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Outlook: West Coast LNG Projects Continue on Course, Slowly

The chances of a liquefied natural gas (LNG) receiving terminal breaking ground on the U.S. West Coast in 2010 or 2011 are more realistic than they were 12 months ago. Three projects in Oregon, two with conditioned FERC approvals, are advancing amidst challenges from state and local sources.

Bullish projections for price and volumes of new supplies, along with the economic value of expanded gas infrastructure, are a focal point of the industry in the West; however, this optimism ignores another reality that includes depressed demand, robust North American gas supplies and a newfound emphasis on conservation and efficiency to match policymakers' words about global climate change.

Even the Northwest Gas Association's (NWGA) latest report concedes that demand in the Pacific Northwest is only projected to grow at about 1% annually during the next 10 years, and that conservation and efficiency programs to stretch existing gas infrastructure and supplies are the first priority in the region. The question becomes: Does this leave room for LNG?

The latest revision of its Integrated Energy Policy Report (IEPR) from the California Energy Commission (CEC) says much the same thing in its conclusion that the case for LNG has changed a lot in the last two years based on the dramatic rise in shale gas production, slackened demand and the prospects in the state of having an indirect LNG sourced through the Sempra Energy receiving terminal along the Pacific Coast in North Baja California, Mexico.

(While Sempra will not talk publicly about shipments of LNG, cargoes have been nonexistent at the Energia Costa Azul facility in Mexico, although Royal Dutch Shell and Russia's Gazprom previously announced deals that involved bringing supplies to the terminal from the Sakhalin II project [see NGI; April 13, 2009].)

"Demand for natural gas across the Pacific Northwest will continue to grow by an average of 1% a year through 2019," according to the NWGA's recently released Gas Outlook. Residential growth in gas use and added gas-fired electric generation will lead the increase in demand.

With sufficient supplies and generally adequate infrastructure, the Gas Outlook indicated that the Pacific Northwest regional natural gas market faces the future in good health. The outlook also points out a number of opportunities to ensure that regional consumers continue to gain the maximum benefits from the use of natural gas.

However, officials at the three competing proposed LNG receiving terminal projects in Oregon are absolutely convinced about the need and the economics for at least one LNG facility in the state. They offer varying arguments for why their specific proposal has the best chance of being built.

Two common arguments they make is that more diversity of supply sources in the Northwest is good for consumers in the long run, and initial landed prices for LNG supplies will beat any competing sources of gas from the Rockies or Canada.

"I think the pie is getting much bigger in the whole U.S. natural gas market; the consumption isn't going up right now, but eventually it will," said Mohammed Alrai, a vice president and co-founder of Oregon LNG, which has one of the projects along the Columbia River closest to the Pacific Ocean near Astoria, OR. "It is really a question of whether shale is going to be able to meet all the new demand or not.

"I think there are questions about how much shale we can take because of the environmental impact in producing it."

While Oregon LNG is still in the midst of the Federal Energy Regulatory Commission (FERC) review process, a project proposed for along the south-central Oregon coast, Jordan Cove, received a heavily conditioned approval from FERC in December. FERC's action covered separate receiving terminal and connecting interstate pipeline facilities that project backers now are hoping can break ground by the summer of 2011 (see NGI, Dec. 21, 2009).

"The next step will be to negotiate [with FERC staff] our conformance with the 128 conditions," said Bob Braddock, Jordan Cove project manager. "This effort will probably continue through the first half of 2010. During all of 2010 we will focus on securing the permits, easements and licenses issued by the Oregon state agencies. The paperwork for all of the dozen or so applications will be submitted in the first quarter, and we expect all the licenses, easements and permits to be issued by the third quarter."

Braddock said permitting for Pacific Connector, a 234-mile, 36-inch diameter 1 Bcf/d pipeline, is expected to lag the terminal's permitting by about six months.

Meanwhile, the third project, NorthernStar Natural Gas Corp.'s Bradwood Landing, farther up the Columbia River from Oregon LNG's proposed site, is the perceived front-runner, having received its conditioned FERC approval last year, but it is now facing Oregon's appeal of the federal decision in the Ninth Circuit Court of Appeals. Last week the project's backers said they are less than three months away from clearing a joint federal endangered species impact review (see related story).

Competitors describe the Bradwood project as "stuck," but a NorthernStar spokesperson rejected that characterization, contending that all three projects face potential legal challenges in the Ninth Circuit. The spokesperson also cited the outcome of a similar case involving a BP unit's proposed LNG facility on the East Coast and the state of Delaware.

In that case (Delaware v. FERC/Crown Landing LLC) and the one on the West Coast pushed by Oregon, the states contend FERC should not be making decisions before the state agencies have acted on the projects. The DC Circuit Court of Appeals, however, concluded that the FERC order for the project, Crown Landing, can't "possibly authorize" development of the facilities until the state gives approval. Therefore, the "state has suffered no injury-in-fact and thus lacks standing." The complaint was dismissed.

"This is similar to one of the arguments Oregon is making. So we feel pretty confident we'll get through the process [in the Ninth Circuit]," NorthernStar's spokesperson said.

While the backers of each project express the same level of confidence, Oregon LNG thinks that its more deliberate, all-inclusive process, in which it is attempting to get consensus with each of the permitting agencies ahead of the draft environmental and biological assessment documents being released, ultimately will save it from being sued by the state of Oregon.

The NWGA outlook mentions the competing LNG proposals, but the report's overall thrust does not give much of a boost to the need arguments for gas imports. It does note that each proposed project has a designated pipeline link to one of the existing interstate pipelines slicing between Washington state and California. Access to the California market now appears to be more critical to allow any of the projects to meet need and economic criteria.

NWGA's outlook makes two points relevant to LNG: industry stakeholders have come up with a variety of new infrastructure projects -- pipelines, storage and LNG imports -- sufficient to more than meet the expected demand increase during the next 10 years; and capacity expansions need a three- to five-year lead time, so it is timely now to start building one or more of the projects to ensure that the Northwest is not caught short of gas.

"Capacity expansions take time and involve numerous steps, including assessing market interest, gathering public input, obtaining permits and financing, environmental mitigation, construction, safety inspections, remediation and more," the gas outlook said.

"Market participants already have responded to market signals that new capacity is needed by proposing a mix of solutions. And ultimately market players -- industry participants, consumers, regulators and policymakers -- will decide which projects move forward. The goal is a natural gas system that allows more choice and flexibility to optimize resources -- to take advantage of the best value at any given time -- and will ultimately benefit consumers with more stable prices."

While this recipe does not mention specific ingredients, it can be inferred that it includes the possibility of LNG imports. California's most recent IEPR is similarly vague, but it at least allows for the market supporting an LNG terminal if independent investors are willing to shoulder the risk rather than state taxpayers or utility ratepayers.

The CEC-developed report sees a growing diversity of supply sources as a strength of the state's ongoing gas policy, which can include increased shale gas dependence and increased LNG, although over the last two years the state's predictions have gone from expecting some significant LNG imports to not counting on them in the near term.

"The recent development of natural gas shale formations has contributed to increased domestic production of natural gas, and LNG does not seem to be a priority fuel for California at this time," the CEC report said. However, the IEPR recognizes that "if private investors are willing to invest in LNG facilities without committing taxpayer or ratepayer funds, LNG should then be considered a viable option."

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