The U.S. LNG Policy

Jennifer Reese

ChE 384 - Energy Technology and Policy

12/8/05
Abstract

Natural gas demand is rising in the United States, while the country is reaching the limits of its domestic production. One solution to the nation’s gas demands is to increase LNG imports. Currently, LNG imports account for about 1 percent of our gas supply, but analysts expect that percentage to increase to 20 percent by 2025. Historically, LNG projects have been discouraged by the government to protect domestic gas production, but increasing gas prices, plateauing domestic production, and decreasing capital costs are attracting many companies to the U.S. LNG market. Proposals for regasification terminals are dotting the coastlines.

LNG projects are evaluated on a basis of available global supply, import capacity, the ability to integrate supplies into our existing infrastructure, security from natural disasters and terrorist attacks, protecting the environment, and ensuring public safety. Many government entities are involved in this approval process, including the Federal Energy Regulatory Commission (FERC), the United States Coast Guard, the Department of Transportation, the Environmental Protection Agency, as well as others.

The most controversial piece of LNG policy has been where to locate the new terminals. Local communities often oppose having a terminal in close proximity to their houses, but locating a terminal near consuming markets minimizes transportation costs, and imports the gas where it is most needed. The other option is to use the existing pipeline infrastructure and import the gas to the producing regions of the U.S., which avoids pipeline construction that would be required to get near-to-market terminals connected to consumers.

It is likely that the United States will need LNG to meet the nation’s rising gas demand and declining production, andthe government is currently investigating the infrastructure, policy, and other implications of greater U.S. LNG imports to ensure future supplies.

The U.S. LNG Policy

Introduction

Natural gas demand is rising in the United States, while the country is reaching the limits of its domestic production. Many in the government and the petroleum industry are encouraging greater imports of liquefied natural gas (LNG) to meet the nation’s demand. Currently, LNG imports account for about 1 percent of our gas supply, but analysts expect that percentage to increase to 20 percent by 2025.[1] The government is currently investigating the infrastructure, policy, and other implications of greater U.S. LNG imports.

LNG Political History

President Ford was the first president to create an explicit administration LNG import policy. In February of 1976, Ford proposed limiting all LNG imports to under 1 TCF per year. This limit would be set to minimize the country’s dependence on foreign energy. President Ford’s energy message also called for the Energy Resources Council (ERC) to develop a comprehensive national LNG import policy.2

In turn, the ERC created an LNG task force to create the new import policy. This task force evaluated all of the issues surrounding LNG, including import quantities, pricing regulations, government financial assistance for LNG projects, contingency plans for shortages, siting requirements, and safety regulations. This task force recommended limiting LNG imports to 2 TCF per year, with a max of 1 TCF from a single country, and categorized the stability of LNG exporting countries based on the country’s political and economic strategies.[2] The task force did not support government financing of LNG projects, nor did it create specific siting and environmental regulations, leaving those issues up to state and local authorities. However, they did recommend that all projects have a contingency plan submitted with the application.

President Carter introduced the National Energy Plan (NEP) and the Energy Organization Act to Congress. Passed in 1977, this act removed the import limits placed on LNG only a year earlier.2The Energy Organization Act also called for a case-by-case review of every LNG import application, on a basis of security of supply, vulnerability to interruptions, safety policies, siting issues, and pricing. This act also placed the LNG task force under the Department of Energy (DOE). The Economic Regulatory Administration (ERA) and the Federal Energy Regulatory Commission (FERC) were created within the DOE to perform regulatory acts, including the approval of LNG imports.2

From government research, the DOE reported that LNG imports do not add to foreign dependence because it helps diversify fuels, and that LNG is safer and has less of an adverse impact on the environment than coal, oil, or nuclear energy. However, the DOE also deemed LNG to be a low-priority gas source that should be discouraged.2 LNG projects would be viewed cautiously, because the DOE prefers that natural gas comes first from conventional U.S. sources. It is up to the DOE to determine if an import project will discourage development of future domestic gas sources, or help meet energy needs.

Recent Policy

All LNG tankers entering U.S. waters must now comply with the Maritime Transportation Security Act (MTSA) of 2002[3], an anti-terrorist regulation put into place after security concerns arose from the September 11th terrorist attacks. Vessels must have certified security plans and procedures, as well as be equipped with automatic identification systems that also track position.

In 2003, The U.S. government implemented two policy changes to encourage development of new LNG import regasification terminals. The Deep Water Port Act was amended to include provisions for natural gas, CNG, and LNG, placing offshore LNG terminals under the jurisdiction of the United States Coast Guard (USCS).[4] Under their control, permits will have discrete timelines. The Federal Energy Regulatory Commission (FERC) has jurisdiction over onshore LNG terminals and recently ruled that LNG plants will now be treated like gas processing plants, meaning they will no longer require open-access regulation. This policy will allow the development of integrated LNG projects, which can help reduce associated risks and increase profitability.

