Shell, El Paso Pipeline Partners plan LNG export facility

By Jennifer A. Dlouhy and Jeannie Kever

Shell and El Paso Pipeline Partners on Monday announced plans to jointly build a plant for exporting natural gas, marking the latest venture aiming to take advantage of high Asian and European prices for the fossil fuel.

Under the deal, Shell will team up with El Paso’s Southern Liquefaction Company to convert the existing Elba Island LNG import terminal near Savannah, Ga., so it can also liquefy and export the fossil fuel.

“This announcement underscores how the abundance of natural gas in the U.S. is changing the energy landscape,” said Shell Oil Co. President Marvin Odum in a statement. “With a measured, phased approach, exports of cleaner-burning natural gas can help meet the world’s rising energy needs while also giving a boost to the U.S. economy.”

But the companies’ plans depend on the approval of regulators at the Energy Department, which is tasked with reviewing more than a dozen applications to export 22.6 billion cubic feet of natural gas per day to countries that do not have a free trade agreement with the United States.

Southern, which is a Kinder Morgan company and a unit of El Paso Pipeline Partners, already has won the Energy Department’s approval to export up to 4 million metric tons of natural gas annually from the Elba Island terminal over the next quarter century to nations that have free-trade agreements with the U.S.

But the natural gas market in those countries is relatively small, especially compared with the potential to sell natural gas to consumers in Japan, Thailand and other nations hungry for an alternative to nuclear power. That’s why Southern and Shell also are seeking a license to export up to 0.5 billion cubic feet per day to countries that don’t have free-trade accords with the U.S.

The Elba Island LNG terminal, built in 1978, still is importing some natural gas, which is offloaded from tankers as a liquid and regassified at the Savannah, Ga., facility. But a glut of domestic natural gas, harvested using horizontal drilling and hydraulic fracturing, has upended the market for the fossil fuel.

Read more: Dow Chemical disavows Texas LNG export project it co-owns

Depending on approvals from the Federal Energy Regulatory Commission and other agencies, construction could begin on new liquefaction facilities at the plant by 2015 and it could be ready to launch exports “a few years” later, said El Paso spokesman Richard Wheatley

Wheatley said the company has applied for FERC review of the project, which would be divided over two phases, with the first eventually enabling exports of up to 210 million cubic feet per day of natural gas.

Wheatley declined to comment on the cost of the new facility, which is set to be detailed in regulatory filings with the SEC later this week.

Once the deal is finalized, El Paso Pipeline Partners is set to own 51 percent of the new entity created with Shell and will operate the export facility. Shell would own the remaining 49 percent and claim all of the facility’s liquefaction capacity.

Although the Energy Department has already approved one LNG export license, for Houston-based Cheniere Energy, analysts generally do not expect any more decisions on pending permit applications until the second half of this year.

First, the Energy Department will finish reviewing a study released in December that concluded the U.S. could claim up to $47 billion in new economic activity even if exports were unchecked. Some LNG export foes, including Sen. Ron Wyden, D-Ore., have called on the Energy Department to redo the report, saying it unfairly relied on old data about domestic natural gas demand.

The Energy Department has signaled it will consider LNG export license applications individually, probably on a first-come, first-served basis. Southern’s August application puts it 11th on the long list of companies vying for licenses.

Still, there is a chance the Energy Department will reshuffle the order.

Michael Farina, GE’s chief economist, suggested there may be a chance for companies to move ahead in the queue, if the Energy Department decides to give weight to stronger financing deals, more complete filings and proposals to take advantage of existing infrastructure, such as current import terminals.

“This is not an open-ended opportunity,” Farina said. But “those are the kinds of things that could be considered” for “the strongest players — people who have been in the natural gas business (for a long time).”

The Obama administration is struggling to deal with the natural gas export issue, as a small but vocal group of chemical companies and manufacturers warn that too many overseas sales could cause the U.S. price to spike, blunting their current competitive advantage. Companies that use natural gas to power their plants or as a building block for creating other chemicals are wary of paying a global price for the fossil fuel, which costs three to four times as much in Japan and some European markets.

But natural gas producers say the relatively low U.S. price — driven by the surge in domestic production — is not high enough to sustain current drilling. Kinder Morgan’s chief executive stressed the value of exports.

Read more: Lawmakers urge exports of U.S. natural gas

“This project will facilitate further development of the abundant natural gas resources in the United States and will be a positive factor in the overall balance of trade between the U.S. and other countries,” CEO Richard Kinder said.

Natural gas is transformed into a liquid by cooling it to 256 degrees below zero. The result is a liquid that is easy to transport in ocean tankers to countries around the globe. Before it can be used again, the LNG must be converted back into its gas form.

The additional costs of liquefying natural gas, shipping it overseas in massive tankers and then converting it again at its destination could add roughly $6.30 to $8.39 to the price per million BTUs, according to the Energy Department’s study.

DOE’s list of LNG export applications (current in January 2013)