While saying liquefied natural gas (LNG) still has a role to play in California's future energy portfolio, Gov. Arnold Schwarzenegger on Friday rejected Australia-based BHP Billiton's proposed offshore LNG receiving terminal project, Cabrillo Port, on the basis that it failed to meet environmental standards.

In the end, the governor agreed with his state agencies that had concluded the project would result in "significant and unmitigated" impacts on air quality and marine life. A BHP spokesperson said the company was formulating its response and it doesn't know when or what action it will take in the future. The company won't disclose how much it has spent to date on the California offshore project, according to a Houston-based spokesperson.

"We respect, but are disappointed by the governor's decision," the spokesperson, Patrick Cassidy said. "For the past four years, we have worked cooperatively with state and federal officials. We have designed and redesigned our project along the way to meet the concerns that regulators and members of the public expressed in hundreds of meetings since 2003 when we first filed the applications. Now, we need time to consider all of the comments made."

Schwarzenegger said he encouraged other companies to look at the objections raised to Cabrillo Port by the California State Lands Commission and California Coastal Commission and come back with alternative approaches. In that regard, earlier this month, the sponsors of another offshore LNG project, the Clearwater Port, committed to take stepped-up air emissions mitigation measures. They made the pledge to federal and state air quality regulators (see Daily GPI, May 17).

Under current federal law for offshore terminals falling under the purview of the U.S. Coast Guard and federal Maritime Administration (MARAD), the governor of the state involved has approval/rejection authority in the process. In that regard, Schwarzenegger wrote MARAD's top administrator, Sean Connaughton, to tell him of his decision. The letter cites potential adverse air quality and marine life impacts against which the project sponsors allegedly provided insufficient mitigation.

"I have always said that California needs to diversify fuel sources for California consumers with cleaner alternatives such as LNG," Schwarzenegger said in his statement accompanying copies of his letter to MARAD. "We need a diverse, dependable and environmentally sound mix of energy supplies to meet the needs of our people and our economy. And as California continues to lead the nation in efforts to expand renewable energy resources, guaranteeing a steady source of clean-burning fuel takes on even greater significance.

"LNG can and must be an important addition to California's energy portfolio. However, any LNG import facility must meet the strict environmental standards California demands to continue to improve our air quality, protect our coast, and preserve our marine environment. The Cabrillo Port LNG project, as designed, fails to meet that test."

Schwarzenegger told MARAD in his letter that California agencies already have determined the state needs LNG, as outlined in the 2005 Integrated Energy Policy Report, and it continues to import 87% of its natural gas supplies. He stressed that the wholesale price of natural gas in the state has doubled since 2000, and that in turn has driven up electricity prices, which are among the highest in the nation.

"LNG can, and must, be an important addition to California's energy portfolio," the governor wrote. "I believe an offshore LNG facility can be constructed along the coast that meets California's stringent environmental standards."

The governor stressed that in the future, as further possibilities of an LNG facility off California's coast arise, "it is important to understand that there are numerous approaches to offshore LNG and that there are many diverse projects currently being proposed by different companies that are pursuing state approval. I encourage companies to come forward with a plan that considers the objections raised by state agencies, local officials and communities so we can bring much needed diversity to California's energy portfolio."

Even with another negative response, LNG proponents remain active in California, and on the eve of a deadline for Schwarzenegger's action, some continued to attempt what critics consider politically impossible -- siting an LNG terminal somewhere along the Southern California coast. The longest-running proposal to site a terminal in Long Beach harbor is still alive as are four separate offshore terminal proposals.

Jointly sponsored by units of Mitsubishi and ConocoPhillips, the backers of the Sound Energy Solutions (SES) terminal at Long Beach hope to have their legal appeals resolved in the next two months. Representatives are continuing discussions with government and community officials and running a series of advertisements in the Long Beach Press-Telegram urging that the aborted environmental impact review (EIR) process be completed on SES's proposed $800 million, 1 Bcf/d receiving terminal.

Last February, SES asked a state Superior Court in Los Angeles County to force the port to complete the job it took on jointly with FERC more than three years ago. It filed a writ of mandate asking the court to order the harbor commissioners to complete the job (see Daily GPI, Feb. 12).

"We feel pretty good right now," said Tom Giles SES COO for the project. "Another newspaper ad will appear Wednesday with a lot of supporters saying 'Finish the EIR,' so I think that and Monday's ad are pretty impressive." He still expects the environmental review and a final EIR/EIS (environmental impact statement) to be completed, and that it will not require any major changes in SES' current plans for receiving and processing LNG.

The combined ports of Long Beach and Los Angeles, which together make up the nation's busiest harbor, are both interested in using LNG in port operations to begin cutting into a severe air pollution problem for the growing amounts of diesel burned in harbor equipment and vehicles and the tens of thousands of trucks hauling away cargo from the ports daily.

To date, after separate public hearings along the Southern California coast the first two weeks of April, the U.S. Coast Guard has endorsed the 3,000-page EIS and report, even though it cites nearly two-dozen environmental and safety problems. The state lands and coastal commissions separately rejected the environmental review and strongly questioned the need for the project.

Clearwater Port's sponsor, NorthernStar Natural Gas Inc., said May 15 that its upgraded environmental approach was appropriate given the onshore environmental concerns and should be followed by the three other offshore LNG terminal proposals in the area. It is a move obviously to head off some of the environmental concerns that undercut BHP's offshore LNG project.

While pledging to apply best available control technology to curb emission sources and compliance with the local air quality standards, NorthernStar has committed that as part of its regasification process it will "significantly reduce emissions" through the use of ambient air vaporizers (AAV), CEO William Garrett said in letters to the Ventura County Air Pollution Control Board and federal Environmental Protection Agency Tuesday.

Clearwater Port will employ "modern temperatures and offshore winds" to warm the LNG until it returns to its gaseous state, Garrett told both Michael Villegas, Ventura's air pollution control officer; and Amy Zimpfer, associate director of the EPA's air division in San Francisco. By taking its voluntary actions, Garrett said NorthernStar hopes that "jurisdictional ambiguities" will be eliminated and what he called "appropriate local air board standards" eventually will be applied to his project.

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