Romney, Obama Seen Favoring U.S. LNG Exports

The United States' future as an exporter of liquefied natural gas (LNG) will hinge on a number of factors, not just on which presidential candidate is elected next month.

The Obama administration last month delayed, for a third time, an independent study of the cumulative economic impacts of LNG exports, citing the complexity of the dynamic market. The report, which is a precondition for approval of additional exports, is now due to be released in late December.

Despite the delay, the Obama administration appears to be generally supportive of approving a reasonable amount of U.S. LNG export terminals, said Benjamin Salisbury, policy analyst with Washington, D.C.-based FBR Capital Markets.

"The Obama administration appears to be generally supportive of a reasonable amount of LNG export approvals," FBR Capital Markets & Co. analysis Benjamin Salisbury told Rigzone in an interview. "We don't see his potential reelection as negative."

Michael Butler, CEO of Seattle-based Cascadia Capital, sees a Romney presidency as more favorable for U.S. LNG export projects. However, an “Obama presidency wouldn't be so debilitating for natural gas," Butler told Rigzone.

Obama, who initially was a big supporter of green energy and clean energy, is now trying to take credit for the surge in U.S. natural gas supply after the Solyndra meltdown and flight of investment dollars from renewable energy projects to the natural gas sector, Butler noted.

"He wasn't willing to come over to this point of view, but the reality is starting to face him," Butler commented.

Both President Obama and Romney have made several comments supporting natural gas in general, said Bill Cooper, President of the Center for Liquefied Natural Gas.

"We are confident that either one would be supportive of LNG exports," Cooper told Rigzone.

U.S. LNG imports, which peaked at nearly 2.4 billion cubic feet per day in 2007, have fallen substantially as the growth in North American gas production due to shale gas, according to an Oct. 18 report by RBAC Inc., a company that develops and licenses management decision support systems for the energy industry. As a result, LNG facility backers are now seeking to outfit existing U.S. LNG import facilities with liquefaction equipment to ship LNG overseas.

Proponents say U.S. LNG exports will benefit the United States by creating construction jobs, and generate revenue to reduce the U.S. trade deficit through LNG sales and federal, state and local government tax revenues. Romney and some Republican lawmakers have been pressuring the Obama administration and DOE to approve LNG exports as part of an all-of-the-above policy.

However, some U.S. politicians and environmentalist groups have called for the U.S. Department of Energy (DOE) to delay approving U.S. LNG exports over concerns that more LNG exports would result in more hydraulic fracturing.

Congressman Ed Markey (D-Mass.) has also spoken out against LNG exports, saying that LNG exports would raise domestic gas prices. A preliminary analysis by the U.S. Energy Information Administration (EIA) indicated exports would raise domestic gas prices, peaking by 14 percent or $.70 per million cubic feet (Mcf) if 1 billion cubic feet per day (Bcf/d) is added from 2015 to 2021, or 6 Bcf/d.

Markey earlier this year introduced legislation that would prohibit the Federal Energy Regulatory Commission (FERC) from approving LNG export facility applications until 2025.

Additionally, large industrial consumers of gas have warned that LNG exports would take away supply that could be used as a feedstock in the manufacturing and chemical sectors.

"We continue to see the existing law as highly favorable to LNG exports but expect political sentiment to further trend against exports," according to an Oct. 2 FBR analysts' note.

While FBR maintains its expectation of 6-8 Bcf/d of low-hanging fruit for export approvals in the foreseeable future, growing risks of project delays exist from litigants seeking to slow down the process.

Factors That Could Influence U.S. LNG Exports

Under the current law, the president has absolute legal authority to approve exports. The formal influence of a member of Congress would only be to change the law. However, there is often informal influence by Congress over presidential decisions, such as key Democrats who have questioned LNG exports, said Salisbury.

One example is Sen. Ron Wyden (D-Ore.), who is likely to serve as chair of the Senate Energy Committee, has called for a pause on LNG exports, which many think means he is really opposed to U.S. LNG exports, Salisbury said. In a September 21 research note, FBR estimated a 47 percent likelihood that the Democrats will win the 51 seats needed to control the Senate and 31 percent likelihood that Republicans will win the Senate majority. This factor could also play a role in influencing LNG exports.

Significant portions of the complicated permitting approval process for LNG export applications, including subsequent litigation, offer numerous opportunities for construction delay, according to FBR. A timeline of five to seven years from first filing to operation of proposed U.S. LNG exports seems reasonable, but extensive environmental studies and project disruptions based on technicalities or seemingly unrelated laws and regulation can still occur even after a project is approved.

FBR notes that Cheniere's application for its Sabine Pass LNG export project received relatively little disorganized opposition. Since then, industrial and environmental groups have filed to intervene in pending applications. Sierra Club has argued that export licenses should require DOE to prepare an environmental impact statement to asses the impact of expanding "destructive natural gas fracking", FBR said, noting that expanding the scope of the EIS could add significant time and uncertainty to the process.

FBR analysts see the environmental review process by the Federal Energy Regulatory Commission (FERC) as a significant barrier to new construction of export facilities. Brownfield projects, or existing LNG facilities that will have liquefaction capacity added, will likely facethe easiest time navigating the "arduous environmental review process", according to FBR. Projects in Gulf Coast states, which are generally more infrastructure friendly than the U.S. West Coast and Northeast, are also more likely to be approved, Salisbury said.

While FERC oversees the design, construction and operation of LNG facilities and the surrounding environment, DOE regulates the import and export of LNG to both free trade and non-free trade countries. The U.S. states also effectively have a veto over the process through a number of required approvals, FBR noted.

