Environmental Groups Gear Up to Stop US LNG Exports

• The Sierra Club and other groups are taking on US LNG exports just when LNG is gaining support as a key response to Russia's aggressive behavior in Ukraine.

• The science behind their claims does not withstand scrutiny, and their timing couldn't be worse, geopolitically.

A collection of environmental groups, including the Sierra Club, Friends of the Earth and 350.org recently wrote to President Obama, urging him to require a Keystone-XL-style environmental review--presumably entailing similar delays--for the proposed Cove Point, Maryland liquefied natural gas (LNG) export terminal. Given the President’s explicit support for wider natural gas use and the administration's new commitment to our European allies to enable LNG exports, the hyperbole-laden letter seems likelier to rev up the groups’ activist bases than to influence the administration’s policies.

Either way, its timing could hardly be coincidental, coming just as opinion leaders across the political spectrum have seized on LNG exports as a concrete strategy for countering Russian energy leverage over Europe in the aftermath of President Putin’s seizure of Crimea. If, as the Washington Post and energy blogger Robert Rapier have suggested, the Keystone XL pipeline is the wrong battle for environmentalists, taking on LNG exports now is an even more misguided fight, at least on its merits.

Referring to unspecified ”emerging and credible analysis”, the letter evokes the thoroughly discredited argument that shale gas, pejoratively referred to here as “fracked gas”, is as bad or worse for the environment as coal. In fact, in a similar letter sent to Mr. Obama one year ago, some of the same groups cited a 2007 paper in Environmental Science & Technology that clearly showed that, even when converted into LNG, the greenhouse gas (GHG) emissions of natural gas in electricity generation are still significantly lower than those of coal, despite the extra emissions of the liquefaction and regasification processes.

The current letter also implies that emissions from shale gas are higher than those for conventional gas, a notion convincingly dispelled by last year’s University of Texas study, sponsored by the Environmental Defense Fund, that measured actual, rather than estimated or modeled, emissions from hundreds of gas wells at dozens of sites in the US.

It’s also surprising that the letter’s authors would choose to cite the International Energy Agency’s 2011 scenario report on a potential “Golden Age of Gas” in support of their claims. That’s because the IEA’s analysis found that the expanded use of gas foreseen in that scenario would reduce global emissions by 160 million CO2-equivalent tons annually by 2035, mainly through competition with coal in power generation in developing countries, addressing the principal source of global greenhouse gas emissions growth today.

The groups take another wrong turn in suggesting that President Obama increase support for wind and solar power instead of supporting gas. The contribution of new renewables to the US energy mix has grown rapidly, thanks to significant federal and state support, but it remains small. Despite record US wind turbine and solar power additions, shale gas and shale oil added more than 20 times as much energy output on an equivalent basis in 2012, and last year’s gains look similarly disproportional. Simply put, the US isn’t enjoying a return to energy security or becoming a major energy exporter because of renewables. It is counterproductive for renewables to pit them against gas as they have done here.

Experts disagree on how much and how quickly US LNG exports can influence gas markets in Europe and elsewhere. Yet while none of the currently permitted or proposed LNG facilities will be ready to ship cargoes until at least late next year, the knowledge that they are coming will inevitably have an impact on traders and contracts, including contracts for Russian gas in the EU. Whether or not US natural gas molecules ever reach Europe, they can serve a useful role in the necessary response to Russia’s aggression in Ukraine. Attempting to block this for spurious reasons puts opponents in jeopardy of becoming what Mr. Putin in his previous career might have called “useful idiots.”

It’s tempting to speculate on what this new campaign says about the participating groups’ perceptions of how the Keystone XL fight is going. Win or lose, they might soon need a new cause, or face the dispersal of the protesters and financial contributors it has galvanized. Blocking LNG may look conveniently similar--even if similarly mistaken--but I can’t help feeling these groups would gain more traction with their fellow citizens by focusing on what they are for, rather than expending so much energy in opposition.

