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Wolf Richter

Wolf Richter

Wolf Richter has over twenty years of C-level operations and finance experience, including turnaround situations and startups. He went to school (BA, MA, MBA) and…

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LNG Exports: Obama Sides with the Oil & Gas Industry

It was announced Friday afternoon, when no one was supposed to pay attention: after years of controversy, heated rhetoric, intense lobbying, and stiff opposition from some unlikely bedfellows, with multinational industrial and chemical companies weighing down one side of the bed, and environmentalists tossing and turning on the other, the Obama Administration decided in favor of the US oil and gas industry. With geopolitical ramifications.

The Department of Energy “conditionally authorized” Freeport LNG Expansion LP and FLNG Liquefaction LCC (Freeport) to export domestically produced liquefied natural gas to countries with which the US does not have Free Trade Agreements (PDF, 132 pages). Already allowed are exports to the 20 countries with FTAs – most of them in the Americas, but also Australia, Korea, Singapore, Israel, Jordan, Bahrain, Oman, and Morocco. But exports to the remaining 180 or so countries have to jump through some hoops.

So Freeport’s LNG Terminal on Quintana Island, Texas, is now authorized to export 1.4 billion cubic feet per day (Bcf/d) of LNG for 20 years to those non-FTA countries. Freeport joins Cheniere Energy Inc.’s Sabine Pass terminal in Cameron Parish, Louisiana, with an export capacity of 2.2 Bcf/d. Freeport’s and Cheniere’s combined capacity would amount to 5.2% of US production (estimated at 69.3 Bcf/d in 2013). Other companies are cooling their heels in line at the DOE, which would, as it said, “process the applications currently pending on a case-by-case basis.” At snail’s pace. The administrations sole concession to environmentalists.

“DOE has had the remaining applications on its desk for months and should ensure that these applications are approved without any further delay,” groused Erik Milito, of the American Petroleum Institute, a trade association representing over 500 oil and gas companies.

Related article: US LNG Exports … Who We Like

Hurdles remain. DOE approval is just another step. The plants will have to get a permit from the Federal Energy Regulatory Commission (FERC) and must pass an environmental review, which could be a nail-biter. And none of the plants are up and running yet.

Then there is an unknown: how will world markets react to this additional supply that competes with at least 63 LNG export terminals currently planned or under construction worldwide? US production can rise to meet that new demand, as the gas glut in recent years has demonstrated in its bloody manner. But for production to rise significantly, the price – which is still below the cost of production for most “dry” gas wells – must rise as well.

Industrial and chemical companies that use natural gas for energy or as feedstock are deeply worried. Would they end up having to pay European prices? Or catastrophically, Japanese prices? The gas industry and its pundits have feverishly assured them that LNG exports would have “only minimal impacts” on gas prices in the US. Yet, the moment DOE announced its decision Friday afternoon, natural gas spiked about 3%, before retracing some of it.

The largest potential customers for LNG are Europe and Japan – staunch allies of the US. Europe is furiously trying to break the stranglehold that Russia’s Gazprom has on its gas supplies. Norway has morphed into a large producer, but it isn’t nearly enough. With prices two to three times higher than in the US, cheaper US gas hitting these markets would wreak havoc in Russia and its political clout in Europe. It would be a game changer in the EU economy, which is bogged down in high energy prices. And it would bring the European allies closer to the US.

Related article: How Renewable Energy will Benefit from US Natural Gas Exports

But it might not happen, at least not initially: because there is Japan, the world’s largest most desperate importer of LNG since the shutdown of its 50 surviving nuclear reactors following the Fukushima meltdowns. The country is doing some serious soul-searching about nuclear power, and whether or not to bring reactors back on line. Meanwhile, its utilities are getting ripped off by distant natural gas suppliers that charge over four times the current price in the US.

Freeport already inked contracts with BP for half of its capacity and with the Japanese utilities Osaka Gas and Chubu Electric for the other half. So at least half, but probably much more of its shipments would be destined for Japan, still the most lucrative market in the world. Those contracts are already being leveraged by the Japanese government in its negotiations with Gazprom on a number of deals, including Japanese participation in an undersea pipeline from Russia’s Far East – which is far only from Moscow – to its neighbor, Hokkaido, the largest island of Japan.

But environmental groups in the US, already fuming at their erstwhile messiah, are getting madder with every fossil-fuel deal the Administration approves. The controversial Keystone Pipeline, which Native American opponents have equated to “environmental genocide,” is waiting in the wings. The Administration simply doesn’t want to get run over by the momentum of the oil and gas industry, and the thousands of high-wage jobs it has created. And it wants to lick its geopolitical chops.

By. Wolf Richter


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