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LNG Export Ruling Heard Around the World

Most Americans have never heard of the U.S. Federal Energy Regulatory Commission. But a decision it made this week to permit certain natural gas here to be exported will likely be felt around the world.

On Monday, FERC voted to allow Cheniere Energy to retrofit its Sabine Pass natural gas terminal so that it can export Liquefied Natural Gas. The facility, which sits on the border of Texas and Louisiana and is near the Gulf of Mexico, will start delivering LNG by 2014.  While the energy agency’s decision is not a surprise, it is occurring over the opposition of not just environmental organizations but also major manufacturers who fear rising energy prices.

“The required actions before site preparation and construction are similar to those found in other project certificate approvals,” says Christine Tezak, a regulatory analyst for Baird and Co. in Washington. “It is up to the applicant to perform all this work, but we do not see anything here that looks to be out of the ordinary.”

Green groups, concerned with environmental degradation, will try and stop the project. Heavy manufacturers that use natural gas as a feedstock are also opposed. They are benefiting nicely from extremely low natural gas prices, which now sit at less than $2 per million Btus. If the natural gas is super-cooled in the form of LNG and transported overseas via tankers then those prices will jump.

But that is good for the economy, say proponents. Cheniere, for example, says that its export facility will indirectly support thousands of new jobs. Seven other LNG export applications are under FERC’s consideration. Among those: Dominion, Sempra and Southern Union.

A decade ago, those firms thought that this country would be importing LNG from Russia. Now, that possibility has been turned on its head because of the shale gas revolution here.

Consider Dominion Resources’ Cove Point: It received permission to convert its terminal in Maryland to an export facility. It still has some hoops to jump through, including a recent one from the Sierra Club. The green group is challenging the export of shale gas derived from the Marcellus region, saying that prices will go up. It is also asking for Dominion to detail how the added exploration would affect the local ecology there.

“The fear is that somehow natural gas would become more like oil,” says Tom Farrell, chief executive of Dominion Resources before an EnergyBiz audience. “Prices will be marginally higher. But there are huge benefits to having exports like improving our balance of trade. I think we will get an export license.”

Price Stability

Oil prices are largely determined by international events occurring in the Middle East. Threats of instability mean that supplies get choked off and prices are run up everywhere. But natural gas is different. It is situated in nearly all countries and with newfound drilling technologies to extract shale from deep underground, it could become universally accessible.

For now, American energy companies are banking on restrictions to “fracking” in certain parts of the world as well as a time lag in such countries as China to start shale exploration. Besides, LNG terminals here can’t sit idle and they need to start earning returns -- something that can be accomplished by allowing them to export. Import facilities can be transformed into export facilities, and cost effectively.

The United States is now awash in shale gas, with the U.S Department of Energy estimating it will comprise 57 percent of all natural gas development by 2030. What better way to please investors than to start selling that natural gas in Europe and Asia, where those prices are much higher: $11 per million Btus and $14 per million Btus, respectfully.

Once Cheniere’s Sabine starts exporting in 2014, that will put upward pressure on natural gas prices here. Indeed, the Energy Department says that the pending LNG export applications amount to 15-20 percent of all domestic gas production. And when the demands from U.S. electric generation and alternatively-fueled vehicles are added to the mix, prices can only go one direction: up. 

The goal, though, should be price stability. To achieve that, developers must be able to bring product to market. By creating new overseas patrons, they will be motivated to drill and to add inventory. Restricting natural gas supplies, conversely, provides little incentive and would ultimately have an adverse affect.

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