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Rough Road Predicted for North American LNG Export Projects

Several companies hope one day to export liquefied natural gas (LNG) from North America, but Wood Mackenzie energy analysts last week warned that the prospects continue to remain far from certain.

In a report issued on Wednesday, the consultancy said the U.S. Department of Energy's (DOE) process for approving additional LNG export licenses has become increasingly politicized.

"For projects able to deliver in the short window before 2018, U.S. LNG exports into the Pacific, in particular, could feature payback periods of less than five years, so U.S. LNG projects able to move quickly enjoy significant first-mover advantages," said Wood Mackenzie's Noel Tomnay, head of global gas research. "However, overall capacity build will likely be constrained by the speed at which liquefaction facilities can be developed to meet this window, with their progress slowed by environmental and regulatory hurdles."

Those hurdles include a study on the potential macroeconomic impact of LNG exports on domestic natural gas prices (see NGI, March 5). Results from the study, which is being conducted by an undisclosed private consultant for the DOE, are expected this spring.

Cheniere Energy Partners LP, through its proposed Sabine Pass Liquefaction LLC facilities in Cameron Parish, LA, holds the only license from DOE's Office of Fossil Energy to export LNG to nonfree trade agreement (FTA) countries (see NGI, May 23, 2011). LNG agreements are in place for a combined 2.1 Bcf/d with four companies (see NGI, Feb. 6; Jan. 30; Dec. 19, 2011; Nov. 28, 2011).

Other applications to export U.S. LNG to non-FTA countries are on hold, pending the results of the DOE's macroeconomic study. However, Tomnay cautioned that it was possible that the DOE could ultimately decide to restrict the number and volume of export licenses to non-FTA countries only. He noted that current applicants are proposing to export a combined 12.5 Bcf/d (97.5 MMtpa) of U.S. LNG.

"Export licenses for non-FTA countries could be determined by proposed projects' place in the filing queue, with those that submitted early better positioned, particularly if a cap is imposed," Tomnay said. "This could result in capacity being approved which may not be the most technically or commercially viable, possibly restricting the pace of capacity build further."

The recent pace of U.S. LNG contracting has had more to do with a tightening global LNG market rather than a weak North American gas market, Wood Mackenzie's analysts noted. And Pacific LNG prices likely will weaken as more U.S. projects -- including the redevelopment of existing regasification facilities and brownfield development -- are brought online. They also predicted that after 2018, incremental U.S. LNG exports to Asia may be restricted by competition, rather than the pace of export approvals, and the exports could face a downturn as well.

In related news, Sabine Pass Liquefaction has asked the Federal Energy Regulatory Commission (FERC) to deny a request by the Sierra Club for late intervention in its LNG export proceeding. "Sierra Club's late intervention will unjustifiably disrupt the proceeding and prejudice the parties," Sabine Pass said in comments filed with FERC [CP11-72]. The Commission has to respond to the Sierra Club request, either before, or as part of its ruling in the overall Sabine Pass case. FERC could vote notationally on the certificate at any time.

Sierra Club filed its protest of the project in late January, arguing that FERC should have done a full environmental impact statement on the project rather than an environmental assessment (EA) (see NGI, Feb. 6). Sierra Club's intervention "was filed almost 11 months beyond the intervention deadline of March 4, 2011, and approximately 15 months after Sierra Club's public acknowledgment of the project," Sabine Pass noted.

As explained in an earlier report, "we do not think the Sierra Club's argument that the Commission should have executed a full environmental impact statement versus an EA poses a significant obstacle to the Commission's ultimate approval of the project. We have not changed this position," said energy analyst Christine Tezak of Robert W. Baird & Co.

Cheniere Energy, parent of Sabine Pass Liquefaction, had asked FERC to issue a siting order for the facilities at its open March meeting, but the request went unheeded. The Commission will issue a decision "as so on as the order's ready," said Jeff Wright, director off FERC's Office of Energy Projects, recently (see NGI, March 26). "There's no deadline for FERC to issue...a siting [decision]...There's statutory [deadline requirements] that deal with rate cases...but nothing that deals with siting."

Sabine Pass "hopes to receive a final certificate from the FERC approving its natural gas export facility before the price guarantees on its EPC [lump sum turnkey engineering, procurement and construction agreement with Bechtel Oil, Gas and Chemical] expire on March 31," Tezak said last week.

Washington, DC-based lawyer and lobbyist David Wochner, a partner with Sutherland, Asbill & Brennan LLP, who has followed the case, said he was "very confused" as to why Cheniere would have set a start date of March 31 given how long it can take for things to happen at FERC. He noted there is considerable, well-funded opposition to LNG exports, particularly from industrials and chemical companies (see related story).

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