The Liquefied Natural Gas Import Terminal Development Act was introduced to Congress in May of 2004 in response to public and state criticism and opposition to LNG terminal siting. Quoting the act, “Except as otherwise provided by Federal law, no State or local government may require a permit, license, concurrence, approval, certificate, or other form of authorization with respect to the siting, construction, expansion, or operation of a liquefied natural gas import terminal."[5] California, as well as other states, are voicing opposition and preparing to sue to ensure their right to have a say in the siting, placement, and regulations placed on LNG regasification terminals. This Act also created a new branch dedicated to LNG within the Office of Energy Projects department of FERC.

Jurisdiction

The United States Coast Guard (USCG) has jurisdiction over the costal waters of the U.S., including operations at LNG terminals and the transportation of the LNG by tanker. The USCG escorts all LNG tankers once they enter U.S. waters. The Department of Transportation (DOT) regulates LNG tanker operations and sets the standards and safety regulations for tanker equipment. The Federal Energy Regulatory Commission (FERC) oversees the onshore pieces of LNG projects, mainly the regasification terminals. FERC issues the permits for the regasification terminals, and is responsible for ensuring the safety at the facilities. FERC is also in charge of maintaining a competitive environment for supply and pricing. The U.S. Environmental Protection Agency (EPA) and state environmental agencies set the air and water standards with which the LNG industry, and other industries, must comply. The U.S. Army Corps of Engineers is responsible for maintaining and dredging the waterways so that the LNG tankers have access to the regasification terminals. The Office of Fossil Energy, part of the U.S. Department of Energy, helps to coordinate across federal agencies that have regulatory and policy authority over LNG.

U.S. LNG Import History and Projections

LNG has been used in the United States since the 1940s. Initially, excess domestic production was liquefied and stored for reserves when gas demand peaks. Not until the 1970s did the U.S. start to import LNG to supplement domestic gas demand. Between 1971 and 1981, four LNG terminals were built in the U.S., but two of the terminals quickly closed when gas prices decreased. The current locations of LNG terminals are shown below in Figure 1. The United States is the only country to export and import LNG, and in 1969 the first exporting terminal opened in Kenai, Alaska.

Figure 1. Existing LNG Terminals[6]

In 2002, U.S. LNG imports were only 0.17 Tcf, less than 1% of U.S. natural gas supply,1 but demand for natural gas has been steadily increasing since 2002. Domestic gas production may have plateaued, making LNG projects much more attractive. A small margin between supply and demand has made gas prices volatile. Figure 2 shows the fluctuation in gas price, especially in recent years. The price for natural gas has risen from around $2.00/Mcf through most of the 1990s to an average of nearly $5.00/Mcf at the start of 2005. However, LNG prices are falling because technology has lowered production and transportation costs for LNG projects, and supplies have increased.

Figure 2. U.S. Natural Gas Wellhead Price ($/Mcf)

The Energy Information Administration (EIA) forecasts an increasing need for LNG imports over the next 20 years. The EIA as well as others, expect LNG to account for 12 to 20% of the national gas consumption in 2025.1 EIA’s projection places U.S. imports at 4.8 Tcf in 2025, which equates to a market share of 15%, up from about 1% currently. The EIA gas forecast is shown in Figure 3, showing the increase in LNG relative to other sources.

Figure 3. EIA Natural Gas Supply Prediction1

The promise of increasing LNG imports and high national gas prices are attracting many companies to LNG projects. Along with expansions at the four existing terminals, six to ten new import terminals will be needed to meet the 4.8 Tcf LNG imports the EIA projects for 2025. Developers have proposed over 40 new terminals with a combined annual import capacity over 10 Tcf, though it is unlikely all of these terminals will be approved. Figure 4 shows the locations of the approved and proposed LNG terminal locations in North America, showing that the Gulf coast, southern California, and the New England area are the hot spots for LNG.

Figure 4. Locations of Existing and Proposed LNG Terminals[7]

Key issues in U.S. LNG Policy

With all of these new LNG terminals proposed, a lot of the recent U.S. LNG policy focus is on where terminals should be located, how to incorporate LNG into the nation’s existing gas infrastructure, how to secure projects against accidents or terrorists, and how secure LNG supplies will be in the future.

