An Overview of U.S. Liquefied Natural Gas Exports

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1 Executive Brief An Overview of U.S. Liquefied Natural Gas Exports

2 Executive Summary The world is competing for the tremendous advantage offered by affordable U.S. natural gas. Relative to globally expensive oil, affordable U.S. natural gas is creating a renaissance in American manufacturing, creating new jobs, investments and value-added exports. The U.S. competitive advantage brought to the economy through the growth of the manufacturing sector and associated jobs, greater energy security and lower utilities costs is increasingly recognized in the United States. There is robust, growing demand for natural gas in all major domestic sectors of the U.S. economy, including manufacturing, utilities and transportation. Large amounts of indiscriminate exports could have adverse effects on domestic prices and overall job creation. To obtain financing, liquefied natural gas (LNG) export terminal projects must make long-term commitments to take gas from the United States to foreign countries. Given the newness of the shale gale phenomenon, there is considerable uncertainly in both domestic supply and demand. The effects of long-term international commitments must be considered when compared to balanced domestic supply and demand. Existing policy, first written in 1938 and last amended in 1992, was not created with today s national and global implications in mind. Total applications for LNG exports to both free-trade agreement (FTA) and non-fta countries represent 40 percent of daily U.S. production. Approvals for exports to FTA countries are virtually automatic. One project to export to FTA and non-fta has been approved and permitted, with partial funding secured. Demand for LNG is greatest from non-fta countries, representing more than 80 percent of global LNG demand. The approval and permitting process for LNG liquefaction facilities and export terminals is long and complex, and LNG facility investments are capital intensive, requiring $4-5 billion for brownfield builds. The arbitrage for natural gas exports from the United States is significant. Not surprisingly, the level of investment by multi-national companies, foreign sovereignties and foreign banks indicates funding for LNG export facilities is available, and other countries place a high priority on securing reliable, affordable energy. Indiscriminate exports of LNG risk creating conditions where domestic natural gas demand is forced to compete with LNG exports, leading to a return of unstable and high domestic natural gas prices. This would have a detrimental impact on the U.S. competitive advantage for domestic manufacturers. 1

3 Natural Gas: The New U.S. Competitive Advantage For the first time in more than a decade, primarily due to recent discoveries and development of domestic shale gas, U.S. natural gas prices are affordable and relatively stable, especially when compared to oil. In fact, global oil is more than five times as expensive as domestic natural gas. This disparity between expensive, volatile global crude oil and affordable, competitive New U.S. Competitive Advantage for Manufacturing domestic natural gas is lowering utility bills for Spot Price ($/MMBtu) individuals, boosting national energy security 30 and leading to billions of dollars in new U.S. investments. 25 Brent Crude Oil In the past year, more than 100 U.S. 20 manufacturing projects across industries as diverse as fertilizers, steel, tires and chemicals 15 have been announced. This represents more 10 than $80 billion in investments. 5 Furthermore, experts are forecasting 5 million new jobs in the manufacturing sector by Henry Hub Natural Gas 0 This starts with construction jobs in the near term and additional, high-wage manufacturing jobs over the longer term, providing significant benefits to the American economy. High and volatile domestic natural gas prices can have a significant negative impact on manufacturing, which has very elastic demand. U.S. manufacturers suffer when natural gas prices are high and volatile, because manufacturing is often energy intensive and natural gas is also often used as a raw material. With the exception of 2010, when natural gas prices were relatively stable and competitive, the past 10 years have seen more than six million manufacturing jobs lost, factories relocating overseas and a decline in U.S. competitiveness. Facilitating the export of LNG at levels that drive gas prices closer to the price of oil risks this new U.S. competitive advantage, particularly for manufacturers, the most price-sensitive users of natural gas. Competitive Advantage

4 Export Application Approval Process The Natural Gas Act (NGA) requires the U.S. Department of Energy (DOE) to automatically grant approval to applications to export LNG from the United States to free-trade agreement (FTA) countries. Korea is the only large importer of LNG that is also an FTA country. The DOE, and by extension the Administration, must evaluate applications to export LNG to non-fta countries to determine whether the application is in the public interest. If the application is determined not to be in the public interest, either the applicant and/or the public can appeal in federal district court as part of the Administrative Procedure Act. If a decision to grant approval is contested, the appeal process is the same the injured party can appeal to the DOE or pursue litigation. Separately, LNG terminal construction and operation applications require approval from the Federal Energy Regulatory Commission (FERC). If the FERC approves the application after an environmental impact assessment, the applicant may construct and operate the LNG terminal after obtaining Clean Water Act, Coastal Zone Management Act and Clean Air Act permits. If the FERC denies approval, the applicant and/or the public can appeal the case to the FERC or pursue litigation. Current Status Only Sabine Pass Liquefaction (wholly owned by Cheniere) has received approval to export to FTA or non-fta countries. The FERC has granted Cheniere the only approval to construct and operate an LNG export terminal. A recent Wall Street Journal article indicated that Cheniere has secured the necessary permits and partial funding, with all funding expected to be secured by the end of Start-up of the 1.1 bcf/d facility is LNG Export Application LNG Terminal Construction/ Operation Application U.S. DOE U.S. DOE/U.S. President In U.S. Interests Not in U.S. Interests expected in As of September 2012, the DOE has approved 13 permits to export to FTA countries, with five more pending. One permit has been approved to export LNG to non-fta countries, with 13 such permits pending. These exports to FTA and non-fta countries represent more than 27.4 bcf/d, or over 40 percent of daily U.S. production. FERC FTA Non-FTA Environmental Impact Assessment FERC Approves FERC Denies Export Approval Export Approval Appeal in Federal District Court Obtain Clean Water Act, Coastal Zone Management Act, and Clean Air Act Permits Appeal to FERC or Take FERC to Court 3

