"Vague, open-ended, unclear" provisions in the Senate and House omnibus energy bills that deal with the states' role in permitting liquefied natural gas (LNG) terminals could wind up stalling or killing, rather than encouraging, the construction of future LNG facilities in the United States, an energy analyst with Stanford Washington Research Group said last Thursday.
Christine Tezak, in an "Energy Policy Bulletin," cited a major defect in the Senate energy measure -- a state could exert its authority under the Coastal Zone Management Act (CZMA) to object and hold up an LNG project "outside" the scope of a consolidated proceeding under a single federal record managed by FERC.
In effect, it maintains the status quo. As a result, an LNG project sponsor, even after receiving a FERC certificate, would be forced to file an appeal with the Department of Commerce to resolve its dispute with the state, which could place the project in limbo for years.
"Leaving CZMA outside of a new single federal record process begs the question, "What's the point?" as it provides no improvement over the status quo. A project could have a FERC permit and then wind up for years working through the CZMA permit." She noted that NiSource's Millennium Pipeline project still remains in litigation with New York State, in spite of FERC invoking eminent domain in 2001 to move that project forward.
"The House [energy] debate [has] led to shared jurisdiction on an issue that was never the purview of the states under any delegated federal program -- the safety assessment. While clearly well intentioned, there is nothing in the House bill that provides for how to resolve any [safety] 'considerations' that the states may raise," Tezak said.
"Looking at the political deal cut in the House this year that puts the states in the safety assessment business without any clear parameters for resolving those concerns, we see increasing, not decreasing, risk for projects that have not yet secured FERC certification (or could have certification by the time legislation might be enacted this fall) if this or similar language remains," she noted.
"If the definition of safety becomes a moving target or the CZMA process remains a Sword of Damocles over issued certificates, we think fewer and fewer projects will get built."
The House passed a sweeping energy bill in late April. The Senate Energy and Natural Resources Committee approved its energy bill just prior to the Memorial Day recess, and the full Senate is expected to begin floor debate on the measure on Tuesday (June 14).
If certain provisions approved by the Senate energy panel last month remain, "we will be more pessimistic about the prospects for additional [LNG] sites successfully securing permits." The odds for project approval would be "very long" if an anticipated amendment to be offered by Sens. Dianne Feinstein (D-CA) and Olympia Snowe (R-ME) on the Senate floor is enacted, Tezak said.
Their amendment, if it materializes, is expected to seek dual federal-state jurisdiction over the siting of LNG terminals. It would give states "an equal say as to what happens in their own backyard -- and they should have the right to establish more stringent standards for LNG facilities than the FERC sets if their residents want more protective ones."
Tezak said she is "concerned that such 'shared' jurisdiction would result in a very slow-moving permitting process at least for the next several years while states sort out exactly what their myriad concerns may be."
She said that "it's not that we don't think that state and local issues must be ignored in order to facilitate investment. However, if state concerns are addressed in the pending energy bill through vague, open-ended, unclear and unspecified parameters with long timelines for review and mediation, we think that the risk to new projects grows."
The Senate energy bill includes language offered by Sen. Lamar Alexander (R-TN), giving FERC "exclusive jurisdiction" to approve or deny an application for LNG facilities located onshore or in waters. The House bill affirms that FERC has preemptive authority over the siting of LNG facilities, but it requires the agency to "actively consult" with states to consider state and local safety priorities. Outgoing FERC Chairman Pat Wood has indicated that the agency prefers the Senate proposal.
"Key to the next stages of assessment of the prospects for LNG project development will be whether the Bush administration -- through the Department of Energy and White House -- will push the legislative language close to the Alexander proposals as the legislation moves from the Senate floor through conference," Tezak noted.
"Barring a concerted push by the Bush administration to encourage Capitol Hill to move toward the language in Sen. Alexander's [stand-alone natural gas] bill, we think that many of the projects from the long list the FERC maintains on its website...may never happen. Existing and permitted projects would likely not shed a tear at a smaller field of prospective competitors."
