Daily GPI

LNG Industry 'Happy' Ukraine Crisis Brought Attention to DOE Delays

Supporters of liquefied natural gas (LNG) exports from the United States aren't using the crisis in Ukraine as an excuse to advance their agenda, but they are happy with how it has called attention to permitting delays at the U.S. Department of Energy (DOE), Center for Liquefied Natural Gas (CLNG) President Bill Cooper said Monday.

Meanwhile, Congress is scheduled to hold three separate hearings on Tuesday and Wednesday to discuss a range of energy issues, including LNG exports, as analysts predict that any disruption of Russian gas supplies to Europe could tighten global LNG markets.

Cooper told reporters that Russia's incursion into Ukraine "obviously increased awareness in the United States about LNG exports, and it certainly has been a catalyst for increased Congressional attention to LNG exports as well. From a geopolitical perspective, LNG exports can be an important tool to help our allies and to promote competition in energy markets."

According to Cooper, 25 applications to export LNG to countries without a free trade agreement (FTA) with the United States are currently pending before the DOE. Of those, he said 18 projects have had public notices in the Federal Register, and the comment period has closed on 17.

"Under DOE's own rules and regulations, [since] no evidence had been introduced to overcome the statutory presumption in favor of the application during the comment period...DOE can proceed to a record decision," Cooper said. "If that had occurred, there certainly would be less talk about how to get DOE to start processing applications more expeditiously.

"It doesn't take Congress to act on this. If the [Obama] administration wanted to, it could speed up the process and make this happen."

The House Energy and Commerce Committee's Subcommittee on Energy and Power will meet Tuesday to discuss HR 6, also known as the Domestic Prosperity and Global Freedom Act. The bill, sponsored by U.S. Rep. Cory Gardner (R-CO), calls for granting immediate approval to all pending LNG export applications that had a notice published in the Federal Register (see Daily GPI, March 18).

The Senate Committee on Energy and Natural Resources is also scheduled to meet Tuesday to discuss energy imports and jobs. On Wednesday, the House Committee on Foreign Affairs has scheduled a hearing to discuss the geopolitical potential of U.S. energy resources.

"Looking at the witness lists, it stacks up to be a robust conversation in all of those hearings," Cooper said. "I think there will be some useful information that can help to promote expedited approval of these bills, either administratively or congressionally."

But Cooper bristled at the suggestion that supporters of U.S. LNG exports were using the Ukraine crisis as an excuse to quickly push projects through the queue at DOE.  

"We have been beating this drum that DOE needs to speeds up its process [and] follow its own rules and regulations," Cooper said. "If they had done so, most of these applications would already be granted and we wouldn't be having this conversation today.

"We didn't gin up the Ukrainian crisis. We didn't gin up the idea that it ought to be connected in some way to LNG exports. But Congress did, obviously, and a lot of editorials, experts and geopolitical analysts have all jumped on that. We appreciate the attention that LNG exports are receiving, and if it does provide a catalyst to make something happen that heretofore has not, then we're going to be very happy with that."

If the Ukraine crisis proves to be short-lived, Cooper said the LNG industry "wouldn't be any worse for wear. I don't know that we were ever satisfied with the pace in which we're seeing these decisions being made, and it certainly seems like we were on a very slow roll to a lot of projects being pulled just because of lack of action."

Cooper said CLNG believes permitting delays by DOE violates the Administrative Procedure Act (APA) and the Natural Gas Act in the United States, as well as the requirements under the World Trade Organization (WTO) and the General Agreement on Tariffs and Trade (GATT).

"If you initiate a lawsuit under the APA to challenge DOE for its inordinate delays, then you get faced with the delays of the court system," Cooper said. "That could prolong consideration of the applications for another two to three years. Delay can kill a project. I'm sure folks are fearful of it and just hope that they're going to get a decision, or that some external stimulus is going to come about that would cause DOE to act faster than they are."

