Not everyone excited about prospect for U.S. LNG exports

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Latest Oil and Gas News: 
November 15, 2011

(Philadelphia Inquirer; Nov. 13) - Several industries are looking to benefit from shale gas as an abundant long-term domestic energy source: Companies that want to promote compressed natural gas as a cheap motor-fuel alternative to imported oil; electricity generators that  want gas to fire up new power plants; entrepreneurs exploring ways to convert natural gas into gasoline. And the chemical industry, which buys natural gas as a raw material for plastics.

Now, another potentially large rival market for U.S. natural gas is emerging: Exports. The Department of Energy has received five applications from companies that want to build terminals to ship LNG overseas. The five export facilities could ship up to 6.6 billion cubic feet of gas a day to foreign countries, about 10% of current domestic U.S. consumption.

But some gas customers say exports will drive up domestic prices, mostly benefit gas producers, and undermine a chief virtue of natural gas - energy independence.  Jim Collins, a representative of the American Public Gas Association, said at a Senate committee hearing last week that allowing natural gas exports would produce "predictable and disastrous" results for household consumers.

Risks deter investment banks
from U.S. LNG export projects

(Platts Gas Daily; Nov. 11) - Price volatility and political risk make investment banks leery of putting money into U.S. LNG export terminals, two investment bankers said last week at the World Shale Gas Conference in Houston. "Financing these U.S. projects is not a slam dunk," said Andrew Moorfield, Lloyds Banking Group's head of oil and gas. "The political noise about gas exports creates a great deal of concern - and banks don't want to be concerned about political noise."

In addition, proposed U.S. export terminals are essentially competing with some 20 similar projects in Australia, Moorfield added. "In Australia, every government department is aligned, right down to the tax office," he said. "It removes political risk and we, as banks, like political stability."

Price is another reason for banks' reluctance to invest in U.S. export projects, said Peter Gaw, Standard Chartered Bank's head of oil and gas. "Liquefaction is very expensive, and that's why it's a big boy's game." Adding costly liquefaction and transportation costs to Henry Hub prices (the U.S. gas price index) makes it "a tough deal," he said, especially going up against far more competitive economics such as export projects in Qatar.

Cheniere signs contract with Bechtel
to build LNG export plant

(Reuters; Nov. 14) - A Cheniere Energy subsidiary has entered into a contract with engineering company Bechtel Oil, Gas and Chemicals to construct liquefaction trains at the Sabine Pass LNG terminal in Louisiana. Cheniere wants to add liquefaction and export capability to the import terminal, which is underused as abundant domestic gas supplies have slashed the need for importing LNG.

Cheniere is planning to construct liquefaction facilities capable of producing about 1.2 billion cubic feet of gas a day in the first phase of its project. Under the contract, privately owned Bechtel will design, construct and commission two liquefaction trains using the ConocoPhillips Optimized Cascade technology, Cheniere said Nov. 14.

Construction is expected to begin in 2012 with LNG exports expected as early as 2015. The contract price is $3.9 billion, with expected total costs for the project estimated at between $4.5 billion and $5 billion. Cheniere has its federal export permit in hand but still needs its FERC certificate. It has one customer signed up to use the export terminal - BG Group, on a 20-year contract for 500 million cubic feet per day - and is in discussions with other potential customers.

Cheniere cost estimate jumps
for LNG export terminal

(Bloomberg; Nov. 14) - Cheniere Energy,  the liquefied natural gas importer that Standard & Poor's said is on the verge of default, has boosted the cost estimate for its proposed U.S. gas-export terminal by 39%. The first phase of Cheniere's planned Louisiana plant will cost $4.5 billion to $5 billion, the company said. That equates to $555 per ton of capacity, compared with Cheniere's $400-per-ton estimate in an Aug. 5 public filing.

Chief Executive Officer Charif Souki said in an Oct. 31 interview that the company will not miss a $298 million debt payment due in May because it will refinance its debt in the meantime. Souki said at the time that he was counting on a 20-year agreement signed last month with BG Group to buy gas and take capacity at the proposed LNG export terminal to help attract financing for the project.

Cheniere, which has lost money for 13 consecutive years, already operates a gas-import terminal at the Louisiana Gulf Coast site that the company wants to expand into a liquefaction and export terminal, too. U.S. import terminals have languished as the glut of domestic gas has squelched demand for foreign LNG.

EPA tests show high levels of chemicals
in Wyoming aquifer

(ProPublica; Nov. 10) - While a nationwide study of hydraulic fracturing for natural gas is under way, a separate government investigation of a region where residents have long complained that drilling fouled their water has found alarming levels of underground pollution. A pair of monitoring wells drilled deep into an aquifer in Pavillion, Wyo., showed high levels of cancer-causing compounds and at least one chemical commonly used in fracking, according to new test results released Nov. 9 by the EPA.