It's tough to know which particular projects DOE might favor, said Tim VandenBerg, senior vice president at Washington Analysis Corp. "We know that some terminals, such as Dominion's Cove Point, face site-specific legal challenges that could delay them."

Under current law, a rebuttable presumption exists that proposed gas exports are in the public interest, requiring opponents to demonstrate that the export is inconsistent with the public interest, according to FBR.

DOE considers all relevant issues, including domestic need for gas and the impact on the U.S. gross domestic product, consumers, industry, U.S. balance of trade and jobs creation. Theoretically, DOE would have to approval them all.

The rush of capacity projects creates a challenge for the Administration in calculating the cumulative economic impact of projects, potentially limiting and rationing approvals, according to FBR analysts.

"Without a rationing mechanism, operators would risk having export licenses reconsidered in the future if economic consequences materialize."

In its approval of Cheniere's Sabine Pass project, DOE emphasized its authority to revisit the permit if the cumulative levels of approved exports prove contrary to the public interest, FBR noted in its Oct. 2 report.

Applications to export to FTA countries are to be granted without modification or delay, but the list of FTA countries that fit the criteria is short, said Cooper.

"The list of FTA countries that fit the criteria are big LNG users except for South Korea," Cooper commented. However, many LNG export applicants would like to export to Japan and other major LNG consumers who are not on the FTA list.

Cooper sees the macroeconomic study as the biggest potential impediment to the United States becoming a major LNG exporter. Nobody knows anything about the study's parameters, or the third party company DOE commissioned to conduct the study, Cooper told Rigzone.

Regardless of who occupies the Oval office, the outlook remains favorable for DOE to approve additional export authority to non-FTA countries, said Tim VandenBerg, senior vice president at Washington Analysis Corp.

"There is a general belief that a handful of terminals will be approved," VandenBerg told Rigzone. "We know that with each approval the DOE will raise the bar, due to domestic price/supply concerns, and eventually there will be a hiatus in approvals.

Where DOE will draw that line is very uncertain," VandenBerg said. "Likewise, it's not clear in what order DOE will process the applications it has received."

Cooper noted that DOE's stated policy is that a competitive LNG export marketplace should be allowed to flourish in the United States with minimum regulatory impediments.

"When we look at domestic needs and whether LNG exports will adversely impact consumers, all the studies show an ample supply of gas in the United States to meet current growing demand for residential, manufacturing, power generation and transportation while allowing some LNG exports," Cooper commented. "There has been no credible evidence introduced by opponents to show otherwise."

The timing of when DOE will move forward with making decisions on the list of LNG export applications is uncertain, and may be similar regardless of which candidate is elected president, Cooper noted.

If Obama is re-elected, DOE will release its macroeconomic study at year-end. The study's release will be followed by a public comment period. DOE then will need to follow up on those comments to determine whether the study should be revisited. This means that DOE may not move forward in its decision-making process until mid-year.

If Romney is elected, he wouldn't be sworn in until late January. By the time he gets his administration lined up, the timing of when DOE would begin approving more LNG export applications would likely be around the same time as a second Obama term.

The fact that supply and demand is a moving target also will impact the amount of LNG that is exported from the United States. By 2013, nearly 2.7 Bcf/d of essentially non-priced related demand growth is expected to occur due to coal production shutdowns, new gas-fired power generation plants and nuclear power plant downtime, FBR analyst Rehan Rashid said.

"This tightening market and price movement could affect the third-party analysis and public response," said Rashid.

He forecasted in an Oct. 2 report that the supply/demand realignment will raise average 2013 prices to $4.50/Mcf.

"If the active rig count were to stay at current historically low levels, we would expect net aggregate supply to be down 1.6 Bcf/d in 2013 and another .7 Bcf/d by 2014."

Additional investment in LNG export projects will be a likely consequence of export approval, FBR said, with Haynesville gas capable of meeting incremental export demand in the politically viable $4.50 through $5.50 range.

The supply curve for U.S. natural gas is fairly flat, between $3.50 and $5, VandenBerg noted, suggesting a large supply response to rising prices might stem from added demand from LNG exports.

"This reality underpins advocate's support for exports."

Perhaps the key factor in the fate of LNG exports is the Asian pricing structure and whether it de-links from oil, VandenBerg commented. This could upset the pricing arbitrage that underpins terminal economics.

"It's the linkage to oil prices that results in such high gas prices in Asia," VandenBerg noted. "Why should they pay so much for gas if prices are so much lower elsewhere in the world?"

Price differentials between North American and Asia Pacific Rim/Europe gas prices could begin to narrow as a result of the significant market resistance that has begun to develop in Asia and Europe to the linkage between oil and gas prices.

"Such a narrowing would not necessarily preclude North American LNG exports, but they could affect their prospects," said Dr. Thomas J. Woods, senior energy analyst, in RBAC's Oct. 18 report.

Investments to liquefy North American gas production for delivery to Eastern Hemisphere markets are unlikely to be made without long-term, baseload delivery agreements, Woods said in the report. Such agreements will be based on either a desire to diversify supply sources, even if delivered North American LNG prices are somewhat higher than other sources or expectations that North American LNG will be competitive with other, principally Eastern Hemisphere LNG sources.

"Because most non-North America liquefaction plant-gate prices are likely to be comparable to or lower than North American liquefaction plant-gate gas prices, transportation charges will play a critical role in the competitiveness of North American LNG exports," according to the report. "The greater the shipping distance advantage for North America LNG, the larger its competitive cushion to compete for market share."

However, the emergence of North American LNG as a new supply could play a critical role in weakening the oil-gas price linkage in world gas markets, providing some solid prospects for near-term growth, the report noted.


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