Where to Put Liquefied Natural Gas (11/05)

The following column by AGI/AIPG Geoscience & Public Policy Intern John Vermylen is reprinted from the November 2005 issue of The Professional Geologist, a publication of the American Institute of Professional Geologists . It is reprinted with permission.

“Gas production has peaked in North America,” said ExxonMobil CEO Lee Raymond at a June 2005 Reuters energy summit. This striking pessimism from the head of the world’s largest publicly-traded petroleum company contrasts with official U.S. government projections. The Energy Information Administration (EIA), the independent statistics and analysis agency within the Department of Energy, projects that total U.S. natural gas production will increase from 19.0 trillion cubic feet (Tcf) in 2003 to 24.0 Tcf in 2025. Despite the disagreement, both ExxonMobil and the EIA believe that natural gas consumption in the United States, which was 22.8 Tcf in 2003, will continue to grow beyond domestic supply, increasing to 31.4 Tcf by 2025.

The energy industries, as well as analysts at the EIA, believe that imports of liquefied natural gas, or LNG, will be able to make up for a domestic supply shortfall. LNG can be shipped in special tankers from natural gas producers all over the world, including those with large natural gas surpluses. The EIA estimates that LNG imports will make up about 15% of U.S. natural gas consumption
by 2025.

This projected growth in LNG imports is not without opposition, particularly among citizens living near proposed LNG terminals. They argue that safety and environmental problems make LNG a bad choice to become a significant component of the U.S. energy supply. Although the total volume of imported LNG will be primarily dependent on the interplay of production, demand, and technology, government policy will have a significant impact on the shape of this development, especially regarding the local siting of LNG import terminals.

One of the largest challenges to using natural gas as an energy source is in transporting the fuel from production sources to consumer markets. Safe, long-distance transportation of natural gas by pipeline was largely solved after World War II, enabling efficient utilization of domestic gas supplies in the United States and other countries. However, some industrial countries lacking domestic gas supplies are too far from foreign sources to import gas by pipeline. This problem spurred the initial development of the LNG industry, primarily serving Japan and South Korea. Export facilities in producer countries cool natural gas to -260ºF, where it is stable at atmospheric pressure in a liquid form. The liquefied gas is shipped in specialized tankers to the importing countries, where it is heated and regasified before being sold in domestic markets. Technological advances in liquefaction, shipbuilding, and regasification have over time reduced costs throughout the LNG supply chain, thus making imports more economically competitive in countries with domestic natural gas supplies.

The U.S. has been a small participant in the global LNG trade since the 1970’s. Four LNG import terminals were built in that decade, but they have been underutilized until recently. In 2004, total U.S. LNG imports were 652 billion cubic feet (Bcf), almost triple the 228 Bcf imported in 2002. Almost all current U.S. LNG imports are from Trinidad and Algeria, with much lesser amounts coming from the Middle East, Malaysia, Australia, and Nigeria.

Increased demand of natural gas in the U.S. is being led by the electric utilities, which are using more natural gas because of its lower environmental impact compared to other fossil fuels and the relatively low capital costs to build gas turbine power plants. This strong demand pushed U.S. natural gas wellhead prices to $6.69 per thousand cubic feet in July, more than triple the 2002 low prices of $2.19.

With gas prices expected to stay high for the foreseeable future, energy companies are looking to increase their investments in LNG facilities. Proposed LNG terminals are subject to an assortment of federal, state, and local regulations. With the push for more import terminals, the specifics of government jurisdiction over LNG facilities have been a major concern at the federal and state level. In the Energy Policy Act of 2005 that was passed and signed this summer, Congress clarified the federal role in the siting of onshore and nearshore LNG import terminals. The Act asserts that the Federal Energy Regulatory Commission (FERC) has authority over siting, construction, and operation of onshore and nearshore LNG terminals. FERC must follow all federal regulations relevant to LNG terminals, including Department of Transportation safety rules and National Environmental Policy Act procedures. State governments
retain oversight rights from the Clean Air Act, the Clean Water Act, and the Coastal Zone Management Act. However, FERC has ultimate authority in approving projects, even if a state or local community is opposed. In contrast, states retain veto power over terminals more than three miles offshore; these terminals are supervised by the Department of Transportation’s Maritime Administration (MARAD).

As of August 2005, FERC has approved twelve new terminals while MARAD has approved two. Most of these terminals will be sited in the Gulf of Mexico, causing relatively little opposition from a region already abundant with petroleum industry infrastructure. Twenty more facilities are currently proposed, twelve under the authority of FERC and eight under the authority of MARAD. With many of the proposed terminals located near heavily populated areas of southern California and the northeast, opposition to these LNG facilities has been stronger.

Safety is the primary concern cited by those opposing LNG facilities. While LNG facilities have a relatively safe record worldwide and a 2004 Department of Energy study indicates that an explosion would not greatly affect areas outside of a setback zone, many communities remain unwilling to accept any risk. For example, the proposed terminal in Long Beach, California, would likely be rejected by local and state officials. However, with the failure of Sen. Dianne Feinstein (D-CA) to insert an amendment into the energy bill that would have given governors veto power over LNG projects, FERC will now make the final decision about the project.

Opposition to LNG facilities is also fueled by environmental and import dependency concerns. LNG is a non-renewable energy source that emits greenhouse gases, which have been attributed to global climate change. The expansion of LNG imports also makes our economy more dependent on foreign energy sources. Fortunately natural gas supplies are not as concentrated worldwide as oil supplies, making it unlikely that we will soon become dependent on Middle Eastern sources of natural gas. Even given the relatively optimistic EIA estimates for growth, LNG imports will supply only about 3.5% of total U.S. energy in 2025, much less than the 27% that oil imports are expected to supply.

Complex market forces will ultimately determine production, consumption, and price for natural gas over the coming years. Congress, through passage of the Energy Policy Act of 2005, has decided that the federal government will have the largest role in siting LNG terminals. States will play a smaller role, though they are likely to closely monitor federal oversight and appeal any decisions that trouble local communities. Whether these types of decisions should be made at a federal level or at a more local level has been an almost constant argument since the founding of our country. The LNG policy debate will continue, even with the recent clarifications in the energy bill.

John Vermylen earned his Bachelor's in Geology from Princeton University, and returned to school to pursue a PhD in Geophysics from Stanford University following his internship. John has a strong interest in carbon sequestration research, and while at AGI he followed developments in national energy policy as well as natural hazards and mining legislation for the Government Affairs Program.

This article is reprinted with permission from The Professional Geologist, published by the American Institute of Professional Geologists. AGI gratefully acknowledges that permission.

Please send any comments or requests for information to the AGI Government Affairs Program.

Posted November 10, 2005

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