The time for doubt is past. The US is well on its way to becoming a major LNG exporter – on a scale to rival Qatar and Australia. Export capacity could exceed 100 million tonnes per year by the early 2020s – 40% of the current global market. The US Department of Energy certainly seems to think so. The implications of this are profound: for US gas consumers, for natural gas markets around the world, and for proposed LNG export projects elsewhere. (This is part I of a two-part series based on own research by Alex Forbes.)
One of the unforeseen consequences of North America’s shale gas revolution can be fairly described as one of the most dramatic industrial turnarounds in history.
A decade ago the conventional wisdom was that the United States was on its way to becoming a major importer – perhaps the world’s largest importer – of liquefied natural gas (LNG). In the US itself there was a stampede to build import and regasification facilities, amounting to many billions of dollars of investment. In Qatar, Yemen, Angola and elsewhere, LNG exporters geared up to construct huge production facilities, representing investments of many more billions of dollars, with the US as the main target market.
This conventional wisdom was shattered by the unconventional gas revolution that began to take hold in North America in the latter half of the 2000s.
As the implications of that started to become clear, there was a growing realisation that the US would not after all have any need for LNG imports on any scale. However, as recently as the first half of 2010, several large energy companies were adamant that the US would not go as far become an LNG exporter – that remained unthinkable.
But not to everyone. Charif Souki is CEO of Cheniere Energy, one of the companies that had invested in a large import facility in the state of Louisiana: Sabine Pass. He reasoned that with the US awash with cheap gas – and prices much higher in Asian and European markets – it would be a good idea to convert Sabine Pass into an export facility. It already had the required storage tanks and ship handling facilities. Why not build some liquefaction trains? Such a “brown-field” conversion could be done at relatively low cost, certainly when compared with green-field projects in Australia or Siberia or off the coast of eastern Africa.
In August 2010, Cheniere applied to the US Department of Energy (DoE) for a licence – under Section 3 of the Natural Gas Act (NGA) – to export LNG to countries that have a Free Trade Agreement (FTA) with the US. Getting such a licence is little more than a formality, but even today the only major LNG importer in this category is South Korea. So shortly afterwards Cheniere applied for a non-FTA licence.
In making these applications the company set in motion a remarkable series of events, the full implications of which are only now starting to unfold.
As of September 2014, just over four years later, the DoE had received 42 applications from companies wanting to export LNG to FTA countries, for a total volume of 41.0 billion cubic feet per day (Bcf/d), and another 35 for non-FTA countries, amounting to 37.6 Bcf/d. These volumes are not additive as most projects have applied for both FTA and non-FTA licences for the same capacity, but the idea of the US exporting around 40 Bcf/d of gas is mind-boggling.
To put it in context, total US gas production in 2014 is expected to be around 72 Bcf/d. Or, to look at it another way, the entire LNG market in 2013 was around 240 million tonnes (Mt), equivalent to 32 Bcf/d. Clearly, only a fraction of the proposed projects could hope to go ahead, because of the limitations of the market if nothing else.
How big will US LNG get?
The big question now facing the LNG industry is, of course, how many of these proposed projects will run the course and get through the construction phase and into operation. There are many interested parties, among them: consumers of gas in the US, some of whom fear that large-scale exports could drive up prices; LNG buyers, who hope that US LNG could be a cheaper and more flexible alternative to supplies from elsewhere; and the sponsors of proposed LNG projects in other countries, who worry that US LNG will be damaging competition.
The question can be looked at from a number of perspectives. To begin with the emphasis was on how many projects the DoE would grant non-FTA licences to. However, to become credible contenders, projects also need to gain environmental approval from the Federal Energy Regulatory Commission (FERC) – or in the case of offshore projects, the Maritime Administration (MARAD) – to site, construct and operate their plants under the National Environmental Policy Act (NEPA).
Getting an FTA export licence is a simple matter of getting a lawyer to draft an application and sending it off to the DoE with a cheque for $50. The DoE is obliged to grant approval (unless there are very exceptional circumstances). Getting a non-FTA licence is a little trickier, as the DoE has to make a determination that the exports would not be against the public interest. Before making a public interest decision, the DoE has to issue a Federal Register Notice of Application seeking comments, protests and motions to intervene. According to one Cheniere executive, this process can cost around $20,000.
