A veto next month of the Compass Port Clean Energy LNG import terminal by Alabama Gov. Bob Riley could doom the project, according to a ConocoPhillips official, because it would force the company to restart the application process, causing a lengthy delay, and would require a switch to a closed-loop vaporization model that could double the cost of operations over a 20-year period.

Riley has until June 11 to make a decision and indicated in a May 5 letter to Louisiana Governor Kathleen Blanco that he supported her veto of McMoRan Exploration’s Main Pass Energy Hub liquefied natural gas (LNG) import terminal offshore Louisiana. Blanco vetoed the project because of its use of an open-loop vaporization process, which uses sea water to vaporize the LNG, potentially causing adverse impacts on marine life (see Daily GPI, May 23).

“Governor Blanco and I have been discussing this for several weeks and we’re both in agreement,” Riley said. “I strongly support her veto and commend her for this decision. Our concern is not with the company but rather the open loop technology it plans to use. In Alabama, we continue to support the development of LNG, but not at the expense of our marine resources and our coastal environment.”

If he vetoes the project “we have a decision to make,” said Steve Lawless, manager of LNG permitting at ConocoPhillips. “We have to step back and say, ‘do we want to go through this again? If the Maritime Administration changes the rules a little bit [excluding the use of open-loop vaporization], we will have to ask whether we even want to go through that process again. Do we go down a path with a terminal that no supplier would ever want? I don’t know what the decision would be. We are looking at the alternatives.”

Lawless said a shift to a closed loop system, which uses gas to heat the LNG, would cost the company $20-30 million initially and $30-40 million during each year of operation given $5/MMBtu gas prices. That’s an $830 million cost increase over a 20-year period that would be passed on to LNG suppliers.

“Over a 30-40 year life of the project, that starts to be real money,” said Lawless. “But what’s important about the additional cost of a closed loop system is that you are going to ask a foreign supplier to accept that additional cost as they send their gas through that regas facility. And if you are already in an offshore environment, which is much more expensive on a capital cost basis to begin with compared to onshore, you are now asking a supplier to pay for the additional offshore expense and the additional operating expense of a closed loop. Now the terminal does not look that attractive anymore. If you don’t have the supply, you don’t have a project.”

Lawless said offshore LNG terminals already cost 50-100% more per MMBtu than an onshore LNG import terminal based on equipment, labor, construction time and materials.

“We’ve submitted the application as a closed loop system. That’s the application we will be sticking to and need to stick to,” he said.

“We don’t believe the governor has indicated which way he will go on the project,” said Lawless. “In our view each project is different. This is about delivering a package of guarantees to the governor. All of our gas is going through Alabama. We think our project is different enough that it [warrants a fresh look]. There has been no blanket statement from the governor that this is where he stands on all facilities.”

He noted that unlike McMoRan, ConocoPhillips has offered a package of guarantees to its host state, including the option of calling on 200 MMcf/d of the imported product. “We provided him an environmental guarantee of essentially no net impact on [Alabama’s] fisheries. There are energy guarantees and economic guarantees. We’ll spend at least $100 million in Alabama on construction. We’ll spend at least $15 million per year on operation. We’ll hire at least 70% of the work force from Alabama. Those are all guarantees that we will provide to Alabama based on the acceptance of the current application.” He indicated that all that may be off the table in the event of a veto.

“We don’t know which way the governor will go on our project. We think he is still being open minded and is still listening to all sides.”

ConocoPhillips also is a partner in the Freeport LNG terminal, which is under construction in Freeport, TX. The company has 1 Bcf/d of Freeport’s capacity. But Freeport is the company’s only solid alternative currently for bringing in LNG. ConocoPhillips also is a partner in the Sound Energy Solutions LNG project being proposed in Long Beach, CA. And it has filed an application for the Beacon Port Clean Energy terminal offshore Louisiana, which would utilize an open loop vaporization process.

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