5 In 2009, LNG demand from FTA countries was only 4 bcf/d, or less than 10 percent of daily U.S. production. By 2011, this grew to 6 bcf/d by some estimates. The prime targets for U.S. LNG exports are non-fta destinations, such as Japan, China, Taiwan, India and Europe. Many of the companies with FTA permits are also seeking permits for non-fta countries so that they can export to either FTA or non-fta countries. The current Administration has placed a temporary hold on approvals for non-fta country applications, pending a study to be completed by the DOE. Global LNG demand in 2011 was approximately 30 bcf/d, and almost all of it was from Asia and Europe. For perspective, the former projected demand from the United States before the shale gale was around 7 bcf/d. Japan has by far the largest demand, though demand in China is expected to double within the next five years. While projections can vary a great deal, most indicate that LNG demand could double in the timeframe. The Energy Information Administration (EIA) recently considered the effect of LNG exports equal to only 18 percent of domestic production (12 bcf/d) on U.S. natural gas prices. The EIA s report, released in mid-january, states that a demand increase of this magnitude could create a cost increase of as much as 56 percent. U.S. Could Export a Total of 29.2 bcf/d* Company Who Wants LNG? Country 2009 LNG Demand (bcf/d) FTA or Non-FTA Importing Companies Japan 9 Non-FTA TEPCO, Tokyo Gas, Osaka Gas Korea 3 FTA KOGAS Spain 3 Non-FTA Gas Natural Fenosa UK 1 Non-FTA Centrica Taiwan 1 Non-FTA CPC India 1 Non-FTA Petronet, GSPC, GAIL France 1 Non-FTA GDF SUEZ, Enel China 0.8 Non-FTA CNOOC, PetroChina, Sinopec, Shanghai LNG Total FTA Demand 4 Total Non-FTA Demand 20 Global LNG Demand 24 Source: EIA Quantity (bcf/d) FTA Application Non-FTA Application Sabine Pass Liquefaction 2.2 Approved Approved Freeport LNG 1.4 Approved Under Review Lake Charles Exports 2.0 Approved Under Review Carib Energy USA 0.03 FTA Approved Under Review 0.01 Non- FTA Dominion Cove Point LNG 1.0 Approved Under Review Jordan Cove Energy Project 1.2 FTA Approved Under Review 0.8 Non- FTA Cameron LNG 1.7 Approved Under Review Freeport LNG 1.4 Approved Under Review Gulf Coast LNG Export 2.8 Under Review Under Review Gulf LNG Liquefaction 1.5 Approved N/A LNG Development Company (Oregon LNG) 1.25 Approved Under Review SB Power Solutions 0.07 Approved N/A Southern LNG Company, LLC 0.5 Approved N/A Excelerate Liquefaction Solutions 1.38 Pending N/A Corpus Christi Liquefaction, LLC 1.8 No Application No Application Golden Pass Products LLC 2.6 Pending N/A Cheniere Marketing LLC 2.1 Pending Under Review Main Pass Energy Hub LLC 3.22 Pending N/A CE FLNG LLC 1.07 Pending Under Review *Includes Corpus Christi Liquefaction, which has not yet applied to DOE 4