The big differentiator is the FERC NEPA approval. According to Souki, total costs to get this approval can exceed $100 million and time taken can be up to two years. So filing for FERC/MARAD approval is a big sign of commitment.
Reforming the licencing process
The DoE recently acknowledged the importance of this by reforming the process it uses to grant export licences. Before the reform, confirmed in August, the DoE had been processing applications on the basis of an order of precedence published in December 2012. It had been granting approvals on a conditional basis, subject to projects getting the required environmental approvals, and only then issuing a final determination. So far only three projects have been granted final non-FTA export approvals (and one of those is a small-scale project whose volumes are negligible when compared with the large-scale projects).
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,” says Chris Smith, Principal Deputy Assistant Secretary for Fossil Energy at the DoE, “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.”
So, today, a simple way of assessing how many projects are likely to make it into construction and operation is to look at how far through the NEPA approval process they have managed to get.
Runners and riders
Table 1 shows the front-runners.
The FERC approval process consists of two phases: the first is a pre-filing stage, which projects have to spend a minimum of six months on; this prepares the ground for what is known as a “formal application”, which can take up to eighteen months or more. The table shows those projects which have either already been approved or which have entered the formal process and have been issued with notices setting out the approvals timetable.
* The four 4.5 million tonne per year (Mt/y) trains of Cheniere Energy’s Sabine Pass project are well into the construction phase and expected to come on stream between 2016 and 2018. All of the 18 Mt/y output is committed to buyers.
* Cameron LNG recently reached FID on its three-train project and preparations for construction are under way. Total capacity is 13.5 Mt/y of which 12 Mt/y is committed. FERC approval has been granted.
* Freeport hopes to begin construction of its first two 4.4 Mt/y trains this year and the third next year, giving total capacity of 13.2 Mt/y. The capacity of all three trains is committed and FERC approval has been granted. Final approval for non-FTA exports is imminent.
* Dominion’s Cove Point Liquefaction Project could begin construction of its single 5.25 Mt/y train this year. Capacity is fully committed and the project has conditional non-FTA approval. FERC approval is likely very soon.
* The two 4.5 Mt/y trains of the Sabine Pass Liquefaction Expansion could enter the construction phase as early as late 2014/early 2015, adding another Mt/y. The capacity of train 5 is committed.
* Cheniere’s second project, Corpus Christi, will initially consist of two 5 Mt/y trains, giving a total of 10 Mt/y. A third is planned but no dates have yet been set. Cheniere has made good progress with marketing the capacity. Construction is due to start in early 2015.
* The Jordan Cove project is the latest to get a FERC scheduling notice, putting the 6 Mt/y project on track for approval in May of next year.
These seven projects alone – all of which are highly credible – give a total capacity of 75 Mt/y (counting only the first two trains at Corpus Christi). The six projects in table 2, which have entered the formal FERC process, but have yet to receive a scheduling notice, amount to another 57 Mt/y of capacity. Together the projects in tables 1 and 2 add up to a capacity of 132 Mt/y. To put this in context, Qatar’s current export capacity is 77 Mt/y and Australia is expected to overtake Qatar by around the end of the decade.
A further four projects are in pre-filing, and several others have yet to make a FERC application of any kind.
A word of caution: just because projects have completed the approvals process does not necessarily mean they will go ahead. Project sponsors also have to sell capacity to buyers and will need to secure large amounts of finance for what are multi-billion dollar ventures. Wood Mackenzie, an energy consultancy, believes that capacity of 80 Mt/y is likely, but concedes that this figure carries a significant level of uncertainty. Another point to bear in mind is that not all the capacity that is built will necessarily be fully utilised. After all, look at what happened with the US regasification projects.
Tomorrow, in part II, the author will discuss the implications for US gas consumers, how the new business models will affect the way LNG business is done and what the likely impacts will be on LNG supply projects elsewhere.