North American Natural Gas Seeks Markets Overseas

A slew of multibillion-dollar coastal projects compete to ship super-chilled LNG to Asia and Europe.

North America's natural gas boom is now so big that the industry and its supporters believe it should not be contained to just one continent.

They argue this new bounty should be shared—especially with hungry markets in Asia and Europe willing to pay a high price for the fuel. But long-distance transport of natural gas is one of the world's most expensive engineering feats, and it will require government approvals, community support, and billions of dollars in capital to take North American gas overseas. (See related quiz: "What You Don't Know About Natural Gas.")

Despite the challenges, proposals are now moving forward to make the Chesapeake Bay waterfront community of Cove Point, Maryland, into a global gateway for Pennsylvania shale gas, and to turn the remote British Columbia coastal village of Kitimat into an international energy hub.

Supercool Gas

In all, some 40 new export projects have been proposed in the United States and Canada, giant multibillion-dollar facilities to superchill natural gas into liquid form at -260°F (-162°C) so it can be shipped by refrigerated tanker. This liquefied natural gas, or LNG, takes 600 times less space, making it economical to move by vessel.

The LNG business has been around for decades; Japan, the world's largest importer, relies on such shipments for all of its natural gas. But as the distance between the world natural gas supply and demand centers becomes more clear, price disparities have grown. The International Energy Agency noted last fall that the price of natural gas in the European Union has been running at roughly triple the price in the United States, while Japan has been paying nearly five times as much.

As a result, there is a frenzy of building and planning to build and expand LNG terminals, not only in North America, but in other energy-rich locations such as Australia, the Middle East, and Russia.

Chris Holmes, senior director of global gas and LNG at the consulting firm IHS Energy, said proposed new and expanded international export facilities, a dozen of of which are already under construction, would nearly triple the amount of liquefied natural gas on the market. The increase would likely meet global demand for decades, he said.

"You have a wide [price] spread there and that's the attraction," Holmes said.

Yet industry analysts say many of the proposed export facilities might not get beyond the planning stage because of high costs and stiff international competition. Exporting natural gas by ship requires building massive facilities to supercool the gas. Holmes said these liquefaction facilities cost as much as $10 billion, only part of a $30 billion investment to build a new export facility.

"This is a very challenging business," Holmes said, adding that it can take more than a decade to turn a profit.

A Gas Wedge Against Putin?

The financial realities mean that North American natural gas will not be hitting the high seas anytime soon. That means U.S. energy supplies made bountiful by hydraulic fracturing, or fracking, are not likely to be a useful lever in the short term against the world's other natural gas powerhouse, Russia, in the current crisis over Crimea and Ukraine, experts say. (See related story: "Green Fracking? 5 Technologies for Greener Shale Energy.")

U.S. House Speaker John Boehner has suggested that the lack of U.S. natural gas ports amounts to a "de facto ban on exports," and he has called for President Barack Obama's administration to dramatically expand natural gas production and speed export facilities in order to supplant Russia as Europe's natural gas supplier. But the consulting firm IHS said in a report Wednesday that although the United States is on track to become one of the world's three major LNG exporters by 2020 to 2022, the ultimate impact on European gas supply likely will be limited. (Russia will remain a major gas supplier to Europe because gas sent across the continent by pipeline still will make more economic sense than gas shipped across the ocean.)

However, IHS said the Ukrainian crisis "may promote a shift to simplifying (and expediting)" the U.S. government's export approval process. (See related story: "Russia Raises Natural Gas Threat Against Ukraine.")

Fast Track for Cove Point?

At the same time, environmentalists have clearly stepped up opposition to LNG terminals: Leaders of 16 U.S. national and regional groups this week sent an open letter to Obama. They argued that expansion of U.S. LNG exports would undermine his administration's efforts to tackle the climate crisis. They urged a full federal environmental review of Richmond, Virginia-based Dominion's proposed $3.8 billion project to turn a moribund LNG import terminal at Cove Point, Maryland, into an export terminal.

Last week, the U.S. Federal Energy Regulatory Commission said it intends to complete its environmental assessment of Cove Point in mid-May,  with a decision on federal authorization of the project by August.

The rapid schedule is a disturbing development to some local residents who are concerned about increased air pollution, noise from the liquefaction facility, increased truck and ship traffic, and the risk of explosion or fire from tankers carrying superconcentrated natural gas.

"They are dumping all of this risk on us with no consideration," said retired Navy engineer Dale Allison, who has lived since 1997 in a home less than half a mile from the facility.

