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'Conditional' LNG Permits Could be Suspect in Finance, Legal Sectors

The Department of Energy's (DOE) conditional approvals of permits for liquefied natural gas (LNG) exports to non-free trade agreement (non-FTA) countries may not pass muster in the financial and legal sectors, an industry executive told an audience of energy attorneys Wednesday.

People tend to gloss over the word "conditional," said Scott Moore, vice president of marketing for Anadarko Petroleum. However, "the financiers won't gloss over that, the lawyers won't gloss over that." So, it's going to move from the regulatory filtering process to commercial and financial gating to determine which export facilities will be built.

Lawmakers who have questioned the "conditional" nature of the permits in the past have been assured by DOE Deputy Assistant Secretary Christopher Smith that while DOE has the authority to issue supplemental orders modifying previous authorizations (such as those for pipeline exports), it has never used that authority.

"DOE does not intend to use this authority as a price maintenance mechanism," Smith said (see Daily GPI, March 5, 2012). "Moreover, DOE takes very seriously the good faith investment-backed expectations of private parties subject to its regulatory jurisdiction. Accordingly, DOE would be reluctant to withdraw or modify a previously granted authorization, except in the event of extraordinary circumstances."

Moore isn't the only one who sees government approval as just a step along the way. DOE has issued conditional approvals for exports to non-FTA countries to four projects so far.

"I suspect that there will be more to follow. [But] whether those facilities all get built or not" remains to be decided, said Adam Sieminski, head of the Energy Information Administration (EIA) at the Energy Bar Association's Mid-Year Meeting in Washington, DC. DOE currently has 13 additional export petitions under review.

"I think there's a bit of a funnel here. The funnel is both [the] financial and physical ability to put together these complex engineering facilities," Sieminski said.

Another member of the panel tasked with discussing the geopolitical implications of energy discoveries downplayed the potential impact of U.S. LNG exports. "I think there's an opportunity [for the U.S.] to export LNG," but it won't be a transformative thing, said Michael Levi, senior fellow for energy and the environment at the Council on Foreign Relations.

"I still would bet on the DOE approval process [for gas export permits], as slow as it is, outpacing the NATO [North Atlantic Treaty Organization] process," said David Pumphrey, co-director for the Energy and National Security Program at the Center for Strategic & International Studies in Washington, DC. Earlier this year bipartisan legislation was proposed to expedite exports of LNG to NATO member nations, Japan and others.

The "Expedited LNG for American Allies Act of 2013" would amend the federal law to treat exports to NATO allies, Japan and other countries necessary to national security in the same manner as FTA countries.

Moving to the subject of domestic production, Sieminski said the boom in domestic oil and gas drilling could be sustained over the next couple of years if prices stay relatively unchanged.

"On the natural gas side, assuming prices move up from the $3.00-4.00 range that they've been in...we think that natural gas production can be sustained," he said.

"The conclusion that we're coming to [for oil] is that, at least, over the next several years...there is no question about sustainability of this, assuming that prices don't change too much from where they are now," he said.

Shale gas production has gone from virtually nothing in the United States in 2005 to accounting for more than one-third of the country's output. Due to the shale revolution, EIA projects that gas production could grow by another one-third by 2040.

Domestic oil production has increased from 0.5 million b/d from tight shale formations to almost 2.5 million b/d during the same time frame, according to Sieminski. "Oil appears to be on a track that's similar to natural gas."

The EIA's sustainability projections were based on findings in its just-published Drilling Productivity Report, which found that increases in drilling efficiency and new well productivity, rather than an increase in the number of active rigs, have been the main drivers of recent growth in domestic oil and gas production (see Daily GPI, Oct. 22).

"Clearly, we are self-sufficient on gas," Pumphrey said. However, "we don't know if we will become self-sufficient in oil." The United States is moving "into a place where it can be a major exporter of gas," as well as displace oil, he said.

While countries like Russia, China, Libya and Argentina have significant oil and gas shale deposits, in some cases surpassing the United States, Sieminski said most of the development is occurring domestically because "private ownership of mineral rights" moves development along more quickly. He also credited the "enormous base" of independent operators with a "higher risk appetite" for developing the shale deposits.

Despite rapidly increasing oil production, the EIA administrator doesn't believe the United States could become a net oil exporter. "It's not a probable case in the EIA's view. But it is not out of the realm of reality."

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