CHAPTER 14 U.S. LNG EXPORTS: A NEW NATURAL GAS AND REGULATORY PARADIGM AND ITS GEO-POLITICAL AND RENEWABLE ENERGY IMPLICATIONS
| Jurisdiction | Derecho Internacional |
(Apr 2013)
U.S. LNG EXPORTS: A NEW NATURAL GAS AND REGULATORY PARADIGM AND ITS GEO-POLITICAL AND RENEWABLE ENERGY IMPLICATIONS
Partner, Brownstein Hyatt Farber Schreck
Los Angeles
LES LO BAUGH is a corporate lawyer and shareholder at Brownstein Hyatt Farber Schreck in Los Angeles. His practice includes energy and environmental transactions, regulation and permitting. He has decades of experience with U.S. federal and state energy and environmental regulatory matters, as well as substantial international experience in a variety of energy fields. He assists companies with strategic planning, investment review decisions, corporate governance, internal investigations, and corporate restructuring. He has also assisted governmental entities in drafting energy and environmental legislation, ordinances, and regulations. He is frequently consulted on LNG, alternative energy, energy policy, climate change, carbon capture and sequestration, smart grid, green building, transmission, energy and "green" tax incentives, renewable portfolio standards, and other issues. He has testified before the U.S. Congress as an expert witness on energy and SEC matters. Les has also served as general counsel for two U.S. energy Fortune 500 companies. He currently represents several LNG export applicants in the U. S. Mr. Lo Baugh served as a Legislative Aide at the U.S. Senate in Washington, DC, where he assisted in drafting major environmental and other legislation. He was named "Outstanding Corporate Counsel" by the Los Angeles County Bar Association, and was recently honored by the U.S. EPA as their keynote speaker on 40 years of environmental law and by the U.S. Pentagon as their keynote speaker for the ceremonial signing of its first protocol with Native American Nations.
TABLE OF CONTENTS
I. INTRODUCTION
II. U.S. LNG REGULATION
A. Federal Regulatory Scheme for LNG Exports
1. Authorization to Export/Import LNG
2. Federal Regulation of LNG Facilities
3. Federal Environmental Review
4. Other Required Federal Approval
B. State Regulatory Jurisdiction
III. U.S. NATURAL GAS RESOURCE BASE
IV. THE 2012 LNG EXPORT STUDY
V. GEO-POLITICAL AND RENEWABLE IMPLICATIONS
A. Geo-Political Implications
B. The Impact on Renewable Energy
VI. CONCLUSION
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TABLE OF FIGURES
Figure 1 Underground Sources of Natural Gas
Figure 2 Annual Shale Gas Production
Figure 3 Lower 48 Dry Gas Production
Figure 4 Gas Production in Billion Cubic Meters
Figure 5 Natural Gas Market Report
Figure 6 DOE Processing Order
Figure 7 Renewable Portfolio Standards
Figure 8 Electricity Generation by Fuel Type
Figure 9 Electricity Capacity by Fuel Type
Figure 10 Crude Oil vs. Natural Gas Prices
Figure 11 Diagram of Fracking Operation
APPENDICES
Appendix A New Wells Completed in the Barnett Shale
Appendix B Shale Plays in the Lower 48 States of the United States
Appendix C EIA Natural Gas Prices and Projections as of 2011
Appendix D Additions to Electricity Generation Capacity by Fuel (EIA as of 2011)
Appendix E U. S. Oil to Gas Price Ratio and Projections (EIA as of 2011)
Appendix F Initial Assessment of Major Shale Basins in 32 Countries
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I. INTRODUCTION
Natural gas is primarily composed of methane (CH4), along with natural gas liquids in varying amounts. The English scientist, Michael Faraday, who invented the electric motor, was also the first to experiment with liquefaction of methane in the mid-19th Century.1 Liquefaction is achieved by cooling natural gas to -260° F (minus 163 degrees Celsius) at atmospheric pressure. At that point it forms a liquid with a specific gravity of 0.45. When natural gas is liquefied, the volume is reduced to 1/600th of its volume when in a gaseous state. Therefore liquefaction facilitates both storage and transportation of natural gas. Typically liquefied natural gas ("LNG") is stored in insulated tanks at atmospheric pressure. Usually there is some boil-off of the liquefied natural gas at a relatively slow rate of about 0.10% to 0.15% of the volume per day. In the case of ocean-going LNG tankers, this is an advantage because the boil off can be utilized to fuel the tanker.
