Bloomberg News

Gas Export Approval Not Seen Signaling Flood of U.S. Permits

May 17, 2013

The conditional approval of a natural gas export terminal in Texas doesn’t necessarily open the floodgates for overseas sales as the U.S. weighs how best to use its growing energy resources.

The U.S. Energy Department said yesterday that exports from the Freeport LNG project, partly owned by Dow Chemical Co. (DOW:US) and Osaka Gas Co. (9532), according to the venture’s website, offered net economic benefits and reflected the “transformative impact” of record gas production from hydraulic fracturing in shale rock formations.

How much of that bonanza should be sold to non-U.S. customers has been hotly debated in Washington in recent months as the Energy Department weighs 20 applications for export terminals. While industry groups welcomed the decision, analysts were split on how quickly the export facilities will go forward.

“I think we need to see more than one to get an idea of what the pace is going to be,” said Randy Bhatia, an analyst with Capital One (COF:US) Southcoast in Houston. The size and scale and complexity of a project may effect the pace of review, he said.

“We don’t think it’s going to open the floodgates” for the department’s approval of other applications, Mihoko Manabe, vice president and senior credit officer for Moody’s Investors Service Inc., said in a phone interview.

Manabe said she expects the Energy Department to approve LNG export facilities proposed by Dominion Resources Inc. (D:US) of Richmond, Virginia, and Sempra Energy (SRE:US) of San Diego.

Sabine Pass

In addition to the Freeport project, the agency has already approved Cheniere Energy Inc. (LNG:US)’s Sabine Pass export terminal in Louisiana.

“The four facilities, we believe, have a good chance of going forward,” said Manabe, lead author of a Moody’s report issued May 1 on the prospects for natural gas exports.

The decision drew wide praise from industry groups, as they called on the department to quickly approve the remaining applications. The announcement was “welcome news,” said Bill Cooper, president of the Center for Liquefied Natural Gas in Washington. Natural gas is cooled to a liquid so that it can be transported by tanker to overseas markets.

“The rain cloud in that otherwise beautiful sky is we don’t know the timeline for moving forward,” Cooper said in an interview.

Erik Milito, director of upstream and industry operations for the American Petroleum Institute in Washington, said in a statement that the announcement was a “step in the right direction.”

More Pollution

The Sierra Club criticized the decision, saying it would lead to more development of natural gas.

“More drilling means more fracking, more air and water pollution, and more climate fueled weather disasters like last year’s record fires, droughts and superstorms,” said Deb Nardone, director of the San Francisco-based environmental group’s Beyond Natural Gas campaign.

While oil and gas producers have lobbied for unfettered exports, companies including Dow that use natural gas as an ingredient for their products have argued for limits on overseas sales, fearing they could cause prices to rise domestically.

Dow issued a statement supporting the Energy Department’s decision, saying it reflected a “measured and balanced” review of the issue. George Biltz, Dow’s vice president for energy and climate change, said the U.S. should neither block exports entirely nor open the floodgates to overseas sales.

“We like the decision because it’s not in either extreme,” Biltz said in a phone interview.

Import Terminal

Less than a decade ago, when U.S. demand for gas looked like it might outstrip supply, Dow invested in a Freeport import terminal that would now be converted for exports. That investment may mean the company would get revenue from sales to non-U.S. customers, despite its opposition to large export levels.

Biltz said Dow isn’t investing in the multibillion-dollar effort to convert the terminal for exports.

Other limited partners in the Freeport LNG development are Zachry American Infrastructure LLC and Freeport LNG Investments, according to the venture’s website. ConocoPhillips (COP:US) and private investor Michael Smith are co-owners of the management company overseeing the original LNG import facility.

The Energy Department cited the changing energy landscape in announcing conditional approval of the Freeport terminal, which is jointly operated by Freeport LNG Expansion LP, and FLNG Liquefaction LLC. The project calls for the installation of refrigeration units, storage tanks and other equipment alongside its existing gas-import terminal on Quintana Island about 65 miles (105 kilometers) south of Houston.

Transformative Impact

“The development of U.S. natural gas resources is having a transformative impact on the U.S. energy landscape, helping to improve our energy security while spurring economic development and job creation around the country,” the department said in its news release.

Bill Gibbons, a department spokesman, said President Barack Obama’s administration was addressing the issue “in a responsible way” and would weigh applications on a case-by-case basis.

After a preliminary review, it seems “the order provides us everything that we requested in terms of the authorization and we commend the Department of Energy on the thoroughness of their review and consideration of exports and getting to the right result,” John Tobola, general counsel of Freeport, said in a telephone interview yesterday.

If all 20 projects were to win approval, they could ship the equivalent of 41 percent of the total U.S. production this year, according to Energy Department data.

FERC Approval

The Freeport LNG project must still win approval from the Federal Energy Regulatory Commission.

The big hurdle was thought to be the Energy Department, which must decide if the projects are in the national interest. The department concluded that exports from the Freeport facility are “likely to yield net economic benefits” to the U.S.

Freeport would be able to export as much as 1.4 billion cubic feet of natural gas a day for 20 years. In May 2011, the department conditionally approved Cheniere Energy Inc.’s Sabine Pass LNG Terminal in Louisiana for a rate of as much as 2.2 billion cubic feet a day.

The Energy Department’s action yesterday is “an indication that other projects, including our own Cameron LNG, will receive this authorization soon,” Mark Snell, president of Sempra Energy, said in a statement.

The power company is awaiting federal approval for exports from a $6 billion to $7 billion expansion of its Cameron LNG project in Hackberry, Louisiana.

‘Narrow Window’

“There is a narrow window opportunity for U.S. companies to participate in the global LNG market,” Snell said.

In its release, the Energy Department cited an Energy Information Administration forecast projecting production to reach a record 69.3 billion cubic feet a day in 2013.

Senator Ron Wyden, an Oregon Democrat and chairman of the Senate Energy and Natural Resources Committee, said the Energy Department’s decision to review applications individually was consistent with his view that a “measured approach on exports will provide the greatest advantage for the U.S. economy.”

To contact the reporters on this story: Jim Snyder in Washington at jsnyder24@bloomberg.net; Edward Klump in Houston at eklump@bloomberg.net

To contact the editors responsible for this story: Jon Morgan at jmorgan97@bloomberg.net; Susan Warren at susanwarren@bloomberg.net


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