He added that CLNG was not encouraging anyone to sue the U.S. over alleged WTO or GATT violations. "We're not advancing any litigation in that realm whatsoever, but it seems like we have an opportunity to fix it before any of that occurs," he said.

In a note Monday, analysts at Wood Mackenzie estimated that Europe imported 155 Bcm (5.47 Tcf) of natural gas from Russia in 2013, with pipelines traversing Ukraine supplying 82 Bcm (2.89 Tcf), or more than half of Russian gas imports.

"Central and Eastern Europe will be most affected by a Ukraine transit disruption, as eastward-flowing pipeline capacity would be insufficient to meet gas demand in Eastern Europe," said Stephen O'Rourke, senior global gas analyst. "The region will have to draw upon strategic storage volumes and some demand will not be fully met. On the other hand, northwest Europe has direct access to Russia's Nord Stream pipeline, which mitigates the impact of any transit disruption."

Noel Tomnay, head of global gas research at Wood Mackenzie, said a two-month disruption of Ukrainian pipelines in the spring of 2014 would cause Turkey and Greece to seek additional supplies of LNG, but it would probably be less than two million tonnes.

"If the disruption is more severe -- for example of six-month duration over the 2014/15 winter --we expect further Southern European countries, including Spain, to call on extra LNG," Tomnay said. "But robust European storage volumes going into the winter should limit overall additional LNG demand to less than five million tonnes."

Wood Mackenzie said a combination of rising demand for LNG in the Asia Pacific and Latin America regions, combined with recent stagnant LNG supply availability, has been making the global LNG market tighter. Any additional requirements for LNG in Europe would exacerbate the problem.

"A tighter LNG market would place upward pressure on global LNG prices, including those in Asia," Tomnay said. "And Southern European markets would need to compete with Asia and Latin America for these additional LNG cargoes. This would push spot prices in some Southern European markets higher -- to levels equivalent to Asia, allowing for shipping differentials."

O'Rourke added that Ukraine would need to use its strategic storage reserves and prioritize gas demand in the residential and power sectors to overcome the impact of a winter gas supply disruption from Russia.

"Should the EU [European Union] seek to supply Ukraine with gas, additional reverse flow capacity would need to be negotiated and accessed," O'Rourke said. "While we believe deliveries to Ukraine would blunt the impact of a Russian disruption, they could exacerbate a difficult position for several Eastern European countries."

Last week, Ukrainian and EU officials -- the latter through the European Commission -- signed a joint report to cooperate on energy issues through 2020, including plans to modernize Ukraine's gas pipeline system and to work on reverse flows (see Daily GPI, March 20). Reverse flows are proposed in Slovakia, Bulgaria and Croatia.

Only one project, Cheniere Energy Inc.'s Sabine Pass facility, has received authorization from DOE to export LNG to non-FTA countries, but the agency has granted six conditional non-FTA export approvals (see Daily GPI, Feb. 11; July 30, 2012). All of the advanced proposals have contracted most of their gas to Asian buyers at higher prices than generally prevail in Europe.

Cooper said announced capacity agreements in the United States -- with the exception of Sabine Pass and its contract with Spain's Gas Natural Fenosa (see Daily GPI, Nov. 22, 2011) -- aren't targeting Europe in particular.

"But as LNG trade emerges globally, and as we have an increase in short-term spot type cargoes on that global stage, it doesn't necessarily have to be that linear commercial arrangement," Cooper said. "As long as the United States is a player in the LNG global trade, it's going to displace cargoes intended for current markets.

"I don't think you have to say that the United States has contracts to supply LNG to the various terminals in Europe. It will still have an impact, it will still influence pricing and it will provide [options] for those folks as they move forward with their terminals."

Russia triggered an international crisis with its smaller neighbor in late February. Following a revolution in the Ukrainian capital of Kiev, pro-Russian forces began to take control of Crimea on Feb. 26. After a referendum on March 16, the Russian Federation formally annexed the peninsula last Tuesday.

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