A major barrier to the construction of liquefied natural gas (LNG) import terminals has been lifted by the Federal Energy Regulatory Commission (FERC) in a preliminary approval of the nation’s first new LNG import terminal in 25 years.

At its regular meeting on Wednesday, FERC granted a significant concession to the industry by agreeing to move “open access” regulation downstream of all LNG import terminals to plant tailgates where gas is delivered into interstate pipeline systems. In the future, FERC will treat LNG facilities as the functional equivalent of natural gas production facilities, over which it has no open access jurisdiction, and allow them to charge market-based rates for terminal services.

The significant policy shift was made in the Commission’s ruling on Dynegy’s proposed Hackberry LNG terminal in Louisiana. FERC granted preliminary approval on non environmental grounds to the Hackberry facility, and in another LNG ruling issued a final certificate to an expansion project proposed by CMS Trunkline LNG at its existing Lake Charles, LA, import terminal.

The Hackberry terminal, which is the first new LNG terminal approved for construction in the United States in 25 years, is scheduled to begin operation in 2006. The project was approved over objections from crude oil shippers, including ConocoPhillips, who claimed the extra tanker traffic would create a bottleneck in Louisiana’s Calcasieu ship channel. However, a study prepared for Dynegy concluded that shipping lanes would not be clogged by the new facility.

Hackberry would operate under market-based rates and have the capacity to receive and vaporize 750 MMcf/d initially and be expanded to 1.5 Bcf/d later (see NGI, June 3). The LNG facility, however, still must cross environmental hurdles to receive a final FERC certificate.

Steve Furbacher, president of Dynegy Midstream Services, said the ability to charge market-based rates was “a critical component of this project’s economics. This decision allows us to continue moving the project forward on schedule.”

Dynegy announced plans to construct the Hackberry Terminal in July 2001. The planned facility will be located on the company’s existing liquefied petroleum gas terminal in Hackberry, LA. Dynegy said it plans to continue to move forward aggressively to obtain all necessary permits, to secure supply partners, to explore opportunities to take equity partners in the terminal project and to complete engineering design and contractor selection before moving into the construction phase.

The other LNG project approved by FERC Wednesday will expand what already is the largest North American LNG terminal by adding a second marine unloading dock and enlarging CMS Trunkline LNG’s storage and sendout capabilities (see NGI, Sept. 2). It plans to construct a fourth storage tank, which would increase storage capacity to 9 Bcf from its current 6.3 Bcf; and would almost double its daily sendout capacity to 1.2 Bcf/d from 0.63 Bcf/d. It also plans to build a second unloading dock, giving it the ability to unload two ships simultaneously [CP02-60].

In a related proposal that also was approved, it will increase the deliverability from its Lake Charles terminal into CMS Trunkline’s pipeline system to 1.2 Bcf/d from 1 Bcf/d [CP02-55]. The cost of the proposed expansion is $177.2 million, and it has a targeted in-service date of January 2005. However, the Lake Charles LNG facilities were among the assets that parent company CMS Energy Corp. put on the auction block in early August (see NGI, Aug. 12).

Numerous other LNG facilities are being planned in the United States, both onshore and offshore, and FERC’s new policy is expected to significantly improve the economics of terminal development, according to LNG companies. Mainland LNG import facilities currently have a total capacity of 530 Bcf/year, according to the Commission. But the agency projects mainland terminal capacity will nearly triple to 1,545 Bcf/year, once the facilities that are presently under construction or have received preliminary FERC approvals are completed.

Major LNG developers have been pleading for such a move for some time, arguing that FERC’s open access and open season regulations would force overseas suppliers to go to the “place of least resistance” — Japan and western Europe (see NGI, Oct. 28). On a worldwide basis, LNG demand is expected to double by 2010, Ron P. Billings of Exxon Gas Marketing Co. recently told the Commission at a special conference on the issue. He said that foreign suppliers would be able to pick and choose their markets, and would go to those that have the “least barriers.” The agency’s open-access regulations, while appropriate for natural gas pipelines and storage facilities, would “create difficult and inefficient shipping logistics for suppliers,” Billings said.

The agency’s new LNG policy will apply to both proposed and existing LNG terminals. Under the policy, terminals will no longer have to receive FERC approval of cost-based rates, or submit an open access tariff for terminal service. The Commission, however, will retain jurisdiction over the siting of terminals under Section 3 of the Natural Gas Act.

Commissioner William Massey had warned that such a policy shift could lead to a domestic LNG market that was dominated by large developers, while Chairman Pat Wood said he was concerned it would provide incentives for facilities to withhold capacity from the market. However, both apparently have changed their minds on the matter.

Massey, who was not at the meeting and spoke via telephone, said he now views the LNG facility as “more akin to a production facility” than to a gas pipeline. “We don’t regulate, generally speaking, production facilities, so I am comfortable with this change in policy.” He believes it will be a broad catalyst for the development of much needed LNG terminals. LNG imports are expected to become a much larger component of the domestic natural gas supply mix because of fewer domestic production targets, rising demand and much higher gas prices.

A major proponent of LNG development, Wood said that while he “didn’t come to this industry to remove open access” but rather to squeeze it into the areas where it was needed, he does believe this change in policy is necessary to foster development of much needed new supply sources.

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