LNG Weighs Anchor

In the face of high U.S. natural gas prices and fears of shrinking supplies, natural gas producers and users are hoping that a bonanza of newly imported liquefied natural gas (LNG) will lead to a future of price and supply stability and better profits.

If their dreams come true, they say the U.S. could see LNG imports boost from less than 3% of daily gas use to 10% by 2010 and maybe 20% by 2025. They point to figures from the Federal Energy Regulatory Commission (FERC) showing that more than 50 new U.S. terminals are approved, proposed, or under discussion, which is a long way from the half-dozen operating today.

How real all this is likely to become remains to be seen. Port communities have raised many objections over frequent arrivals of tankers the size of three football fields carrying 150,000 m³ or more of liquid natural gas, equivalent to more than 3 billion cu ft of gas. Even measures taken for port safety--U.S. Coast Guard escorts of LNG tankers, temporary halts of other port traffic, and so forth--have had the unintended effect of underscoring the potential danger of LNG transports, Boston residents say. A study by Sandia National Laboratories found that an explosion from an LNG shipboard leak, although unlikely, could result in major injuries and significant damage one-third of a mile away from the leak and in people suffering second-degree burns more than a mile away.

Also, the permitting process needed to approve LNG shipments, onshore and offshore terminals, and storage facilities is muddled and under challenge. Some 18 federal, state, and local agencies have some degree of oversight responsibility.

And the cost of the needed infrastructure is substantial, easily topping several billion dollars for a liquefaction facility to turn the gas into liquid, for ships to haul LNG across the world, and for a marine terminal to store and vaporize the liquid, turning it back to gas and then sending it to pipelines.

Despite controversy, FERC recently approved eight new onshore terminals, and the U.S. Coast Guard and the Department of Transportation Maritime Administration have approved three offshore ones. Just two weeks ago, one of the recent approvals, Excelerate Energy's unusual LNG-ship-based regasification system, began piping gas to shore from 116 miles out in the Gulf of Mexico.

Indeed, chemical and gas companies expect the Gulf to open the way for greater U.S. LNG imports, but just a week ago, a coalition of local and national environmental and citizens' groups and charter fishing boat captains filed suit to block construction of a Shell offshore LNG terminal.

LAST YEAR, the U.S. imported nearly 700 billion cu ft of LNG at four receiving terminals. One billion cu ft fills the energy needs of about 3.4 million U.S. households for a day.

Today's level is a big jump over 2003, when the nation received about 500 billion cu ft; but for comparison purposes, in 2003, Japan imported 2,823 billion cu ft, Western Europe received 1,390 billion cu ft, and South Korea imported 900 billion cu ft of LNG.

The profit potential of expanding the U.S.'s and the world's LNG market is not lost on oil and gas companies. In a recent speech, Philip J. Dingle, president of ExxonMobil Gas & Power Marketing Co., noted that LNG's share of the global gas market is projected to double to 12% by 2020, quadrupling today's volume in absolute terms.

He said the gas industry would need to invest about $100 billion a year out to 2030 to meet projected LNG demand. Much of the investment will be directed to markets in India and China, Dingle said, but he boasted that ExxonMobil and Qatar Petroleum had signed two $12 billion deals to build the LNG infrastructure to deliver 2 billion cu ft of natural gas per day to both the U.S. and the U.K. The U.S. portion is geared to begin shipments in 2008 and continue for 25 years, he said.

ExxonMobil has proposed onshore marine terminals and regasification facilities in Texas at Corpus Christi and near Port Arthur and an offshore facility in the Gulf of Mexico with a combined capacity of 4.8 billion cu ft a day.

ExxonMobil is just one of many players hoping to make out if the U.S. turns to LNG. Their hope is not only to sell gas in the U.S., the world's biggest energy user, but also to enlarge the international LNG infrastructure and usher in the economies of scale needed to lower costs and to increase profitability of supplying natural gas to the rest of the world, whose citizens have a growing thirst for energy. ExxonMobil's Dingle believes that gas will fill 25% of the world's energy needs by 2030.