A different version of this posting was previously published on Energy Trends Insider.

Canada: From Energy Supplier to Competitor?

• In addition to its impact on global oil and natural gas pricing and trade, the shale revolution is altering the energy relationship between the US and Canada.
• This long-standing supplier/customer relationship is becoming more complex as producers in both countries seek new markets outside North America.

In remarks last month the Canadian Natural Resources Minister, Joe Oliver, suggested that with the continued growth of unconventional oil production in the US, "Our only customer will become a competitor." Considering plans for liquefied natural gas export facilities on both sides of the border, he might have included LNG in that comment, too. Let's take a look at the kind of competition he might have had in mind.

Canada has long been an important supplier of crude oil to US refineries, since at least the 1950s. For much of the 1980s and '90s it was in a virtual three-way tie with Mexico and Venezuela for the #2 spot on the list of top oil exporters to the US, behind Saudi Arabia. Since 2004 Canada has claimed first place on that list as its production expanded, while Mexican and Venezuelan output declined and some Saudi oil went to other markets. From 2010 to 2012 exports of Canadian crude oil to the US, including oil sands crude, increased by 23% to over 2.4 million barrels per day (bpd). This has provided Canada with a reliable outlet for its production and the US with additional supplies not exposed--except for price--to ongoing instability in the Middle East and other regions.

However, with or without the Keystone XL Pipeline, the competition to feed US refineries is becoming more intense.  Canada's growing crude exports, including significant quantities of heavy and/or sour crude oil, must displace similar crudes imported into the US from  Latin America and the Middle East without losing ground to the expanded light oil production from US shale plays such as the Bakken and Eagle Ford, and the otherwise mature Permian Basin of Texas and New Mexico. Each of these areas now yields a million bpd. These dynamics are compounded by 1970s-vintage US oil-export rules that keep domestic crude bottled up in the Gulf Coast and weaken the economics of oil production throughout much of North America. 

If it seems odd for a Canadian official to talk about competition within the US market in this way, consider that the main country exempted from current US oil export restrictions is Canada. US oil exports to eastern Canada by rail and by tanker have grown rapidly in the last two years and are likely to expand beyond the current 100,000 bpd level, if export license applications are any indication. US oil exports to Canada may be displacing non-North American crudes today, but they likely also have an adverse effect on the economics of projects intended to ship more western Canadian crude eastward. So Canada now understandably looks towards Asia, home to the world's fastest oil-demand growth, as the logical destination for at least some of its future oil production.

 Natural gas creates another, perhaps more plausible arena for export competition between Canada and the US. Canada envisions a resurgence in gas production similar to what the US has experienced, based on a combination of conventional gas discoveries, such as in the Mackenzie Delta of the Northwest Territories, as well as the shales of Alberta and British Columbia. It also stands to gain additional gas reserves if it is successful in its bid to claim more of the Arctic. As Canadian gas is displaced from its long-standing export market in the US by the shale boom in the lower-48, LNG exports from B.C. are looking more attractive. The province lists five projects in different stages of development and highlights B.C.'s advantageous shipping route to Asia.

Many more LNG export projects have been proposed for the US, with at least four having received approval to sell to countries with which the US does not have free-trade agreements. A number of these are based on existing, or at least previously permitted, LNG import facilities, giving developers a head-start on construction. The US also has a big edge in proved natural gas reserves and technically recoverable gas resources, including shale gas.

Despite these US advantages, aspiring Canadian LNG exporters won't have to contend with an enormous domestic market for their gas, in which many industries are competing to use more gas in power generation, chemicals and other manufacturing, and different paths for displacing oil from transportation, including CNG, LNG, methanol, ethanol or gas-to-liquids fuels. As a result, I suspect that a Canadian LNG plant could count on a more stable long-term cost of gas than one on the US Gulf Coast.