"This is a beautiful place where people are happy to live and don't want to hear noise 24 hours a day and breathe pollution," added his wife, Sue. They said they would put their house on the market if the Dominion project gets final approval.

But the project has strong support from Maryland's construction trade unions and U.S. Representative Steny Hoyer, a Democrat who is one of Maryland's most powerful political figures. The three-year construction would provide up to 3,000 jobs, and, once operational, the facility would pump $40 million a year into Calvert County, according to Dominion. (See related story: "Can Natural Gas Bring Back U.S. Factory Jobs?")

On the other side of North America, in Kitimat, a coastal town of 9,000 people in northwest British Columbia, where three separate LNG export projects are proposed, the local economic impact also is a major consideration.

Kitimat Mayor Joanne Monaghan says the terminals are already bringing desperately needed jobs to a community that lost much of its industrial base when a pulp and paper mill closed in 2009.

More than 3,000 workers have traveled from elsewhere in the province for jobs clearing land and doing other work in preparation for construction, Monaghan said. She hopes that number will swell to 10,000 if terminal construction begins. "This was a community of doom," she said. "Now it's a community of boom."

Keeping Low-Cost Gas at Home

But in the debate over North American gas exports, there is another way to look at the economic impact. Even studies that project that increased LNG exports will help boost the U.S. economy conclude that exports will lead to higher domestic natural gas prices.

Not only would Americans pay more for heating fuel, but manufacturers, who use natural gas not only for power but as a feedstock for a wide array of plastic products, would see higher costs as well.

America's Energy Advantage, an industry group that includes Dow, Alcoa, and others, is pushing to keep natural gas exports in check. Trent Duffy, a spokesperson for the group, said exports could stymie the American manufacturing renaissance that is possible due to the low price of domestic natural gas.

If Asian countries want to buy natural gas, Duffy said, they should be required to sign free trade agreements that would lower barriers for all U.S. goods and services. "Why not use what they need most to pry open their markets?" Duffy asked. "Why are [we] giving away the crown jewel?"

U.S. homeowners would bear the brunt of the rising costs.

Scott Morrison, a spokesman for the American Public Gas Association, which represents publically owned gas distribution companies, and is also a member of America's Energy Advantage, said exporting gas will lead to a rise in heating costs, while lining the pockets of energy companies and stockholders. "This looks very much like wealth transfer to us," he said. (See related story: "No Freeze on Winter Energy Prices, Despite Natural Gas Boom.")

A Global Race

Even as LNG project sponsors face a broad array of export opponents, and a  complicated regulatory and financing process, they are racing each other to begin construction.

The Canadian government has approved eight export licenses*, and is considering five other applications. In the United States, there have been 37 LNG export applications, six of which have gained U.S. Department of Energy (DOE) approval, the first step in the regulatory process to export natural gas to countries that do not have a free trade agreement with the United States.

Australia already has three functional LNG export facilities, and seven additional projects under construction. The new facilities have experienced construction cost overruns and delays, but if they are completed, Australia could rival the Middle Eastern giant Qatar by 2020 as the largest exporter of LNG, according to the Paris-based International Energy Agency.

Analysts say projects planned for North America, if built, would put far more LNG on the international market than either Australia or Qatar, so  the United States would rank first and Canada second among gas exporters.

Most experts believe that the capital markets will support construction of only a limited number of LNG terminals—enough to supply, but not flood, the market. Otherwise, the price of the fuel would fall too low to justify the enormous upfront investment.

That has some supporters nervous.

In the United States, construction has begun on only one terminal, the $10 billion Sabine Pass project on Louisiana's Gulf Coast, which is being converted into an export liquefaction facility. The plant was constructed just a few years ago as an import facility, when it looked as though the United States was running short of natural gas. It is a living example of how quickly the global energy supply-and-demand picture can change. (See related story: "With U.S. Natural Gas Booming, a Move to Send It Overseas.")

Meanwhile in Canada, none of the companies has made a final decision on whether the terminals will go forward. Project sponsors have bristled over a proposed 7 percent tax on LNG facility income by the government of British Columbia.

Monaghan, mayor of Kitimat, thinks the province should quickly make a final decision on its tax structure and negotiate with energy companies so her community does not get beaten in the global LNG race.

"The first over the finish line will win," Monaghan said. "And the others will be left behind."

*Editor's Note: One of the companies to receive a license for a project in British Columbia was a consortium led by Shell, which is sponsor of National Geographic's Great Energy Challenge initiative. National Geographic maintains autonomy over content.

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