Sprawled on 1,000 THRESHOLD ON THE

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1 ON THE THRESHOLD The U.S. looks ahead to a big future in the global LNG market as the first export terminal nears completion. BY ADAM FOLK Sprawled on 1,000 remote acres of green Louisiana marshland is Cheniere Energy Inc. s $18 billion investment in the future of the American natural gas industry. Soon, tankers bound for the Gulf of Mexico and ports beyond will be loaded with the abundance of the U.S. shale boom courtesy of the new liquefaction plant Sabine Pass LNG. The first two of the facility s six natural gas liquefaction facilities, or trains, are scheduled to begin shipping in The other four will begin operation at six- to nine-month intervals after the first. It s an ambitious timeline that places Cheniere years ahead of its closest domestic competitors, and for many in the natural gas industry, represents the starting gun of a potential U.S. LNG export race. There are 45 LNG export licenses under some stage of review by the U.S. Department of Energy. If all were approved tomorrow, it would mean hundreds of millions of tons of LNG a year would begin shipping from the U.S. a number that could put this nation alongside Australia and Qatar as one of the top LNG exporting countries. The push to export is spurred, in part, by a 64 percent projected increase in global natural gas consumption by At the same time, U.S. natural gas production is expected to grow by 56 percent, according to U.S. Energy Information Administration projections. This means the United States is poised to supply natural gashungry nations such as Japan with better access to clean, reliable energy. In general, natural gas production in the U.S. is booming due to the shale revolution, and along with that, global LNG demand is strong, PHOTO PROVIDED BY CHENIERE ENERGY INC. 24

2 When its construction is completed later this year, Louisiana s Sabine Pass is set to be the first in the U.S. to ship LNG overseas. FEBRUARY 2015 AMERICAN GAS 25

3 THE RAMIFICATIONS OF THE U.S. EXPORTING NATURAL GAS IS BIGGER THAN JUST PRODUCERS BEING ABLE TO REALIZE PROFITS ASSOCIATED WITH TRADE. IT MEANS WE ARE ON THE CUSP OF WITNESSING ANOTHER MAJOR TRANSITION IN GLOBAL ENERGY MARKETS. Kenneth Medlock, James A. Baker III Institute for Public Policy, Rice University said Katie Pipkin, senior vice president of business development and communications for Cheniere. We estimate there will probably be 10 billion cubic feet a day of LNG exports by 2020, and we expect there will be more beyond that. Pipkin, who worked on the team that secured the financing for the company s Sabine Pass project, thinks the U.S. has advantages in exporting LNG because it s a new source of supply for global buyers who d like to diversify their portfolio. Sabine Pass will also offer buyers destination flexibility, she said. [Customers] can sell the LNG basically wherever they want to as long as it s within our permits with the DOE, Pipkin said. A lot of your traditional plants, you buy it at Point A and you deliver it to Point B, and you can t take it anywhere else. We re offering the customer a new source of flexibility. But while Sabine Pass is about two years ahead of other recently announced LNG projects, it won t be the country s only LNG export terminal for long. Soon, projects in Oregon, Maryland and Florida hope to join others in Louisiana and Texas to begin what industry analyst Kenneth Medlock of Rice University calls a transformation for global gas markets. Carib Energy LLC, a subsidiary of Crowley Maritime Corp., won approval to ship up to 40 million cubic feet per day of LNG from Florida. In Richmond, Virginia, Dominion Resources Inc. was approved to build the $3.8 billion Cove Point liquefaction plant on the Chesapeake Bay near Lusby, Maryland, with hopes of exporting 770 million cubic feet per day within the 131-acre footprint of its existing LNG import terminal. And just a stone s throw from Cheniere in Hackberry, Louisiana, Sempra Energy recently broke ground on a $10 billion addition to its own import facility, Cameron LNG, which will have three trains, a 21-mile natural gas pipeline and a new compressor VIEWPOINT: WHAT LDCS THINK ABOUT LNG EXPORTS ocal natural gas distribution companies see opportunities for new markets and L investment as the U.S. prepares to begin exports of liquefied natural gas later this year. Hank Linginfelter, executive vice president of distribution operations for AGL Resources Inc., said LNG exports will likely benefit distributors because there will be more investment in the supply chain. He expects LNG exports to mirror the positive effects of the shale gas revolution a boom in construction jobs and the domestic economy and points to an increase in jobs for local contractors because of the new LNG facilities in Louisiana. We estimate that the benefits outside the Lower 48 will accrue not only to the importing countries, but also to U.S. territories such as Puerto Rico, the Virgin Islands and also potentially to the Caribbean region as a whole, as some smaller-scale LNG exports make their way to these countries, Linginfelter said. Joe Hamrock, executive vice president and group CEO for NiSource s gas distribution segment, also sees a brighter economic future as a result of LNG exports, with local distribution companies benefiting from more investment in natural gas infrastructure. Hamrock said good-paying manufacturing, construction and professional jobs are likely to grow with LNG exports. An appropriate mix of domestic use and export opportunities for America s producers provides useful incentives for continued U.S. Linginfelter Hamrock Morehouse McMasters natural gas supply development, Hamrock said. This mix also promotes continued investment in natural gas infrastructure, supports the creation of new professional jobs and increases the nation s standing and influences in global energy markets. At MDU Resources Group, Frank Morehouse said he foresees some global political benefits to the U.S. export of LNG. If LNG exports take off, Morehouse, the president and CEO of MDU s utility business, said it will give many European nations who currently rely on Russian-produced natural gas the alternative they are seeking. Michael McMasters, the president and CEO of Chesapeake Utilities Corp., also thinks LNG exports could open new markets for U.S. natural gas. This would benefit everyone in the industry, he said. The advent of LNG exports opens new markets for the U.S. natural gas industry, which has a positive impact for all domestic gas consumers by allowing fixed costs to be shared over a broader base and provides incentives for producers to continue to invest in developing new resources, McMasters said. There are benefits beyond just business, though. A world that uses more U.S. natural gas is a cleaner world, according to AGL s Linginfelter. We should also experience significant environmental benefits as the U.S. and other countries move to utilizing more cleaner-burning natural gas instead of coal, oil and other less environmentally friendly fuels, he said. 26