The protracted controversy over the Keystone XL Pipeline project has focused a great deal of public attention on a single aspect of our energy relationship with Canada, while obscuring other aspects that are beginning to shift. Adding a new competitive overlay to our long-standing energy supply chains could ultimately increase North American leverage on OPEC's pricing power, while helping to develop a deeper and more flexible global market for LNG, with resulting environmental benefits. While this might result in winners and losers at the project and company level, the overall effect should be positive for both countries.

A different version of this posting was previously published on the website of Pacific Energy Development Corporation.

Do LNG Exports Threaten the Shift to Gas?

Last week US liquefied natural gas provider Cheniere signed a long-term agreement to sell BG (formerly British Gas) LNG exported from the Gulf Coast. The governor of Alaska was also recently quoted suggesting that his state's surplus natural gas might find a better market in Asia than if sent to the lower-48 via a new pipeline. Both stories indicate just how much the shale gas revolution has altered the US energy balance. They also provide further validation of its likely staying power. Coincidentally, they reminded me that time was running short to respond to my residential gas supplier's offer to lock in an annual fixed price, as I did last year. That's relevant, because even though the risk of a big spike in natural gas prices looks very low now, the prospect of future US gas exports--an unthinkable idea only a few years ago--serves notice that the shale bonanza is also stimulating new segments of demand that compete with existing ones and will tend to drive prices higher.

Cheniere's role in all this looks like a classic lemons-to-lemonade story. Their Sabine Pass LNG terminal and two others in development on the Gulf Coast were designed to import gas and feed it into the domestic pipeline system. They weren't the only ones to pursue this idea, which looked entirely reasonable when they were planned. In the first half of the last decade US gas production was in decline and LNG imports were climbing, facilitated by rising gas prices that made imports at the higher global gas price attractive, at least seasonally. The combination of a surge of shale gas output and the largest US recession in decades turned these plans on their head. Now Cheniere is redeveloping Sabine as an LNG liquefaction and export facility, with construction scheduled to begin next year.

The Wall St. Journal's Heard on the Street column had a good analysis of Cheniere's deal with BG. It closed with the observation that, "...it is natural that excess supply should seek a market." That got me thinking, not just about what I might be paying for natural gas to heat my home in a few years, but about whether exports pose a threat to ambitious notions of displacing large increments of coal-fired electricity with power from gas turbines, shifting large numbers of US cars and long-haul trucks to compressed natural gas (CNG) or LNG, and building new US chemical plants to capitalize on the abundance of shale gas. Most of these plans depend on gas remaining fairly cheap, particularly relative to oil. The current price of natural gas at its key Henry Hub trading point is the equivalent of $22.50 per barrel, a level that we haven't seen for oil since March 2002. Could gas exports drive up domestic prices to the point at which these other uses couldn't compete?

The answer depends both on how much gas would be exported and on the shape of the supply curve for shale gas. If the latter is steep--if not much extra supply can be brought on without requiring big increases in price--then exports could begin to look like a zero-sum-game at the expense of today's consumers and tomorrow's other new uses for gas. However, if large quantities of shale gas are waiting in the wings for only small increases in price, then while all these uses would be in competition with each other, they should be able to coexist at prices that leave gas considerably more attractive than oil, and competitive with both coal and the cheapest renewables. Assessing which view is likelier isn't simple, because it involves multiple shale basins and evolving federal and state regulations, but in general the data I've seen supports the more optimistic view. Many estimates suggest that most US shale plays would produce attractive returns at around $5-6 per million BTUs (MMBTU), compared to current prices around $4, which have left some producers with poor wellhead economics.

If that's correct, then even a big increase in demand from multiple sources, including a stronger economy, additional power generation, new chemical plants and LNG exports, might not boost natural gas prices by more than $1-2/MMTBU before significant additional supply came onstream. (A reality check on that is the sharp drop in the number of gas wells being drilled when prices slid below $6/MMBTU in late 2008, as the recession and financial crisis took hold.) $1/MMBTU sounds like a big jump at the wellhead, but for consumers it would represent an increase of only about 8% after transmission and distribution costs are added. For power generation in efficient combined cycle plants, it would raise costs by less than $0.01/kWh. And for vehicle use, it equates to an extra $5/bbl, or around 12.5 cents per gallon of gasoline-equivalent fuel. Although not trivial, such increases would be smaller than we've seen from market volatility over the last few years.

