Winners & losers as US re-writes LNG export rules

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The US Department of Energy (DoE) has proposed changing the rules governing the process of granting export approvals to LNG ventures in the lower 48 states. If approved after consultation, the change would be good news for those projects making progress with environmental approvals but stuck way back in the queue for export approvals.

The DoE has also recognised just how big a stampede has developed to export LNG from the US. It is now planning new studies to determine the economic impacts of export volumes between 12 Bcf/d (about 90 mtpa) and 20 Bcf/d (150 mtpa. Previous studies considered volumes of 6 Bcf/d and 12 Bcf/d. Some observers believe that export volumes could rise above 100 mtpa, making the US a bigger exporter than Australia or Qatar.

In addition, the DoE has published for consultation two new environmental studies: one looking at the impact of unconventional gas exploration and production activities, the other analysing the implications of life-cycle greenhouse gas (GHG) emissions arising from LNG exports from the US.

The proposals: A response to how the US LNG export industry has developed over the past couple of years – make a lot of sense.

To go ahead, proposed projects need an export licence approval from the DoE and environmental approval for siting, construction and operation from the Federal Energy Regulatory Commission (FERC) – or, in the case of offshore projects, the Maritime Administration (MARAD). The former is relatively cheap and quick to prepare and file, even for projects that intend to export to countries with which the US does not have a Free Trade Agreement (non-FTA countries).

Costly and time-consuming: However, getting FERC approval can take up to two years at a cost of up to $100 million, according to Charif Souki, CEO of Cheniere, the only company to have completed both processes to date.

So, under the current arrangement, it is possible for a project to complete its FERC approval but then find itself stuck in the ever-lengthening queue of applications for licences to export to non-FTA countries. (Getting a licence for FTA countries is a mere formality, which takes very little time indeed, but most big LNG importers are non-FTA countries.)

An obvious example is the Golden Pass project sponsored by Qatar Petroleum and ExxonMobil. It has been making good progress with its FERC application but is still ninth in the queue for a DoE non-FTA export licence determination. Since the start of 2013 the DoE has completed six such applications (for five projects), an average of one every three months.

At that rate, Golden Pass could face a frustrating – and costly – wait of over two years, despite it being one of the most credible contenders, thanks to the deep pockets and LNG experience of its sponsors. The three-train 15.6 mtpa project would be a conversion of an existing regasification facility at an estimated cost of around $10 billion – a specific capex of just $640/tpa of capacity.

What the proposals mean: So far, the DOE has been processing applications on the basis of an order of precedence published in December 2012. It has been granting approvals on a conditional basis, subject to projects getting the required environmental approvals, and only then issuing a final determination. Only one project, the four-train Sabine Pass project (pictured above) sponsored by Cheniere has so far been given a final export licence.

Under the new proposals the current published “order of precedence” would be scrapped, along with the practice of issuing conditional approvals. Instead, the DoE is proposing to review applications and make final public interest determinations only after completion of the environmental review required by the National Environmental Policy Act (NEPA). So the FERC/MARAD process would become the key driver.

Chris Smith, Principal Deputy Assistant Secretary for Fossil Energy at the DoE, said: “The proposed changes . . . will ensure our process is efficient by prioritising resources on the more commercially advanced projects, while also providing the department with more complete information when applications are considered and public interest determinations are made . . .

“The department will make the proposed procedural change and environmental reports available for a 45-day public review and comment period.”

The practice of issuing conditional authorisations to export LNG to non-FTA countries was designed to provide regulatory certainty before project sponsors and the FERC spent significant resources on environmental review.

“However,” said Smith, “market participants have increasingly shown a willingness to dedicate the resources needed for their NEPA review prior to receiving conditional authorisations from the DoE . . .

“By considering for approval those projects that are more likely to actually be constructed, the DoE will be able to base its decision on a more accurate evaluation of the project’s impact on the public interest. The DoE will also be better positioned to judge the cumulative market impacts of its authorisations in its public interest review.”

The importance of ”cumulative impact”: It is this issue of cumulative impact that is likely to create winners and losers from the proposed changes. At some stage it is likely that the DoE will decide that enough is enough, because of the likely economic impacts of very large volumes of gas exports. So position in the queue for export approvals could well end up being the deciding factor in whether or not a project can go ahead.

Again, this makes good sense, given that it would not be ideal to have projects getting export licence approval, and possibly then getting bogged down in other matters, and thus preventing more viable projects from going ahead.

As Smith points out: “While it is not assured that all projects for which NEPA review is completed will be financed and constructed, projects that have completed the NEPA review are, generally speaking, more likely to proceed than those that have not.”

That may not be much comfort for projects getting bounced back from the front of the queue.

Article by Alex Forbes