Exxon to Sempra can export half of U.S. home gas supply

Natural gas suppliers from Sempra Energy (SRE) to Exxon Mobil Corp. (XOM) are fighting for the first U.S. export permits after a study said selling some of the fuel to Asia will benefit the economy more than consuming it domestically.

They could win approval for projects to ship about 6 billion cubic feet a day of liquefied natural gas by 2025, according to estimates by consultants including Tudor Pickering Holt & Co. That amount of LNG would supply about half the current U.S. residential market and is worth $93 million a day at Japan’s current import price, a global benchmark.

The government-sponsored study released Dec. 5 gave a green light to exports, saying they shouldn’t delay North America’s possible energy independence in coming decades based on shale discoveries. Companies from Exxon to Dominion Resources Inc. (D) are rushing to get export permits in time to take advantage of the lower production price in the U.S. compared with other markets.

“The reality is that LNG projects are quite difficult to deliver,” Elizabeth Spomer, a senior vice president of business development for Reading, England-based gas producer BG Group Plc (BG/), said in a statement. “This is due to a host of factors — from regulatory obstacles to the challenges associated with financing and construction.”

The 6 billion cubic feet a day estimate represents about a fifth of the projects that companies are proposing, measured by LNG capacity, as regulatory hurdles and competition limit building.

Foreign Buyers

The opportunity relies largely on expectations that foreign buyers will continue to pay more for the fuel in years to come.
Japan paid an average of $16.92 per million British thermal units for LNG through October, when prices sank to a 16-month low of $15.52, and a record $18.07 in July, Japanese Finance Ministry data show.

In contrast, U.S. gas futures traded in New York hit a 10- year low in April of less than $2 per mmBtu. The price, which rebounded as the year progressed, is set to end 2012 below $4.

Cheniere Energy Inc. (LNG)’s Sabine Pass project is the only winner so far of full U.S. approval for an LNG export terminal outside of Alaska. The facility is planned for Cameron Parish, Louisiana. The Houston-based company is working to have initial production by 2015, kicking off LNG exports from the Gulf.

Decisions on the remaining export applications, which bring the combined proposals to a capacity of more than 29 billion cubic feet a day, are still months away. Reviews must be completed, and financing and construction will require years more before exports flow.

Domestic Prices

That could give competing LNG projects planned from Australia to Mozambique time to sign up buyers first.

The study, conducted by NERA Economic Consulting, found that the U.S. would see net economic benefits from exporting LNG, with the gains rising as exports increase. Exports may boost domestic prices by more than $1 per thousand cubic feet in coming years, NERA said. The benefits will more than offset the effect of higher prices for U.S. consumers that may be triggered by reduced domestic supply.

The U.S. Energy Department has set priorities for its permit reviews, listing projects in the order they’ll be assessed. Projects at the top have a competitive edge, as they have a better chance of getting under way before the global LNG market becomes saturated with competing projects, analysts from UBS AG said in a Dec. 18 report.

‘Huge Plus’

Freeport LNG’s initial phase of a Texas project is first in line for review among proposals to export LNG to non-free trade countries, according to the department’s website, followed by Energy Transfer Equity LP (ETE)’s Lake Charles proposal in Louisiana and Dominion’s Cove Point project in Maryland. The Golden Pass project in Texas, backed Qatar Petroleum and Exxon, is last in line at No. 15.

Being first on the list is “a huge plus for us,” said John Tobola, general counsel at Houston-based Freeport LNG. Freeport may begin exports in 2017, with an initial application for 1.4 billion cubic feet a day of capacity.

Projects planned as expansions of existing import facilities may have the smoothest paths to getting the necessary permits. Adding on was the approach at Cheniere’s approved Sabine Pass export plan in Louisiana. It’s also the model being pursued by such would-be U.S. LNG exporters as Freeport, Exxon, Sempra, Energy Transfer and Dominion.