4 station. Sempra Energy is considering several opportunities for additional LNG exports, confirmed Paty Ortega Mitchell, a spokeswoman for the company. We believe the U.S. is well-positioned to offer a competitively priced and a stable supply of LNG to the world market including Japan, Europe and South America. When the project is complete in 2018, the facility will be able to ship 1.7 billion cubic feet per day of LNG overseas. These are just a handful of the projects in the works. Over the next few decades, the fruits of projects like these could change the future of the U.S. economy. The ramifications of the U.S. exporting natural gas is bigger than just producers being able to realize profits associated with trade, said Medlock, a James A. Baker III and Susan G. Baker Fellow in Energy and Resource Economics and senior director of the Center for Energy Studies at the James A. Baker III Institute for Public Policy. It means we are on the cusp of witnessing another major transition in global energy markets. The effect on the market will be huge, Medlock said. American LNG exports will join LNG from Australia and natural gas from Russia to increase liquidity and fungibility in the gas market. To further explain, a good is liquid if it can be easily exchanged for cash or a different good, while a fungible good such as wheat or lumber can be easily interchanged with another good of the same kind. Diamonds, for instance, are liquid because they can be exchanged for dollars, but not fungible since color, cut, size and other aspects vary from diamond to diamond. Currently, natural gas is neither liquid or fungible since it is priced differently in different parts of the world because it is not easily transportable. LNG is likely to change that, Medlock said. That, in turn, could create new opportunities for investors. It might also begin to influence contracting behaviors, alter the marketing status quo and begin to unhinge the common practice of indexing LNG sales to oil. It will be transformative in that sense, but then you layer into that the fact that the U.S. market currently is the most liquid in the world, Medlock said. You actually have the ability to use forward markets to hedge purchases you can use inventories to position yourself, to think about seasonal swings in demand, all sorts of things that you really can t do elsewhere. If you open that avenue from the U.S. market to the rest of the world, those benefits begin to spill out. LNG TERMINALS: WHERE ARE THEY NOW? Several liquefied natural gas terminals will come online on the Gulf Coast and in other U.S. coastal regions during the next few years. They include: Sabine Pass: Nestled on 1,000 remote acres of Louisiana marshland in Cameron Parish, Cheniere Energy Inc. s $18 billion facility is scheduled to be the first to export LNG when the initial phase of construction is completed later this year. Cheniere has an ambitious timeline with six liquefaction and purification facilities called trains going online within six- to nine-month intervals of the first, placing it years ahead of its closest competitors. Nearly all of the LNG production capacity for the first five Sabine Pass liquefaction trains has been sold under 20-year contracts with global clients. The facility has approval to export 2.2 billion cubic feet per day. Cameron LNG: Officials broke ground on Sempra Energy s $10 billion addition to its current import facility in Hackberry, Louisiana, in late October The facility will have three trains, a 21-mile natural gas pipeline and a new compressor station and will be able to ship 1.7 billion cubic feet of LNG overseas per day when the project is completed in In addition to San Diego-based Sempra Energy, other partners include the French gas and electric utility GDF Suez; Mitsubishi Corp. and Mitsui, Japan s largest and second-largest trading companies; and Nippon Yusen Kabushiki Kaisha, a Japanese shipping company. Carib Energy LLC: The subsidiary of Crowley Maritime Corp. won approval to ship up to 40 million cubic feet of LNG per day in 40-foot containers from a proposed liquefaction facility in Martin County, Florida. In 2011, Carib became the first company to receive a 25-year license to export LNG from the U.S. to Free Trade Agreement countries in the Caribbean, Central America and South America. It has struck deals to provide LNG to Coca-Cola bottlers and pharmaceutical companies in Puerto Rico. Jordan Cove Energy Project: The facility in Coos Bay, Oregon, is the first LNG export terminal to be proposed on the West Coast. The Jordan Cove Energy Project has won conditional approval to export 1.2 billion cubic feet a day. The proposal includes building a loading terminal for an LNG-carrying ship; two onshore, full-containment LNG storage tanks; and a natural gas-fired power plant with the capacity to supply 420 megawatts. It also requires the construction of a 230-mile pipeline. Its first expected exports are in Cove Point LNG: The single-train export facility on the Chesapeake Bay in Lusby, Maryland, could begin exporting in Dominion-owned Cove Point LNG has a planned export capacity of 770 million cubic feet per day and will be an expansion of Dominion s existing, import-based facilities at Cove Point. The expansion is projected to cost about $3.8 billion. Freeport LNG: Freeport LNG received final approval in November to build an export plant expansion to its existing import terminals on Quintana Island in Texas. Officials anticipate about 45 months from the beginning of construction which began in November 2014 to complete the first of three LNG trains. Each subsequent train should begin operating at about six-month intervals thereafter. The three trains will give Freeport LNG the ability to export 2 billion cubic feet a day. The first exports are scheduled for Lake Charles Liquefaction Project: This project won conditional approval in 2013 to export 2 billion cubic feet of LNG per day. The project is supported by BG Group, Energy Transfer Equity and Energy Transfer Partners along with their subsidiaries, Trunkline LNG Corp. and Trunkline LNG Export. PHOTO PROVIDED BY SEMPRA ENERGY FEBRUARY 2015 AMERICAN GAS 27