Last year - after warning residents not to drink or cook with the water and to ventilate their homes when they showered -- the EPA drilled the monitoring wells to get a more precise picture of the extent of the contamination. The Pavillion area has been drilled extensively for natural gas over the past two decades. Residents have alleged for nearly a decade that the drilling -- and hydraulic fracturing in particular -- has caused their water to turn black and smell like gasoline.

The gas industry - led by Canadian company EnCana, which owns the wells in Pavillion - has denied its activities are responsible for the contamination. EnCana has, however, supplied drinking water to residents. The information released by the EPA was limited to raw sampling data; the agency did not interpret the findings or make any attempt to identify the source of the pollution. The EPA says it will release a lengthy draft of its findings, including a detailed interpretation of them, later this month.

Not all Pennsylvania hunters like
the sound of compressor stations

(New York Times; Nov. 11) - For those who have ever stalked deer, turkey and bear in northcentral Pennsylvania, this hunting season is like no other. For one thing, it is louder. The soundtrack of birds chirping, thorns scraping against a hunter's brush pants and twigs crunching underfoot is now accompanied by the dull roar of compressor stations and the chugging of big trucks up the hills.

Some of the state's most prized game lands lie atop the Marcellus Shale, a vast reserve of natural gas. Nine wells have cropped up on one game land of roughly 7,000 wooded acres in Potter County, and permits have been issued for 19 more. An old dirt road that meanders up a ridge has been widened and fortified. Acres of trees have been cut. In their place is an industrial encampment of rigs, pipes and water-storage ponds, all to support the extraction of natural gas through hydraulic fracturing.

"Who wants to go into their deer stand in the predawn darkness and listen to a compressor station?" lamented Bob Volkmar, an environmental scientist who went grouse hunting the other day. Like many hunters, Volkmar is upset the State Game Commission is giving over more public land to drillers, which does not fulfill the agency's mission to enhance the hunting experience. The game lands, as he points out, were bought with proceeds from licenses and fees paid by hunters and trappers.

Report says natural gas industry has
spent heavily to avoid regulation

(The Business Journal; Youngstown, Ohio; Nov. 11) - The citizens group Common Cause released a report Nov. 10 that estimated natural gas interests have spent more than $747 million during a 10-year campaign "to avoid government regulation of hydraulic fracking, a fast-growing and environmentally risky process used in Ohio and at least a dozen other states to tap underground gas reserves."

According to the report, "A faction of the natural gas industry has directed more than $20 million to the campaigns of current members of Congress ... and put $726 million into lobbying aimed at shielding itself from oversight." The Common Cause report is the third in a series titled "Deep Drilling, Deep Pockets." Common Cause is a nonprofit government watchdog group.

In Congress, the industry's political giving heavily favors lawmakers who supported the 2005 Energy Policy Act, which exempted fracking from regulation under the Safe Drinking Water Act. Current members who voted for the bill received an average of $73,433, while those who voted against the bill received an average of $10,894, according to Common Cause.

Editorial says Pennsylvania's proposed
1% natural gas tax is too low

(Harrisburg, PA; Patriot-News editorial; Nov. 14) - Marcellus misstep: That's the only way to describe House Bill 1950, the House Republicans' attempt at a Marcellus Shale package. GOP leaders say they are for "responsible drilling," but they might as well let the drillers write their own laws.

The biggest issue is the impact fee. The proposed rate works out to about a 1% tax, which would make Pennsylvania the lowest of any natural gas drilling states. Even Texas, which gives shale gas drillers a tax break in the early years down to about 2%, didn't go that low. It's certainly a pittance compared with most other states, including neighboring West Virginia's 5.8%.

This newspaper has called for a reasonable severance fee for years. We concur with Republicans that taxing drillers to solve all the state's fiscal woes is the wrong approach. But enacting the lowest rate in the country on shale gas drillers is not reasonable; it's corporate welfare. This is a landmark issue for Pennsylvania. Common sense and good governance have to trump a promise made to a Washington, D.C., lobbying group. We can do better. We must do better.

Trinidad and Tobago sends LNG
to Japan as U.S. cuts back orders

(Bloomberg; Nov. 13) - Trinidad and Tobago, the largest exporter of liquefied natural gas to the U.S., said exports to that country have fallen "sharply" because of rising U.S. shale gas production. The U.S. share of Trinidad and Tobago's LNG shipments has plunged to 25%, from 75% three years ago, Energy Minister Kevin Ramnarine said Nov. 13.

Trinidad and Tobago exports an average 2 billion cubic feet of gas per day and will continue to ship this amount even if the U.S. reduces imports, he said. The country is shifting some of the supplies previously sent to the U.S. to markets in South America, mainly Brazil, Argentina and Chile, and also to Asia, Ramnarine said.

"There is strong demand from Asia, especially Japan, and we are getting better prices there too," he said. The nation exports 22% of its output to Asia. The country has four LNG production lines and is considering building a small-scale plant to ship the fuel to smaller Caribbean Islands as demand in those nations is rising.