Getting Customers

Still, the test of any project is whether it can lock up enough customers to buy LNG and get financing from banks or partners for the capital needed to construct multibillion-dollar plants. In August, Cheniere’s Sabine Pass project gave a notice to proceed on construction of two liquefaction units, with a project cost of about $5.6 billion.

Projects in states such as Oregon could face greater environmental challenges than terminals proposed for the Gulf Coast, where energy infrastructure already exists and residents are more familiar with the oil and gas industry.

LNG exports would offer added revenue to businesses in the U.S., NERA said in the report. The average annual increase in revenue from LNG exports ranges from less than $3 billion to more than $30 billion, depending on the scenario used for project approvals, according to the study.

Even so, the government probably will move slowly and carefully, said Kevin Book, a managing director at ClearView Energy Partners LLC in Washington.

BG Buying

Ken Medlock, an energy fellow at Rice University in Houston, said he sees no more than 7 billion cubic feet of daily export capacity being built by 2025, and less than half of that capacity may get used on a regular basis.

BG expects “a limited number of projects will be built in the U.S.,” with sites near the Gulf of Mexico that expand existing facilities having an advantage in cost and local support, Spomer said. BG has agreed to buy 5.5 million metric tons a year from Cheniere’s Sabine Pass facility. The company also will supply gas for Energy Transfer’s Lake Charles export project in Louisiana and then market the LNG.

Dominion, which is proposing to export as much as 1 billion cubic feet a day from Maryland, believes its location will bring added diversity in the event a hurricane disrupts processing in the Gulf region, said Dan Donovan, a spokesman. The Richmond, Virginia-based company expects 6 billion to 8 billion cubic feet a day of LNG export projects will be built in coming years, he said.

‘Real’ Projects

The endorsement of the LNG study was crucial in signaling the government may be friendlier to the projects. It also can provide reassurance to potential overseas customers, who were examining other options in case the U.S. didn’t turn out to be a reliable gas provider, Octavio Simoes, president of LNG operations at Sempra, said in a phone interview. Sempra is working on the Cameron export project that has signed up buyers and is planning to open in Louisiana in 2017, with government approvals possible next year.

Sempra thinks the Energy Department will “address those projects that are more real, that have signed commercial contracts with parties, that have parties that have the capability to develop these projects,” Simoes said. He estimated 5 billion to 6 billion cubic feet a day of U.S. LNG export capability may be built in coming years through three to five projects.

Oil and gas companies this month applauded the LNG study. It “reminds us all that we have every reason to be confident in the benefits of free trade,” Ken Cohen, vice president of public and government affairs at Irving, Texas-based Exxon, said in a Dec. 9 blog post.

Political Considerations

Political considerations can still affect how projects are viewed and whether they’re approved. Some lawmakers may seek to curb gas exports, reducing potential effects of higher prices on consumers and companies that rely on the fuel.

U.S. Representative Edward Markey, a Massachusetts Democrat, has said more information is needed before the U.S. can be confident that large-scale LNG exports are in the nation’s interest. EOG Resources Inc. (EOG) Chief Executive Officer Mark Papa said he expects to see some U.S. exports, though “the federal government will probably put a limit on it.”

In Alaska, dwindling regional gas supplies have forced ConocoPhillips (COP), operator of the only U.S. LNG export plant, to idle it for much of the past year.

Government Reviews

Ultimately, the number of export terminals built “will be determined by the market’s appetite” for sales agreements and not by a specific quantity set by the Energy Department, UBS analysts said. Some government reviews may stretch for possibly two years as the Federal Energy Regulatory Commission considers environmental issues, UBS said, adding that the Energy Department may have political considerations.

Worldwide demand, meanwhile, will limit how much U.S. prices can rise because the gas won’t be attractive to buyers if it costs more than other supplies, according to NERA’s report.

“The global market for LNG is what will be the final determinant of how many of these projects go forward,” said Mary Barcella, director of North American natural gas for IHS CERA in Washington.