Terminal Sighting

Probably the most controversial piece of LNG policy has been where to locate the new LNG terminals. As pointed out in Figure 4, many of the developers are trying to build terminals in proximity to major consuming markets like southern California and the Northeast. Local communities often oppose these near-to-market terminals, because no one wants to have the regasification terminal in their “backyard.” Developers, because of the strong opposition, have withdrawn many proposed LNG projects. In some cases, state and federal agencies are at odds over the LNG terminal approval process, especially with the Liquefied Natural Gas Import Terminal Development Act asserting the sole jurisdiction of siting to the federal agencies. The California Public Utilities Commission (CPUC) has opened investigations into proposed California terminals, and has ordered the developer to apply for a separate state siting permit, and is challenging FERC’s claim that it can preempt state jurisdiction.1 Similarly, Alabama is trying to ban onshore regasification terminals, and is calling for all terminals to be located offshore and connected to the mainland via pipeline.

Developers propose these terminals near consuming markets to avoid pipeline bottlenecks, minimize transportation costs, and import the gas directly where it will be utilized. Often, the regasified LNG can be delivered to consumers cheaper than domestic production can be transported via pipeline. This is especially true for the Northeast, where gas is transported in from the Gulf of Mexico. If new terminals were built far from consumer markets, delivered gas might cost more than if LNG terminals were built locally.

Pipeline Connections

As LNG increases market share, LNG projects will directly impact pipeline infrastructure needs. Importing the LNG near consuming markets requires more investment and the construction of additional pipelines to get the gas to consumers. Many advocate integrating the increasing LNG imports into the existing pipeline system. If the LNG were imported into regions where gas is currently being produced, the pipeline system is currently set up to distribute the gas, and fewer new pipelines will need to be constructed. The availability of pipeline capacity directly affects pipeline transportation costs, so it is an important consideration in LNG project economic comparisons. However, gas is expensive in places like Boston where there are few distributing connections from the main pipeline, and pumping more gas into pipelines in the Gulf isn’t going to help.1 Therefore it is unclear whether adding LNG supplies to traditional producing regions will be less costly than building in-market terminals and adding regional pipelines.

Security

Many of the policies the federal government creates, are done so to assure safety and security and to protect the public from an LNG accident or terrorist attack. As LNG terminals and tanker shipments increase, so will the risks and the cost of protection. One of the most significant public expenses is the cost of Coast Guard escorts for all tanker shipments of LNG, ranging from $20,000 to $80,000 per shipment, putting marine security costs at $56 to $116 million annually by 2025.1 Whether the costs of security should be assumed by industry may become an issue in the near future.

Supply

Because each terminal and tanker handles a large volume of LNG, there is the potential that one facility could bottleneck supplies. A disruption at a U.S. import terminal or a supplier’s export terminal could affect regional gas availability. Natural disasters, terrorist attacks, labor strikes, and political relations all have the ability to impact the pricing and availability of natural gas. The future sensitivity of U.S. natural gas markets to LNG terminal disruptions is difficult to forecast and will be driven by factors such as supply diversity and pipeline development. Nevertheless, the concentration of incremental gas supplies to a few regasification terminals may raise new concerns about the security of U.S. natural gas supply.

Federal Reserve Chairman Alan Greenspan asserted that increasing LNG import capacity would create “a price-pressure safety valve” for U.S. natural gas markets and would be “likely to notably damp the levels and volatility of American natural gas prices.”1 For this to be true, there needs to be sufficient worldwide LNG production to supply incremental U.S. demand and sufficient global infrastructure to transport it. Liquefaction terminal and LNG tanker production capacities, both current and future, appear to be keeping ahead of LNG demands, meaning that both short-term and long-term global LNG demands are likely to be met, as currently projected.

Another supply concern is how the creation of a natural gas cartel similar to the oil cartel OPEC could affect supplies and pricing. OPEC members currently control nearly 50% of proven world gas reserves and 52% of global LNG production capacity.1 When non-LNG sources are taken into consideration, the OPEC share of the global gas supply will be about 5% in 2010. Competition between traditional pipeline transportation and LNG imports makes the natural gas market different from the crude oil market.

Continued growth of U.S. demand for LNG may affect trading and political relationships with other LNG consuming countries such as Japan and South Korea, and developing countries like China and India. Others are concerned about becoming dependent on another foreign energy source, and the drawbacks of having to deal with maintaining supplies from regions perceived as politically unstable or inhospitable to U.S. interests. It is difficult, if not impossible, to predict the relationships between importers and exporters over a long time period. However, experience suggests that global LNG trade may introduce new risks and opportunities among trading countries that policymakers need to be aware of.

Policy Recommendation

After reviewing the current LNG policy, one area stands out as being especially problematic. LNG developers currently face multiple, often competing state and local reviews that lead to permitting delays. A typical regasification terminal is estimated to take over five years from initial permit application to commencement of imports. Streamlining and coordinating different departments such that more work could be done concurrently, instead of waiting for one department to finish its analysis, will speed up the approval process. The national energy status and energy capacity will be better understood instead of basing other decisions off unknown variables and potential terminals that later are canceled. Each process step should also have a specified timeline or deadline, so that projects will either be approved or declined, instead of leaving projects in limbo.