Qatar negotiating for stake in
Russia's Yamal LNG project

(Reuters; Nov. 13) - Qatar is in negotiations to take a stake in the Yamal Arctic LNG project under development by Russia's second-largest gas producer, Novatek, Qatar's energy minister said Nov. 13.

The condensate and gas field is expected to start production in 2016 at 650 million cubic feet of gas per day, building to 2 billion cubic feet per day by 2018. Novatek last week said it sold 20% of the Yamal LNG project to French major Total for $425 million. Two or three more foreign partners could join Total as investors in Yamal, in extreme northwest Siberia, Novatek's chief executive said in October.

Russia is courting the Qataris even as it loses market share in Europe, its largest customer, to its Mideast rival. Russia's slice of European Union imports dropped to 27% last year, from 29% in 2009, data from BP show. Qatar's share rose to 8% from 4.7%.

To compensate, Russia is seeking to increase shipments to Asia. The Yamal project would give it an additional Asian outlet. Novatek has been experimenting with the northern sea route, using icebreakers to clear a path for tankers to Asia.

Gazprom looks to Asia if China
pipeline negotiations fail

(Reuters; Nov. 13) - Russian energy giant Gazprom expects to rely heavily on LNG exports to Asia as talks with China on pipeline gas supply have stalled, the company's head said Nov. 13.

Gazprom has been mired in painstaking discussions with China about Russian pipeline gas supply since 2006, but the talks appeared to hit a dead-end over pricing terms.

Russia's initial plans were to supply China with several billion cubic feet of gas per day starting in 2015.

"The top priority for our eastern export corridor is production of LNG, which will be consumed by the Asia-Pacific countries," Gazprom's chief executive officer Alexei Miller said on a visit to Honolulu as part of Russian President Dmitry Medvedev's delegation to an Asia-Pacific meeting.

TNK-BP wants to get into the gas export business

(The Wall Street Journal; Nov. 13) - TNK-BP hopes to substantially increase its natural gas business by the end of the decade, investing billions of dollars to become a major player in the sector, Executive Director German Khan said. TNK-BP, which is half-owned by BP, aims to produce more than 3 billion cubic feet of gas per day by 2020, about triple year's level, Kahn said.

At present, gas is a small part of TNK-BP's portfolio, with marketing opportunities limited by the dominance of monopoly Gazprom. But Khan said he expects Gazprom's grip to ease over the next several years, allowing other producers the chance to sell for export, potentially with a single company acting as agent. At present, Gazprom has a monopoly on exports and rivals are limited to sales on the domestic market, where prices are much lower.

"In the midterm, if we're talking about reform in the gas sector, we'll get to a situation where a single exporter for a minimal commission will be selling gas from various producers," he said. "I think that would be acceptable."

Draft EIS available for offshore Australia LNG project

(Platts; Nov. 14) - The Woodside Petroleum-led $30 billion Browse LNG project in Western Australia has moved a step forward with the release, for public comment, of the draft environmental impact statement for the upstream component of the development.

The draft upstream EIS covers construction, operation and de-commissioning of all offshore aspects of the project, including processing platforms and wells, and subsea pipelines, operator Woodside said in a statement Nov. 14. The project would commercialize gas and condensate in the offshore Browse Basin, about 180 miles off the northwestern coast of Australia. The draft EIS is open for public comment until Jan. 25, 2012. The partners are expected to make a final investment decision later in 2012.

Woodside and its partners in the Browse LNG project - BHP Billiton, BP, Chevron and Shell - are planning to process 14 trillion cubic feet of gas in three fields at an onshore LNG project near the town of Broome in Western Australia's Kimberley region. The site would be designed to process all the gas in the offshore Browse Basin, with Woodside's LNG project - at 1.5 billion cubic feet per day - to be the foundation development.

TransCanada strikes deal with Nebraska
to reroute oil pipeline

(Calgary Herald; Nov. 15) - TransCanada signed an agreement with Nebraska lawmakers Nov. 14 to reroute its proposed Keystone XL oil pipeline around an aquifer that provides drinking water to millions. The company says the route change could put the project back on President Barack Obama's desk for a decision shortly after a six-month review by the state of Nebraska.

If legislation is approved by state senators, the Nebraska Department of Environmental Quality will study and suggest a new pipeline routing. The diversion around the Sandhills region and Ogallala aquifer should quell the controversy that led to a U.S. State Department decision last week to delay approval of the $7 billion pipeline, said Robert Jones, TransCanada's vice president of Keystone Pipelines. The company expects delays due to rerouting will add upward of $1 million a day to the project cost.

Nebraska officials have said the assessment can be done in six months, Jones reported. The State Department's national interest determination, which is required for the president to decide on the permit necessary for construction of the 1,700-mile cross-border pipeline, hinges on appeasing fears in Nebraska. "The State Department was very clear ... they needed more information about a reroute around the Sandhills," Jones said.

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