Seven to nine new LNG terminals are projected to be built in the U.S. within a decade. "The industry will move toward larger and larger operations to take advantage of economies of scale," ExxonMobil spokesman Bob Davis says. "Today in Japan, an LNG tanker pulls into Tokyo harbor every day or so. If you fast forward 10 or 20 years, you will see that happening in the U.S."

The U.S. uses about a third of the world's gas and is home to the one of the world's earliest LNG export terminals, in Alaska. It is also the site of the first commercial liquefaction plant and the world's worst fatal LNG accident at that same facility.

In 1944, three years after it opened, the Cleveland LNG storage plant exploded, killing 128 people, injuring more than 200, and stalling construction of more U.S. LNG facilities for nearly two decades, says Damien Gaul, an analyst with the Department of Energy's Energy Information Administration (EIA).

Despite the passing of so many years, this accident is still frequently recalled by LNG opponents to demonstrate LNG's destructive power. They say today's tankers carry five times the amount of LNG stored in the Cleveland plant in just one of their four or five shipboard tanks.

LNG ADVOCATES counter that technologies today are completely different; however, accidents still occur at LNG facilities. In 2003, 27 people were killed when an Algerian liquefaction plant exploded, but the Center for LNG--a trade association of gas, oil, and supply companies--says the Algeria facility is not comparable to plants in operation or planned in the U.S.

FERC, other government agencies, and the gas industry note that in the past 40 years, more than 33,000 LNG shipments have been made without a significant accident or spill.

Some 113 LNG facilities are operating in the U.S., EIA notes. More than 90 of these facilities store natural gas supplies for peak use, taking advantage of the volume reduction gained through liquefaction. EIA estimates that about 86 billion cu ft, or 2%, of all U.S. gas storage is liquefied. This doesn't include marine terminals that receive imported LNG, since the liquid is usually gasified and piped quickly to make way for more shipments.

The oldest U.S. shipside LNG facility is a liquefaction terminal in Kenai, Alaska, which began operating in 1969. It is the U.S.'s only LNG exporter. It ships small amounts (64 billion cu ft per year) of LNG to Japan and is run by ConocoPhillips and Marathon Oil.

The U.S. began construction of its first import facility in 1971 in Everett, Mass. Three others followed: Lake Charles, La.; Cove Point, Md.; and Elba Island, Ga. Imports at the Georgia and Maryland facilities ceased in the 1980s as gas prices fell, and the Lake Charles facility operated on a minimal schedule.

That changed in early 2000 as gas prices and demand increased. FERC notes that these facilities all plan to expand storage by more than 50% in the future.

Until the late 1990s, the U.S. imported virtually all its LNG from Algeria, but in 2003, EIA reports that Trinidad & Tobago accounted for 75% of U.S. LNG imports along with Nigeria, Qatar, Oman, and Malaysia. This is likely to change with bigger ships hauling more LNG from farther away.

Of 11 new approved terminals, eight are onshore and offshore in Texas and Louisiana, two are in the Bahamas with plans to pipe gas to Florida, and one is an expansion of the Georgia facility. Additionally, several terminals are in planning or under construction in Mexico and Canada and are intended to ship some gas to the U.S.

New facilities are also proposed for U.S. urban areas outside the Gulf, but these have been met with loud local opposition from mayors, city planners, residents, and others. In Long Beach, Calif., for example, regulators with the California Public Utility Commission are suing FERC over who has jurisdiction to permit an LNG facility. FERC and oil, gas, and chemical companies want the federal body to be the primary agency in making LNG decisions.

"New England and California consume tremendous amounts of energy, but they don't want to see new facilities in their states," says David Keane, a spokesman with the Center for LNG and an official with British Gas.

Consequently, LNG suppliers have focused most on states along the Gulf of Mexico, where, they note, petrochemical and chemical companies abound and the public has been more willing to accept the problems that occur with industrial concentration in return for benefits and jobs.

"Unfortunately, they are not wrong," notes Aaron Viles, an organizer with the Gulf Restoration Network, a coalition of citizen's groups and others along the Gulf.

