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Offshore LNG Given Another Black Eye; ConocoPhillips Shelves Compass Port

The fate of many U.S. offshore liquefied natural gas (LNG) import projects was clouded Friday after ConocoPhillips withdrew its application for the 1 Bcf/d Compass Port LNG terminal upon being notified by Alabama Gov. Bob Riley that he intended to veto the application for the offshore Alabama LNG deepwater port.

Despite ConocoPhillips' promise of no net environmental impact from the project's open-loop vaporization process, Riley said he still had his doubts. He had a June 11 deadline to make a decision on the application at the Maritime Administration (MARAD).

This is the second LNG import project that has been blocked by a Gulf Coast state governor. Last month McMoRan Exploration's Main Pass Energy Hub, proposed for offshore Louisiana, was vetoed by Louisiana Gov. Kathleen Blanco (see NGI, May 15). McMoRan subsequently changed its vaporization design to a more expensive and less environmentally intrusive closed-loop system.

Several more LNG projects proposed offshore in the Gulf of Mexico and offshore California could face similar decisions in the near future. And some proposed offshore Boston plan to use open-loop vaporization as a back-up process. It's unclear at this point how many state governors will jump on the bandwagon, forcing offshore LNG ports to alter their designs potentially making them less attractive to overseas LNG suppliers.

ConocoPhillips so far is unwilling to switch to a different and more costly design for its $800 million project. The company had promised Alabama that there would be no adverse environmental impact from its current design.

In a letter published last Wednesday in the Mobile Register, Sig Cornelius, president of Global Gas for the company, promised the state "guaranteed environmental protection, doing all we can to minimize and prevent impacts to the marine environment; guaranteed environmental improvement, not just maintaining the status quo but taking steps to improve both the marine and air environment; and guaranteed long-term, meaningful and quantifiable economic benefits to businesses, consumers and working families of Alabama...

"Some people claim that use of open-loop technology will result in significant fish losses," he continued. "The facts are that 99.5% of all water that passes through the footprint of the facility will never pass through the vaporization system; that the natural Gulf current moves faster than the system's intake velocity, allowing all mobile aquatic creatures to swim away; that water intakes can be engineered to select water layers with low levels of fish eggs and larvae; and the colder water outflow can be designed to return to ambient temperature within about 100 feet of the discharge structure."

He also said the company hired experts from the Dauphin Island Sea Lab and the Gulf Coast Research Lab to develop an independent program to assess the marine environment and provide baseline information on which to make scientific judgments about the project. The work began in October 2004, and more than six years of comprehensive baseline data was expected to be examined before operations began in 2009.

"Contrary to those who claim that commercial and recreational fishing interests will pay the cost in over-catches, Compass Port will combine technology and operational practices to guarantee there is no net change in aquatic species of concern as a result of our operations," he said. "We have begun working with state and federal authorities to develop a marine conservation plan that will accomplish just that goal.

"And we've recommended that legally binding license conditions be established that require Compass Port operations to be suspended if this condition is not met. We will be the first to fully own the responsibility for impacts we may have on the Gulf."

On top of its environmental commitments, the company said it would spend $100 million in the state during construction and $15 million each year during operations. It committed to hiring at least 70% of its project workforce from among Alabama residents, and said it would give the state first dibs on 200 MMcf/d of supply coming through the port.

Despite those efforts and promises, Riley still told ConocoPhillips on Thursday that he would veto the current LNG project application. "As governor, I will not permit the establishment of any activity that I believe may adversely impact our marine resources if I have the power to stop it. All along I've expressed serious concerns about the proposed open loop system, and I supported Governor Blanco's decision to veto an application made by another company for an open loop LNG terminal off the coast of Louisiana.

"In response to my concerns, ConocoPhillips felt the best course of action would be to withdraw their application, and a letter to that effect is being sent from the company to the federal Maritime Administration. I appreciate the open and candid discussions I've had with officials of ConocoPhillips throughout this process. My concern is not with the company, but rather the open loop technology it planned to use off our coast. In Alabama, we continue to support the development of LNG, but not at the expense of our treasured marine resources and coastal environment."

ConocoPhillips said although it was withdrawing its application from MARAD, it would begin evaluating the economics of utilizing a closed-loop warming system and would continue the research project at the site with the Dauphin Island Sea Lab and the Mississippi Gulf Coast Research Lab to establish a comprehensive environmental baseline.

"Compass Port remains an attractive location and the decision on whether or not to proceed with refiling an application will be made after consideration of all the economic factors," said Cornelius.

Two weeks ago, Steve Lawless, manager of LNG permitting at ConocoPhillips, told NGI in an interview that switching to a closed-loop system would make Compass Port too expensive for LNG suppliers; they would be the ones bearing the cost of the vaporization system. He said the switch would cost ConocoPhillips $20-30 million initially and $30-40 million during each year of operation given $5/MMBtu gas prices. That's an $830 million cost increase over a 20-year period.

"What's important about the additional cost of a closed loop system is that you are going to ask a foreign supplier to accept that additional cost as they send their gas through that regas facility," said Lawless.

"And if you are already in an offshore environment, which is much more expensive on a capital cost basis to begin with compared to onshore [LNG import projects], you are now asking a supplier to pay for the additional offshore expense and the additional operating expense of a closed loop. Now the terminal does not look that attractive anymore. If you don't have the supply, you don't have a project" (see NGI, May 29).

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