As we mentioned last week, the Department of Energy has finally approved Freeport LNG’s export terminal in Quintana Island, Texas.
This is exactly the development we’ve been waiting for…
The government has kept a tight leash on liquefied natural gas (LNG) exporters for far too long.
Hydraulic fracturing (fracking) and horizontal drilling have boosted U.S. natural gas production by one-third since 2005, with output hitting an all-time high of 25.3 trillion cubic feet last year.
This has depressed U.S. natural gas prices to a range of $3 to $4 per thousand cubic feet (mcf). That’s important because the fuel costs about $12 per mcf in Europe and as much as $16 to $17 per mcf in Japan.
So even with U.S. gas prices of $4 per mcf and an additional cost of about $6.40 per mcf to liquefy, transport and regasify the fuel in Japan, U.S. producers stand to make a healthy profit of $6.60 per mcf.
That far exceeds what they’re getting at home.
Problem is, U.S. companies are prohibited from exporting LNG to countries that don’t have a free trade agreement with the United States.
As a result, more than 20 LNG export projects are lined up, waiting for export licenses.
But with the approval of Freeport’s facility, that bottleneck is finally starting to loosen up.
That’s big news for the companies that are next in line, because their shares are likely to get a serious boost when their projects are approved.
After all, Cheniere Energy (LNG) – which so far is the only publicly traded company to have its LNG export facility cleared – saw its shares soar 20% upon getting its license.
I’m glad you asked…
Next in Line
Next on the list is another private company – Lake Charles Exports. But right after that is the Richmond, Virginia-based Dominion Resources (D).
Dominion is looking to convert its Cove Point terminal on the Chesapeake Bay to an LNG export facility with a daily send-out capacity of 1.8 billion cubic feet.
The company has pitched its plan to the government, saying the project would contribute about $1 billion annually in federal, state and local government revenue.
It also said an average of 750 construction workers would be employed during the three-plus years of construction. And the benefits to the energy industry as a whole would support another 14,600 jobs once exports begin.
Furthermore, pipelines connecting the Cove Point terminal to Pennsylvania’s Marcellus Shale gas field are already in place. So by giving Dominion the green light to go ahead with exports, the government could also stimulate drilling in Pennsylvania, where gas production has stagnated due to oversupply.
The company has already found buyers for pretty much all of Cove Point’s capacity. Dominion has struck deals with a subsidiary of GAIL Ltd., India’s state-owned gas company, and Japan’s Sumitomo Corp.
Under those agreements, Dominion would collect a flat fee for transporting and processing the fuel. So it’s being paid on volume, which means natural gas prices are irrelevant.
That income would go a long way for Dominion, which is already one of the largest energy producers and transporters in the United States. Keep in mind, the company has 10,000 miles of gathering and transmission pipeline, a massive natural gas storage business and a sizeable amount of processing capacity.
But an LNG export facility 60 miles south of Washington, D.C. would have to be considered its crown jewel. Especially with natural gas demand ratcheting up at home and abroad.
Undercutting the Competition
Another company to look at is Sempra Energy (SRE).
The San Diego-based Sempra has applied to add natural gas liquefaction and export facilities to its existing Cameron terminal in Hackberry, Louisiana.
Cameron has a total LNG export capacity of 12 million metric tons per year, or about 1.7 billion cubic feet per day. The facility is expected to start delivering LNG to international markets in 2017.
Like Dominion, Sempra claims the project will boost both the local and national economy, creating nearly 3,000 direct jobs in the peak construction year and approximately 130 full-time jobs when fully operational.
The Cameron facility has already been approved to export LNG to countries with which the United States has free trade agreements.
Currently, Cameron is fourth on the list, right behind Dominion, but that could change, since Sempra has petitioned the DOE to move up its application.
You see, the DOE has been reviewing applications based on when they were filed – first come, first served. But Octavio Simoes, President of Sempra LNG, has suggested that projects be prioritized by how many regulatory hurdles they’ve cleared.
“Right now, Sempra’s Cameron LNG project is ranked as [fourth] in the DOE queue but is essentially first in the FERC queue,” Simoes said, referring to the Federal Energy Regulatory Commission.
Christopher Smith, Acting Assistant Secretary at DOE, said the proposal would be taken under consideration. If it’s implemented, Sempra’s LNG export facility would jump to the top of the list.
Either way, Sempra and Dominion are both likely to benefit as the DOE opens up the LNG floodgates.
It’s only a matter of time.
And “the chase” continues,