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Shipper's Balk at Proposed Cove Point OFO Requiring LNG Imports

Major customers of Dominion Cove Point LNG LP (DCP) last week protested the company's proposed tariff changes requiring them to deliver liquefied natural gas (LNG) by tanker to its import terminal to keep the cryogenic portion of the facility cooled. They contend that DCP's proposal would back out cheaper gas from the United States and potentially disrupt the domestic gas market. Industrial gas customers suggested that the long-term solution may be to once again deactivate the Cove Point LNG terminal in Lusby, MD.

If DCP does not receive an LNG shipment in the near future, it proposes under its tariff to issue an operational flow order (OFO) that would require its firm import shippers to deliver LNG to the terminal. While DCP believes it already has the power to issue an OFO and impose penalties on those who don't comply, it has asked the Federal Energy Regulatory Commission (FERC) to clarify its authority to clear up any confusion that its customers may have. It asked FERC to make the proposed tariff changes effective June 26.

The prolific development of the Marcellus Shale and other shale gas has led to reduced usage at the Cove Point LNG facility. In fact DCP, a subsidiary of Richmond, VA-based Dominion Resources, has not received an LNG cargo since February, which is threatening the operation of the terminal's cryogenic facilities. Regular arrival of cargoes -- approximately one every four months -- is critical because the cryogenic facilities at the Cove Point terminal must remain cooled to a temperature of approximately minus 260 degrees Fahrenheit in order to be fully operational and able to receive LNG imports.

DCP issued an April 28 notice to firm import shippers to voluntarily bring LNG cargoes to the Cove Point terminal, but they all responded negatively (see Daily GPI, June 1).

Statoil Natural Gas LLC "agrees that Cove Point and its customers must act quickly to craft a balanced solution in order to maintain terminal operations both in the short- and long-terms. Accordingly, Statoil urges the Commission to set the proceeding for technical conference in order to provide a forum for the parties to resolve this matter expeditiously," the Stamford, CT-based-company told FERC.

"Statoil appreciates the serious natural of the cooling problem...Nonetheless Statoil does not agree that Cove Point's proposed OFO solution is the right one and ...requests that the Commission suspend Cove Point's proposed tariff sheets for the maximum period allowed (five months)."

Statoil said it especially objects to Cove Point's proposal to treat the firm import shippers as a single group when issuing an OFO. "A more balanced solution requires Cove Point to issue OFOs on an individual, shipper-specific basis...First, Cove Point should alternate OFOs between two groups -- the firm import shippers (those taking service under Rate Schedule LTD-1) and the 2004 terminal expansion shippers. Second, Cove Point should specify the volume required to keep the terminal cool; and [lastly] if an OFO is directed at the firm import shippers, it should be issued on an individual, shipper-specific basis to the firm import shipper that has failed to bring in a cargo to Cove Point in the longest amount of time.

"While it is possible that a series of cargoes coming to Cove Point under the OFO protocol may be enough to resolve the immediate cooling crisis, a longer term solution to the cooling issue could be upgrades to Cove Point's existing liquefaction capabilities," Statoil said.

Cove Point has threatened to impose penalties of $10,000 on shippers that fail to comply with the OFO. Statoil called this "unnecessary and overly broad," and added that Cove Point "has failed to demonstrate that it is just and reasonable."

The Process Gas Consumers Group (PGC), which represents major industrial users of natural gas, also objected to Cove Point's proposed tariff revisions. "Forcing shippers to import LNG in this admittedly and obviously uneconomic fashion potentially backs out lower priced domestic natural gas production and potentially disadvantages natural gas consumers," it said.

It pointed out that FERC approved the construction of the Cove Point import terminal based on the company's claims that it would not adversely impact customers. "However, DCP is now proposing to disrupt the natural gas market by requiring admittedly expensive imports into the U.S. market to the detriment of customers. DCP wants shippers (and perhaps ultimately consumers) to shoulder the burden of the change in its business forecasts and market changes that underpinned its early decisions to reactivate Cove Point," the industrial group noted.

"Rather than grant DCP's proposal outright, perhaps there is a middle ground solution that would preserve the status quo and protect the integrity of the existing Cove Point operations, while allowing the parties time to consider and arrive at at a longer term solution -- even if the longer term solution is to once again deactivate the LNG facilities at Cove Point," PGC said.

Cove Point was originally constructed in the mid-1970s at a cost of $400 million, but was shut down due to a sluggish market. FERC approved the resumption of LNG imports at Cove Point in October 2001. The terminal received its first commercial delivery in 23 years in August 2003 from Trinidad and Tobago (see Daily GPI, Dec. 9, 2004).

Like Statoil, PGC called on the Commission to convene a technical conference to discuss DCP's proposed tariff revisions.

"Cove Point's proposed tariff changes are radical and overreaching," said Shell NA LNG LLC. "They would shift Cove Point's long-standing business risks to its LNG import shippers. Contrary to Cove Point's assertion, Cove Point does not immediately need to implement the proposed tariff changes because Cove Point already has the ability under its tariff to purchase LNG for operational reasons," Shell said.

"Not having cargoes arrive at the terminal on a regular basis is a business risk Cove Point assumed when it purchased the terminal. Cove Point's lack of desire to purchase LNG cargoes for operational reasons on a current basis and then recover such costs under its current tariff mechanisms is not justification for its radical approach. As the Commission has stated on numerous occasions. OFOs were never intended to be used for ongoing operational requirements like the ones Cove Point claims it is experiencing."

Likewise Shell urged FERC to set the issue for discussion during a technical conference and to suspend the effectiveness of Cove Point's proposed tariff changes for the maximum five-month period.

BP Energy Co., called DCP's proposed tariff revisions "unprecedented and improper," saying they would permit DCP to "interfere with the commercial activities and decisions of its shippers." It also urged FERC to suspend the tariff proposed for the maximum five-month period.

The Independent Petroleum Association of America (IPAA) "expresses its concern that Cove Point's solution -- to order the import of LNG while backing out American natural gas supplies -- should not be the solution that shippers and the interstate pipelines reach as a fair, longer term solution to the changing sourcing of natural gas. Cove Point faces a problem that interstate pipelines are facing or will face in the near future. IPAA urges FERC to encourage a solution involving all affected parties that will accommodate the abundant supplies of natural gas being produced by America's producers.".

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