She favors Alexander's proposal that would move the state permitting processes, delegated by the federal government under the Clean Water Act (CWA) and CZMA, into a single permitting schedule set by FERC. This would get "the relevant issues on the table sooner rather than later -- allowing project developers to either solve them quickly, or preserve capital and move to the next project," Tezak said.
"From an investment perspective, this represents an improvement over the status quo, in that obstacles to approval would be identified and, if possible, resolved earlier. If obstacles identified in the state regulatory process cannot be resolved, then the sponsors would be able to cut bait on a troubled project sooner and focus investment dollars on more viable alternatives.
Beyond their delegated authority under the CZMA and CWA, she noted that states have plenty of ways to "kill' unwanted LNG projects. "Global major ExxonMobil abandoned its Mobile Bay project in Alabama. Calpine walked away from Humboldt Bay in California, and TransCanada and ConocoPhillips bid adieu to Harpswell, ME" due to local opposition.
Deepwater LNG projects also are running into opposition due to a technology being proposed for projects in the Gulf of Mexico, according to Tezak. "The technology at issue is the open rack vaporization system (ORV), where warm Gulf seawater would be flowed over pipes containing the liquefied gas, warming it and returning it to a gaseous state. The water that is cooled in the process is then returned back to the ocean.
"When [Texaco's] Pelican Port was reviewed, concerns related to fish kills that might occur from the ORV systems were resolved with a recommendation from the National Oceans and Atmospheric Administration (NOAA) that the intake pipe be located deeper." The Environmental Protection Agency (EPA) at the time had no objection.
"However, in the [Royal Dutch/Shell] Gulf Landing project's review, the EPA and NOAA were openly calling for the abandonment of the ORV system in favor of a much more expensive closed-loop system that would require the use of natural gas to reheat a recycled solvent (whether water or glycol)." For Gulf Landing, the cost of moving to a closed-loop system was estimated to be $23-40 million per year.
The Maritimes Administration (MARAD) "declined to accept the bald-faced call for a closed-loop system offered by the EPA and NOAA, much to the chagrin of state-based fishery advocates and environmentalists," Tezak said. The Sierra Club and other groups joined together in a so-called "Gumbo Alliance" to fight the license given to Gulf Landing and to protect against future projects using ORV in the Gulf. The alliance filed a lawsuit against Gulf Landing in April, and Louisiana's governor also has voiced her protest.
"Although Louisiana did not halt the Gulf Landing license when it had the opportunity in early 2005, the use of the ORV technology at future projects in the Gulf of Mexico may garner Gov. Kathleen Blanco's (D-LA) opposition, and other state governors could follow suit. McMoRan's Main Pass project is adjacent to Alabama, Mississippi and Louisiana. One unhappy governor can change the fate of this project," Tezak said.
"While MARAD can decide that the costs outweigh the benefits of an agency recommendation, MARAD cannot move a project forward if an adjacent coastal state governor files the appropriate formal and official opposition."
There are some things that are going right for LNG projects, according to Tezak. Foremost was FERC so-called "Hackberry" decision in December 2002 in which it lifted the open-access requirements for LNG terminals. "The long list of proposed projects and planned expansions is validation that the Hackberry approach has stimulated investment interest in this sector. We do not anticipate the FERC will change course on this policy."
She also cited the high level of federal interagency coordination between FERC, MARAD, the EPA and other agencies on LNG projects, saying this "continues to be a positive for the investment climate."
In addition, FERC's pre-filing process continues to help LNG project applications with their efforts to win agency permits, according to FERC's Office of Energy Projects.
Lastly, "we are encouraged with the progress the industry has made to try and get a handle on the extent of the problem" involving gas quality and interchangeability issues, Tezak said. "The next step is possible appropriations to the FERC budget for a shared project to define regional standards for gas quality and interchangeability to minimize disruption on the domestic pipeline infrastructure."
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