Putting the Cheniere/BG deal in perspective, the 3.5 million tons of LNG per year involved equate to 0.5 billion cubic feet per day of gas, or 0.8% of 2010 US "dry gas" production (natural gas with the valuable ethane, propane and butane removed.) The facility's total planned capacity of 9 million ton/y works out to 2% of US gas last year. By comparison the Department of Energy has forecasted US gas production growing by about 3.3 BCFD, or 6% in the next five years in their base case, and by up to 14% in their high-shale-resource case. These figures indicate that there's room for several of these demand sectors to expand, including both power generation and LNG exports, without putting intense pressure on prices. This issue is attracting some attention, including from the US Senate, which has scheduled a hearing next week to consider the consequences of gas exports.

Real Trade-offs

In systems with as many complex inter-connections as our national and global energy networks, every decision about new capacity entails difficult trade-offs. It was refreshing to see the New York Times remind opponents of the proposed Broadwater LNG facility of that fact in an editorial today--though I'm not sure that was precisely the Times' intent. We now possess an array of alternatives to expanding the supply of conventional energy. Renewable energy, efficiency technology, and old-fashioned conservation can substitute for many--though not yet all--of the attributes of their "dirtier" cousins. However, this development also shifts the onus of responsibility onto those who band together to block conventional energy projects. It's not enough merely to protect an unsustainable status quo; they must make good on their promised alternatives. If that's not what the Times had in mind when they said, "Broadwater’s critics are committing themselves to bearing the cost of the cleaner, greener way," it should have been.

Having lived within a couple of miles of the Long Island Sound shoreline at the time that the Broadwater LNG terminal was first proposed, I've followed this argument for some time. I still think that Broadwater is conceptually sound; putting LNG capacity near the end-market for natural gas makes more sense than the default option of placing it on the other end of a thousand miles of pipelines and their attendant bottlenecks. Yet I also remain skeptical that Broadwater will ever be built. I really can't imagine a less congenial location for such a facility, whatever its technical merits. Unfortunately, I remain equally unconvinced that the alternatives that are being used to justify turning down Broadwater's permit applications will ever see the light of day. Good intentions for efficiency investments have a tendency to devolve into endless faffing about with the details, and the only large-scale local alternative of which I'm aware, Long Island Power Authority's proposed Jones Beach wind farm, was derailed last year by similar opposition.

So what are the underlying trade-offs, if Broadwater's billion-cubic-foot per day LNG terminal is nixed, but its supply isn't promptly replaced by a combination of renewables, demand-side management, and conservation? Well, residential natural gas prices will stay exceptionally high, and fewer homeowners will convert from heating oil, even after a winter that set new price records for that fuel. That will translate into higher greenhouse gas emissions and local pollution, and more intense competition with Europe and Asia for global diesel fuel/heating oil supplies--and hence higher diesel prices in the future. At the same time, higher natural gas prices and potentially constrained supplies mean that businesses and consumers in the New York and Connecticut markets that Broadwater would serve will pay more for electricity, too, and more of that power will be generated from coal, either locally or from other states with a surplus. None of that bodes well for the economy of a region that is being hit harder than many by the combined effects of the housing market collapse and the inevitable contraction of Wall Street firms.

None of this is inevitable. However, avoiding that outcome will require environmental and other groups to agree on a set of real priorities, and then work to marginalize those members with a proclivity to block everything new. Perpetuating an alliance that, by allowing every subgroup to veto any alternative, is effectively against coal and LNG and nuclear and wind power is a recipe for economic stagnation that ultimately won't benefit the environment, either. So when the New York Times talks about " a serious commitment to energy conservation and serious investments in wind and solar power, and in retooling existing power plants for efficiency and cleanliness," that's not just an argument against LNG; it's an absolute obligation to ensure that the proposed alternatives actually materialize.

