The Political Plot Thickens As LNG Export Approvals Trickle In
The anticipated liquefied natural gas (LNG) export boom has taken another small step forward.
After signing off on just two export licenses, a third proposal was given the green light by the Department of Energy yesterday.
This one belongs to a joint venture of British major BG Group – available via American Depository Receipts (ADRs) in the U.S. (OTC: BRGYY) – and the Southern Union division of Energy Transfer Partners, LP (NYSE: ETP).
The joint venture is now approved to export of up to 2 billion cubic feet of LNG a day for the next 20 years from a new facility at Lake Charles, LA to any nation not on a sanctions list.
It follows the first permit granted two years ago to Cheniere Energy (NYSE: LNG), and a second given to the privately-owned Freeport LNG Expansion LP in May.
All three are Gulf Coast terminals and neither is limited to the countries that have free trade agreements with the U.S. That significantly expands the likely number of future LNG export contracts.
But two potential stumbling blocks have emerged…
Concerns About Bureaucratic Delays
The first involves the delays in receiving the licenses. Initially, the DOE said they had expected to take about eight weeks between reviewing the some dozen current applications. However, the Freeport and Lake Charles approvals took longer than that.
Market insiders assume the process will be streamlined. But the nagging concern is that the time required to put terminals on line could be an impediment to American involvement in global trade.
“This is a narrow time frame,” one of my LNG contacts has acknowledged. “By the time DOE has its act together this train may have left the station.”
There is certainly a double meaning expressed here. A “train” is also the term used to describe an LNG processing facility.
As I have noted in OEI previously, the increase in LNG traffic is the single most decisive change in worldwide energy transfers to hit this decade.
If the terminals being built internationally for both liquefying natural gas and then turning it back into a gas on the other end are any indication, LNG has become the route of choice for immediate energy diversification in many parts of the globe.
The Expanding Market for LNG
In Asia, LNG is widely perceived as decisive in moving its energy sector from a heavy dependence upon the region’s inferior coal reserves. That has led to huge production projects in Australia and Papua New Guinea which are already represented in the investment portfolios for both Energy Advantage and Energy Inner Circle.
Meanwhile, Western Europe regards LNG as the tool for breaking its dependence on long-term, take-or-pay contracts (requiring a minimum amount of gas be taken or paid for as if the end user had imported that volume) that have their price determined by a basket of crude oil and oil products.
Take-or-pay contracts have long been Russian major Gazprom’s (depository receipts in the U.S. via OTC: OGZPY) approach of choice and Europe has had few options but to comply.
The arrival of LNG, on the other hand, along with the opening of several major receiving terminals and the prospect of additional facilities to come, will likely supply enough reliable import volume for local spot markets to sell at discount to take-or-pay pipeline rates.
Even Africa is on the LNG bandwagon. North African sources are providing increasing export volume, even with the ongoing political unrest.
And further south, terminal plans are emerging to provide a genuine diversification of the energy balance and the first real chance for lower energy costs.
Of course, as little as five years ago, the assumption in North America (one I shared) was that imported LNG would become a major growth story in the U.S. Some estimates even suggested imported LNG would account for 15% of total U.S. volume as early as 2020.
That was before the advent of huge shale and other unconventional gas reserves. These days, the only reason LNG would be imported into the country would be to provide an arbitrage or contract swap opportunity.
In contrast, the surfeit of new gas has resulted in wide (and largely justified) talk of American self sufficiency. In tandem, the rush to export as LNG emerged.
In fact, from zero export today, even Gazprom now acknowledges that U.S. LNG exports will comprise as much as 8% of the world market by 2020. Meanwhile, other figures put the target at closer to 12%.
A Growing Political Hurdle
And that brings up the second overarching difficulty…
Opposition is building from those who claim LNG exports will end up increasing prices for Americans.
Here the argument is that exporting the largess is self-defeating, since it would worsen the economic recovery at home by accelerating energy costs. The position is at least indirectly supported by new figures from the DOE’s Energy Information Administration (EIA).
In June, the EIA revised the estimates of global shale gas reserves first put out in April 2011. While the new estimates point to 32% of gas worldwide being held in shale, they also call into question where the recoverable reserves are located. In the first report, the U.S. was listed second after China. In the latest revision, the U.S. is now fourth behind China, Argentina, and Algeria.
Putting aside my long-standing criticism of EIA figures being too conservative, and even accepting the new American positioning, the analysis still posits 665 trillion cubic feet of recoverable shale gas in the continental U.S. That is without including conventional gas, coal bed methane, or tight gas. The figure still expands our horizon of ample readily available reserves by at least four decades (a huge figure in the business).
Nonetheless, the attack is underway.
Allowing LNG exports, the argument runs, is tantamount to increasing living costs for every resident in the country. This is having its effect.
In acknowledging the contentious nature of the debate, the DOE said yesterday it would evaluate the impact of each subsequent export license application based on “the public interest with due regard to the effect on domestic natural gas supply and demand fundamentals.”
That means we shouldn’t expect any quickening in what has become a political lightening rod for some. The balancing of internal needs with prospects for improving trade revenue is of course necessary.
But if recent past experience is any guide, we should expect to count the licenses approved this year on one hand.