Freeport LNG CEO ‘disappointed’ by US export ruling

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The United States’ Department of Energy announced in November that it had approved yet another application to export LNG to countries with which the US does not have a Free Trade Agreement – taking the total number of non-FTA approvals to five for an overall volume of 6.8 Bcf/d. However, its decision not to grant the full volume applied for by Freeport LNG has left the company’s CEO, Michael Smith (pictured above), “disappointed” and complaining that “they’re basically making up the rules as they go along”, according to a report published by Platts.

Freeport LNG, which won a non-FTA approval for 1.4 Bcf/d for its first two trains last May, had applied for a licence to export another 1.4 Bcf/d, covering its third train and a possible fourth. However the DoE approval is for just 0.4 Bcf/d.

A bit of a squeeze: The 1.8 Bcf/d total volume that has been approved is equivalent to around 13.6 mtpa, only slightly more than the combined nameplate capacity of the first three trains, each of which will be rated at 4.4 mtpa, giving a total of 13.2 mtpa. However Smith is hoping to squeeze up to an extra 15% of capacity from each train, which would give a total volume of just over 15 mtpa. It is common for LNG trains to produce more than their nameplate capacities.

Fortunately for Freeport, one of the five customers it has already signed up is South Korea’s SK E&S. South Korea has an FTA with the US that came into force in March 2012, so those volumes do not require a non-FTA licence. It is the only major LNG-importing nation to have an FTA with the US and the DoE is obliged by law to grant approvals for exports to FTA countries except in exceptional circumstances. In the case of non-FTA countries the department has to determine whether exports will be in the public interest.

That said, the SK E&S liquefaction tolling agreement (LTA) is for only half a train’s-worth of capacity – 2.2 mtpa – so even excluding those volumes the approved non-FTA volume of 1.8 Bcf/d looks rather tight. It is not clear how the decision may affect the company’s plans to possibly construct a fourth train. Presumably Freeport would have to apply for another non-FTA licence –  but would have to join the back of a queue that now numbers 20 applications.

Why the limit? Explaining its decision to limit the non-FTA volume to 0.4 Bcf/d, the DoE said: “[Freeport LNG] has notified FERC (the Federal Energy Regulatory Commission) that the liquefaction project will have a liquefaction capacity of 1.8 Bcf/d of natural gas – not the 2.8 Bcf/d requested in total. There is no basis for authorising exports in excess of the maximum liquefaction capacity of a planned facility.”

What is odd about this explanation is that the DoE has already authorised the full 2.8 Bcf/d volumes for export to FTA countries (the FTA and non-FTA volumes are not additive). Its decision may have something to do with the criteria it published in December 2012 regarding the order in which it planned to process the outstanding non-FTA applications. It decided at that time to give priority to projects that had already made applications to the FERC. Perhaps the DoE was concerned about a possible legal challenge from projects still waiting in the queue.

Freeport LNG has sold all the nameplate capacity in train one to Japanese utilities Osaka Gas and Chubu Electric; train two has been sold to BP; while train three has been sold to SK E&S and Toshiba Corporation.

In a video recently posted on the company’s web-site, Smith says: “This group of world-class companies speaks volumes for the quality of our project, our site. It is by far the best line-up of customers of any of the proposed or currently under construction export facilities in the US.”

Next in line: Commenting on its policy regarding the processing of the 20 applications still in the non-FTA export licence queue, the DoE said:

“The Energy Department will continue to process the applications currently pending on a case-by-case basis, in the order of precedence previously detailed. During this time the Department will continue to monitor any market developments and assess their impact in subsequent public interest determinations as further information becomes available, including the EIA’s Annual Energy Outlook Report at the end of 2013.”

The next two projects in the queue are Cameron LNG and the Jordan Cove Energy Project.

by Alex Forbes