Northern Energy Hub

Imagine that you had a wealthy neighbor with an insatiable appetite for something that he had the capability of providing for himself, but apparently not the inclination. It might look like a good business opportunity. This is essentially the situation facing the Canadian Province of New Brunswick, which is at various stages of planning and constructing a new "energy hub" consisting of three big projects, an LNG terminal, a new refinery, and a nuclear power plant, all primarily intended to serve the market in the northeastern US. Yesterday I was interviewed by the St. John, New Brunswick radio affiliate of the Canadian Broadcasting Corporation on whether the expected US demand for these projects is likely to materialize.

Between the call from the show's producer and the actual interview I looked up the electricity forecast for the Northeast from the Energy Information Agency (EIA) of the US Department of Energy. The EIA expects electricity demand to grow by 22% by 2030, compared to 2005. That's somewhat slower than the average for the US as a whole, but still about 0.8%/year, and without any demand factored in for plug-in hybrid cars or other uses not already tapping the grid.

I suggested to the host that the key uncertainties for New Brunswick to consider were energy efficiency, the growth of renewables, and the Northeast's allergy to new energy infrastructure. Efficiency is clearly going to play a role, but will it reduce absolute demand or merely provide new headroom for growth--compact fluorescent light bulbs saving the power to run plasma TVs? Renewables could also satisfy much of the incremental demand in the region, helped along by state Renewable Portfolio Standards and a potential federal RPS, but only if big projects such as Cape Wind and the smaller Long Island wind farm can overcome strong objections by local interests. Nor does it seem very likely that the Northeast will build enough LNG import capacity of its own, given the opposition to projects like Broadwater.

The toughest question I received was for an up or down call on building a nuclear power plant in New Brunswick to supply the US. I hesitated, because it's not yet clear that nuclear power will be widely accepted as "green", even though some prominent environmentalists have endorsed it as a key strategy for countering climate change. The total regional demand growth anticipated by the EIA works out to about 7500 MW of new capacity within 25 years. One new nuke plant would deliver a big chunk of that, and unless its output got that "green e" label, it might face a tough fight for market share. But compared to the likeliest alternative source for baseload power in this period, a coal power plant with carbon sequestration, I think an export-oriented nuclear plant could succeed.

In order for New Brunswick to win the bet it is preparing to make, all that really needs to happen is for the public and governments of our northeastern states to continue doing what they've been doing: using energy in steadily growing quantities, despite high prices, and reacting with hostility whenever someone wants to build new infrastructure to meet their anticipated future needs. Of course, if they heeded the various wake-up calls they've been getting--the Blackout of 2003, climate change, and air quality problems--and suddenly started conserving or investing more, New Brunswick's new facilities might end up sitting idle.

LNG Inkblot

Yesterday my wife returned from the gym and suggested I turn on the TV. "An LNG facility in Dallas exploded. I saw it on the news," she said. The terms "LNG" and "Dallas" struck me as mutually exclusive, but I did as she suggested and saw the burning wreckage on CNN, which mentioned natural gas and cylinders. A quick Google search turned up dozens of reports from local Texas television stations and newspapers running leads such as "Liquefied natural gas tanks explode; send debris onto highway." Of course a day later we know that the accident involved acetylene tanks at a facility that has no connection to LNG. Aside from the fact that the technology involved was in use for decades before anyone even dreamed of liquefying natural gas for commercial purposes, what does the confusion over this event tell us?