5 PHOTO PROVIDED BY CHENIERE ENERGY INC. While Medlock is optimistic about the growth of U.S. LNG, Tim Boersma, a Ph.D. fellow with the Energy Security Initiative at The Brookings Institute, is a bit more cautious. The impact of U.S. LNG exports on the natural gas industry and this country are difficult to determine at this point, he said. It largely depends on how many projects eventually make it through the regulatory process [of exporting LNG to non-free Trade Agreement countries], and more importantly, the timing of these projects with other LNG projects in the world and demand trends. Boersma suspects that by the time several of the LNG projects are approved or completed, there will be many more world suppliers competing for the same LNG markets, mainly in Asia. Once that demand is fulfilled, it could be more difficult to find investors for new U.S. LNG projects. Still, Boersma says it s likely the U.S. will be a major exporter of LNG, just not to the levels that more bullish analysts suspect. He estimates the U.S. could eventually ship between 4 to 8 billion cubic feet of LNG a day. We believe a couple more projects will eventually make it to the market, making the U.S. a significant LNG exporter from mid-2025 onwards, he said. With dozens of LNG terminals still awaiting approval, it is difficult to forecast 28 the future. But U.S. natural gas is certain to force traditional suppliers to rethink their traditional market model, Boersma said. In addition, an explosion of domestic energy production means broad benefits to the U.S. economy. A recently published EIA report found that exports of up to 12 billion cubic feet of LNG a day would result in higher levels of economic output and could spur investors to be more active. In addition, the American Petroleum Institute estimates that natural gas-producing states such as Pennsylvania, Texas and Louisiana could see as much as $31 billion added to their state economies while gaining 60,000 to 155,000 jobs. Increased LNG construction and exports will also boost demand for steel, cement and other goods, leading to job gains in such manufacturing states as Ohio, New York and California. In the marshlands of Louisiana, as Cheniere s steel hulk nears completion, excitement is building. At this stage in the game, it s clear that the nation and its natural gas producers have only just begun to explore the foreign market opportunities for LNG. In a decade, we will likely be discussing a very different global gas market, Medlock predicted, with the recognition that U.S. shale and the emergence of LNG exports from the U.S. being the principal driving force. u THERE ARE 45 LNG EXPORT LICENSES UNDER SOME STAGE OF REVIEW BY THE U.S. DEPARTMENT OF ENERGY. IF ALL WERE APPROVED TOMORROW, IT WOULD MEAN HUNDREDS OF MILLIONS OF TONS OF LNG A YEAR WOULD BEGIN SHIPPING FROM THE U.S. A NUMBER THAT COULD PUT THIS NATION ALONGSIDE AUSTRALIA AND QATAR AS ONE OF THE TOP LNG EXPORTING COUNTRIES.