Viles is no fan of LNG, but the group says it will not oppose offshore terminals if certain stipulations are met. Last week, however, his group, the Louisiana Charter Boat Association, and the national Sierra Club petitioned a federal court of appeals to overturn a federal permit given to Shell for an offshore LNG terminal.

The terminal will use seawater pumped through an open system to regasify the LNG, heating the water before returning it to the sea. The groups say some 200 million gal of Gulf water a day will be used, killing zooplankton, eggs, and larvae by the billions. The boat captains complain that they face greater ecological restrictions than does Shell.

Along with closed systems for the offshore facilities in the Gulf, they want the government to factor in the cumulative environmental impacts of all LNG facilities planned for the Gulf when issuing permits.

On the other hand, the Louisiana Chemical Association (LCA) plans to position Louisiana as the nation's "LNG import leader."

"Louisiana is very well-suited for LNG development," says LCA's Edward J. Flynn, director of security, safety, and health affairs. "There is an existing infrastructure that already supports LNG, a significant pipeline system, and a large market of industrial gas users in the state. We need to promote development of LNG terminals and fast-track regulatory approvals and construction."

He stresses, however, "We have to have environmental safeguards in place, but without a doubt from the LCA's perspective, we want to see the state as the U.S. LNG leader."

Chemical companies want to tap into these potential new gas supplies. For instance, Dow has put together a deal giving it 0.5 billion cu ft in daily output for a planned regasification plant in Freeport, Texas, next to its huge plant there.

Dow owns a 15% share of the regasification terminal, which began construction on the first of the year. It will get access to one-third of the facility's 1.5 billion-cu-ft daily output. The Freeport plant uses about 0.3 billion cu ft per day, and the company will sell the rest, says B. J. (Jody) Sumrall, Dow business manager for LNG.

A SIMILAR deal has been rumored between DuPont and ExxonMobil for a proposed terminal near DuPont's Corpus Christi facility. However, both companies deny a deal has been struck for the facility's gas, which is planned to bring in 1.0 billion cu ft per day.

Gas coming into the Gulf may travel much farther north, says Ray Mentzer with the Center for LNG. For example, he says an ExxonMobil facility planned for Port Arthur can pipe natural gas to Chicago and even to the Northeast, as well as to the company's petrochemical plant in Beaumont, Texas, using a spaghetti-like pipeline of 11 interconnections.

The chemical industry hopes increased imports of LNG might help ease the gas shortages that have plagued companies.

Industrial gas users draw about one-third of U.S. gas supplies, and the chemical sector, with its need for gas for feedstock and fuel, is the nation's largest industrial gas user, according to EIA. Consequently, the nation's high gas prices--as much as three times above historic levels--have caused chemical plants, fertilizer manufacturers, and other industries with high gas use to shut down U.S. plants or reduce profits. The gas problem has particularly hit methanol, ammonia, and ethylene producers that depend heavily on gas for feedstock. Gas prices have played a key role in flipping the chemical sector from its leading role in providing the nation with a positive balance of trade to being a deficit leader (C&EN, Oct. 20, 2003, page 20).

The chemical industry is particularly worried about projections of increased natural gas demand from electric utilities that may want to move away from coal, a cheaper but less efficient and dirtier fuel for electricity generation. The high cost of gas has curbed utility interest, but EIA figures show that utilities are using less than half the natural gas they have the capacity to burn.

But LNG will not be a "silver bullet," solving the gas crisis for chemical companies, argues Michael S. Parr, DuPont senior government affairs manager.

He worries that LNG may raise the floor price of gas because of the huge capital investments required to bring it to U.S. shores. "It also will expose the U.S. to the same unstable parts of the world that have bedeviled us on other fossil fuels, like oil.

"And if gas prices do drop, electric utilities that have significant idle gas capacity and have been put off due to gas's high price may began to burn more of it, sucking up gas that chemical companies want."

But LNG "absolutely" will play a role in easing gas demand, Parr and most others in the chemical industry say. However, the U.S. needs a national policy change to bring in a more balanced national energy portfolio, expanding all energy resources, he says.

"We need to get gas supply and demand back into balance where prices will allow U.S. chemical companies to be the very dynamic and aggressive global competitors they were a couple of years ago."