates of Royal Dutch Shell plc.

But even if export levels are capped at 60mtpa, Henry Hub (HH) prices will likely approach US$6 to $7/mmbtu by 2020, or close to double current levels. Along with the Qatar-sized 10bcf/d of domestically produced gas that the US is set to export to global markets, primarily Europe, the 2 bcf/d (or approximate 15 mtpa equivalent) set for export to Mexico via pipeline also has to be taken into account.

The total of roughly 80 mtpa of natural gas exports from the US will inevitably have an impact on domestic prices. Exports at this level, along with the necessary energy output for production, will likely absorb most of new US natural gas output in the coming seven years, increasing or even doubling HH prices (to $6-7/mmbtu) over the same period.

Almost any LNG export cap, with most industry estimates varying between 40 and 120 mtpa, will necessarily have implications for the LNG export projects proposed for approval by the DOE as the total volume of proposed LNG projects exceeds 240 mtpa. However, the estimate of roughly 60 mtpa would allow for only a smaller number among the 20 LNG export projects presented for DOE approval.

The DOE has executed a comprehensive review of the LNG export application for the Dominion Cove Point LNG terminal over the past few months,

There is less unanimity about the level of LNG export caps
auditing and evaluating the project in terms of economic, security and environmental factors. After the review had passed through the extensive public discussion process, the DOE found the project to be in agreement with guidelines and approved Dominion Cove Point in early September, capping exports at 0.77 bcf/d over 20 years – a development that also points to the likely future direction of approvals for LNG export projects by the DOE in the coming months.

The most likely projects to gain approval in the immediate future are Cameron, Golden Pass and Elba Island. According to the energy consultancy Poten and Partners, they have nearly all committed their volumes on an FOB or Liquefaction Tolling Agreement (LTA) basis. Considering that they have, in an output constrained environment, committed their volumes either to legacy Asia buyers or leading LNG portfolio players, the above five export facilities are the likeliest to receive export licenses soon.

An important case to consider in terms of export licensing mechanics for prospective LNG export projects is the Golden Pass project. Exxon Mobil and Qatar Petroleum’s proposal of a 15 mtpa (~2 bcf/d) export capacity via Golden Pass could supply their obligation to the UK while freeing up Qatari export volumes for sale in more lucrative Asian markets where prices are almost three times the US rate and roughly 1.5 times higher than in the UK gas market, the most liquid in Europe.

There are a number of obstacles to the early approval of Golden Pass as it is currently behind 10 other applicants in the DOE export license queue, a position which could potentially result in multiple-year delays. However, there are still options to expedite the process with Exxon having an enviable track record in clearing energy bills through Congress.

For this reason the initiative of Alaska and Oregon Senators proposing a bill expediting approval of LNG export projects that have particularly powerful financial sponsors or stakeholders is important. If passed, this would likely lead to the DOE’s earlier approval of licenses for Golden Pass which is partly owned by Exxon Mobil, as well as five other projects.

Also relevant here is the heavy concentration of LNG export projects on the Atlantic coast, which points to a primary focus on European markets. However, a new development might alter calculations for both investors and the regulator.

Progress on the $5.25 billion plans for the expansion of the Panama Canal means that possibilities are opening up for US LNG Atlantic-oriented projects to export to the substantially more lucrative Asian markets at a fragment of the cost involved in the usual routes around Africa or South America.

Furthermore, the DOE has over past years conditionally approved four export licenses for projects that are located on the Gulf Coast, which would be ideally placed for exports to the Asian markets. Conversely, the most recent DOE LNG export approval, the Dominion Cove Point terminal, is located on the Maryland shore up north.

However, delays in the Panama expansion, putting completion back by anywhere between 6-9 months to the second half of 2015, may factor into the regulator’s approval process for the LNG export project applications.

Finally, the approval of the remaining 20 export applications faces a number of hurdles. Although under Secretary Moniz’s short tenure the DOE has quadrupled the speed of approval compared to his predecessor, recently, Senator Ed Markey of Massachusetts has suggested that the DOE should slow down the approval process, arguing that further export increases might hurt domestic manufacturing and consumers.

Recent analyses of these legislative-branch arguments have questioned this assertion. The DOE itself stated that the economic benefits from LNG exports largely outweigh the costs in all export scope scenarios. The policy consulting firm ICF International argued that increases in natural gas exports would likely not hurt domestic manufacturing and job creation but rather increase it, producing more than 450,000 jobs. This is underlined by the NERA economic consultancy argument that produced a figure of $73 billion per year as potential LNG export contributions to US economic growth.

These very tangible arguments and the current DOE secretary’s track record make it probable that opposition to further DOE LNG export approvals will be challenged and likely overruled. Consequently the remaining 19 LNG applications with the DOE are likely to be approved at faster rather than slower rates. Acceleration in export application approvals would allow the US economy to more substantially capitalize on the developing energy renaissance.

EER: the developments concerning LNG are going fast, as could be heard last week during the World Energy Conference in South Korea. We will report to this respect soon.

Luka Oreskovic is a researcher and associate of the Institute for Quantitative Social Science at Harvard University and a columnist or contributor to the Financial Times, the Economist, Moscow Times and Huffington Post.