6 Financing In addition to DOE and FERC approval and obtaining appropriate permits, long-term customer contracts, gas supply and financing are also priorities for those wishing to export U.S. LNG. To construct a new facility requires 4-5 years. It takes about three years to convert an import facility for export. Locking in the Customer LNG supplier-purchaser agreements are historically long-term (e.g., 20 years) take-or-pay contracts. The Cheniere contract, for example, is indexed to Henry Hub prices and includes a fixed capacity charge, where the purchaser pays 115 percent of Henry Hub price and a fixed capacity charge of $2.25/MMbtu. The remaining LNG that is not under contract can be purchased on a short term-basis. Cheniere has signed long-term supply agreements to supply a total of 2.2 bcf/d (entire capacity) of LNG to the B.G. group of the UK, Gas Natural Fenosa of Spain, Gail India Ltd. and Korea Gas Corp. Committed Suppliers In the United States, no reserves are specifically dedicated to LNG exports, so any company producing gas in North America could supply the gas for LNG exports. However, there are a number of companies that have a vested interest in supplying the gas for LNG. LNG Exports: Next Steps Permitting DOE & FERC Customer Contracts Financing Construction & Infrastructure Gas Transport & Shipping Gas Supply Regasification Financial Support Financing an LNG facility requires $10 billion per trillion cubic feet (TCF) of capacity (1 TCF/year = 2.75 bcf/d). Cheniere expects to secure $3.4 billion in total from eight banks, including Bank of Tokyo-Misubishi UFJ, Ltd., in the third quarter Cheniere already has $2 billion in equity. This $5.4 billion will fund the first project phase, which will export 1.1 bcf/d by Furthermore, foreign investments in U.S. shale gas ownership plays are significant. The chart on page 6 gives a snapshot of just some of the money being invested in shale plays. 5

7 How Important Is LNG? Affordable, abundant natural gas is critical to nations seeking energy security; when the prime minister of Japan last visited with U.S. President Barrack Obama, one of his principal goals was to secure the Administration s support for natural gas exports to Japan. More than other urgent policy issues at hand, the Japanese Prime Minister needed to secure an affordable energy supply for his country. Japan is only one among many that have this critical need. The United States underestimates the global demand for LNG, particularly from lowcost sources. The risk to U.S. growth, its population s economic welfare, as well as to its energy security is also largely underestimated by the United States. U.S. pricing will certainly rise, if for no other reason than the next increments of natural gas that have to come out of the ground are more expensive than the current ones. Depending on actual cost curves and supply quantities, coupled with other growing domestic demand uses like electricity and transportation, LNG exports can be expected to drive U.S. natural gas prices toward the global natural gas price, nullifying the U.S. competitive advantage that is currently enjoyed by consumers and industry. Foreign Investment in U.S. Gas/Oil Bakkan Shale Norway Statoil, $4.4 B Jordan Cove, OR Niobrara Shale China CNOOC, $1.3 B Woodford Shale United Kingdom BP Plc, $1.75 B Barnett Shale France $2.25 B Eagle Ford Shale China CNOOC, $2.2 B Netherlands Royal Dutch Shell Acquired 250,000 Acres, Price Uncertain Australia BHP, $15.1 B Eagle Ford & Haynesville Plays Cameron, LA Freeport, TX St. Charles, LA Sabine Pass, LA Haynesville Shale Netherlands Royal Dutch Shell Acquired 400,000 Acres, Price Uncertain Cove Point, MD Fayetteville Shale United Kingdom BP Plc, $1.9B Australia BHP Billiton Ltd, $4.65 B Shale plays Utica Shale Undisclosed Major Foreign Energy Corp. $2.14 B Marcellus shale Marcellus Shale India Reliance Industries, $1.7 B Netherlands Royal Dutch Shell, $4.5 B Norway Statoil, $3.37 B U.S. ports where liquefied natural gas exports are planned Natural gas and oil Gas product 6

8 The Debate The discourse on how best to use this new source of domestic natural gas is extremely active and includes regular news articles, advertising, internet advocacy, opinion pieces, think tank reports and public statements from advocacy groups, Wall Street analysts, industry executives, members of Congress, governors and others. Some groups demand that access to the shale gale or natural gas exports be banned. Some contend that zero LNG exports are critical to protecting and encouraging U.S. growth. On the other end of the spectrum are proponents of accelerated approval of all LNG export applications. Proponents of automatic and unlimited exports of LNG cite free trade and no government interference as their rationale. The position is highly attractive to conservative policy-makers and influencers. Supporters of unlimited LNG exports claim that these exports will increase gas production, produce economic growth, create jobs and balance trade. They also contend that LNG exports will lead to increased supply of natural gas liquids, which is what chemical manufacturers need. At the same time, domestic shale gas is critical to U.S. energy security and economic prosperity. Manufacturers are using this new competitive advantage to create the greatest economic value to the United States through a revitalized manufacturing sector. Building on the advantage of shale gale, more jobs, growth and valuable exports can be created through the manufacturing sector. Excessive LNG exports would be detrimental to the overall growth potential of the U.S. economy and to manufacturing in particular. LNG exports will not necessarily result in increased domestic supply of natural gas liquids, as many receiving countries require high Btu-content LNG. The U.S. manufacturing sector has a tremendous stake in this issue, in addition to other residential and commercial consumers. The Right Policy Until there is greater clarity on supply-side cost and availability issues, and until there is a greater understanding of domestic demand growth, a prudent course of action that requires a balanced approach between domestic growth needs and export opportunities makes the most sense. This means LNG export applications to non-fta countries should be subject to a rigorous public interest review, including the potential impact on manufacturing, competitiveness, the U.S. economy and U.S. energy security.