The first LNG plant was built in 1912 in Virginia. It began operations in 1917. But the first commercial liquefaction plant was not built until 1941 in Cleveland, Ohio. By the mid-1950s, several entities in the United States were looking at the possibility of using LNG to fuel a variety of vehicles for transportation. In addition, Continental Oil and others formed a joint venture for the purpose of liquefying natural gas in the Gulf Coast of the United States and then transporting it by water to Chicago, to be vaporized there into natural gas for the food processing industry in the stockyards and to make use of the cold temperature of LNG for food refrigeration. A large barge with LNG tankers was constructed to bring the LNG up the Mississippi River to Chicago. However, the U.S. Food and Drug Administration misguidedly refused to permit the concept because of an ill-conceived fear that the food might be contaminated by LNG. As a consequence the project did not move forward.
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Subsequently a proposal to export LNG gained favor when an opportunity arose to sell LNG to the United Kingdom. On January 25, 1959 the tanker MB Methane Pioneer left the Louisiana Gulf Coast with the world's first ocean cargo of LNG and sailed to the UK to deliver the LNG. The success of the Methane Pioneer encouraged Shell to order two LNG tankers which were constructed in the UK. The ships began transporting Algerian LNG in 1964. A few years later, the United States began to export Alaskan LNG to Japan. In 1968 the Methane Pioneer brought the first LNG shipment to the United States, landing at the Boston Harbor where the shipment was offloaded into various trucks positioned on a barge.
By the early 1970s, the United States government developed a program to encourage U.S. shipyards to build LNG tankers. The government provided loan guarantees via the MAR Title XI Act.2 A total of 16 LNG ships were built at three different US shipyards. Initially they were U.S. flagged and manned by U.S. crews, which permitted them, under the Jones Act,3 to depart from a U.S. port and return with cargo to a U.S. port. But they were subsequently reflagged to reduce operating costs. The extensive natural gas pipeline system and geographically dispersed production areas across the United States, coupled with the Jones Act, discourages the use of LNG tankers to move LNG within the United States.
In the late 1970s and early 1980s, the United States experienced skyrocketing natural gas prices due to significant supply shortages. Prices for new natural gas rose above $12 per Mcf. As a result, several projects were proposed to import natural gas to the lower 48 states. Regulatory commissions adopted policies to restrict the use of natural gas to the "highest and best use."4 Alternative projects were proposed to build a gas pipeline from Alaska's Purdue Bay and North Slope down through Canada, with western and eastern laterals to bring gas to the western and eastern U.S. markets. In addition, several LNG import projects were proposed. However, by the time the Alaskan pipeline and various LNG projects received their final regulatory approvals, it had become apparent that the scarcity of natural gas in the U.S. market place was principally due to two factors: (1) counterproductive state and federal regulation of natural gas; and (2) the tendency of major oil companies to drill for oil and not for natural gas because they considered gas more of a nuisance than a source of profit. When regulations and laws were changed on the federal level and appropriate adaptations were made at the state level, the price of natural gas declined substantially as the supply rose dramatically.5 As a result of the collapse of natural gas prices, both approved LNG import projects and the Alaskan pipeline project were abandoned as they were no longer cost-competitive. However, Alaskan LNG exports did continue to Japan.6
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By 2002 and 2003, the United States was again projecting a need for substantial imports of LNG to meet the natural gas demands of the country. The official U.S. governmental estimate, prepared by the Energy Information Administration ("EIA"), projected a need to import 229 Bcf (4.8 million tons) by 2002, then doubling to 540 Bcf (11 million tons) by the end of 2003. But largely due to the Jones Act, LNG exports from Alaska were not considered a viable option for the lower 48 states. At that point in time, there were only four LNG import facilities in the United States: Cove Point, Maryland; Elba Island, Georgia; Evert, Massachusetts; and Lake Charles, Louisiana. It was widely anticipated that those four LNG terminal facilities would need to be substantially expanded to meet a huge future demand. In addition, numerous proposals were placed before regulators to build numerous additional LNG re-gasification terminals in North America.
The EIA's Annual Energy Outlook 2004 (AEO2004) projected that not less than 4 new LNG terminals would be constructed between 2007 and 2009. It also projected that imports would reach 1,600 bcf by 2006. The EIA estimated that by 2010 as much as 39% of natural gas imports would be from LNG, up from 5% in 2002.7 It was also projected that by 2015 LNG imports would become the largest source of U.S. natural gas imports, surpassing Canadian gas imports. Ultimately, over 50 LNG import terminals were proposed. But only a handful of terminals were ever constructed.8 In fact, several of the LNG import terminals that were constructed never received significant LNG imports. They have stayed relatively idle except for maintenance and similar activities. So what was the cause of this failure to receive significant LNG...
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