For starters, it provides a sort of Rorschach test for the public's perception of LNG. If there are explosions and fire at a facility that has something to do with gas, then it must involve LNG, because LNG is inherently so hazardous. A variety of news organizations didn't bother to check their facts or even refer to their common sense before reporting yesterday's explosions as an LNG accident, which automatically made it national news. I learned a long time ago that it's unreasonable to expect reporters to recognize the visual profile of different industrial sites, but how long would it have taken them to ascertain that LNG facilities are normally found near deepwater ports where LNG tankers--which are pretty large vessels--can dock, not 300 miles inland? Or to do as I did, and search the Dallas area phone directories for industrial gas companies, discovering that there were none that handled LNG? If they had to guess at what was going on, exploding propane tanks would have made a much better working hypothesis than LNG, aside from being more commonplace.

Without inflating a media error into a conspiracy, it does seem remarkable that the initial explanation for yesterday's incident should involve a fuel that most Americans--reporters included--have never encountered outside the press, which has given equal time to the hysterical arguments of LNG opponents who can't differentiate between a chemical fuel and an atomic bomb. To say that LNG has a serious image problem in this country is an understatement, but the consequences of that are affecting consumers' gas bills. The proposed LNG facilities with the best chances of surviving the permitting process are those planned for the Gulf Coast, which is awash with gas, rather than near markets a thousand pipeline miles away, on the wrong side of costly distribution bottlenecks. As long as LNG provokes the kind of response we saw on display yesterday, that's unlikely to change.

Low-Key LNG

It's been some time since I've posted on the subject of liquefied natural gas (LNG), and some interesting developments have occurred in the interim. A couple of new US LNG receiving facilities have recently been approved, including one off Gloucester, MA that connects to tankers 13 miles offshore and relies on re-gasification facilities on the delivering vessel, rather than onshore. That significantly reduces the investment in the LNG terminal, while also lowering the handling risks that form the basis of local environmental and citizens' group opposition to traditional LNG terminal projects. I'm not sure this is the ultimate solution to our growing, long-term gas supply crunch, but it looks like an important component in the transition from North American gas self-sufficiency to year-round LNG imports. In between, there will probably be many years in which LNG imports will be seasonal and opportunistic, and this kind of infrastructure is ideally suited to that situation. It's also very helpful in the development of a global LNG spot market.

Despite its unpopularity in some quarters, LNG offers significant environmental and energy security benefits. While its life cycle of production, transportation and end-use emits more greenhouse gases than domestic pipeline gas, the net emissions are still lower than for coal. And although it represents additional energy imports, it contributes to energy security via diversification. Even if it didn't get us a more reliable group of suppliers than we have for oil, it creates a different supplier mix, and as long as that is not perfectly correlated to the oil side, it diversifies the risk of our overall energy supply portfolio.

The company behind the Gloucester terminal, Excelerate, also operates a fleet of the special tankers necessary to deliver into this kind of minimalist terminal. They own a second terminal on the Gulf Coast that uses the same design, and which entered service two years ago. Another facility in the UK using this technology has just received its first cargo. This design is well-suited to seasonal or occasional use, because it costs much less than a standard onshore re-gasification terminal: under $100 million, versus $ 0.5-1 B for the standard variety. No one can't afford to sink a billion dollars in a terminal that will only be used a few times a year, but a tenth of that cost might make sense, particularly if it contributes to creating a "network effect" for a more flexible LNG market.

There's no free lunch, of course, and the downside of this approach is the higher cost of the special ships that are needed for this trade. As volumes through the Excelerate facilities go up, it's not clear that total shipping and throughput costs would ever be quite as low as those associated with the more traditional arrangement of a simple LNG tanker discharging into an onshore re-gas terminal. But in a country that has not yet come to grips with the true extent of its natural gas problem, and that regards LNG as something alien and scary, this low-profile value chain probably has an edge. By comparison, Shell's Broadwater project proposed for the middle of Long Island Sound remains mired in controversy. Like it or not, the US is going to need more LNG, and Excelerate's approach makes more sense than building the terminals in Mexico and sneaking the gas across the border when no one is watching.