US energy revolution gathers pace as the Obama administration approved wider exports of liquefied natural gas and international companies committed billions of dollars for new infrastructure.

Last updated: May 17, 2013 9:21 pm

US energy revolution gathers pace

By Ed Crooks in New York, Jonathan Soble in Tokyo and Guy Chazan in London

The growing role of the US in world energy markets was underlined on Friday as the Obama administration approved wider exports of liquefied natural gas and international companies committed billions of dollars for new infrastructure.

The developments were both consequences of the shale revolution in the US, in which improvements in the techniques of horizontal drilling and hydraulic fracturing, or “fracking”, have unlocked new supplies of oil and gas, and raised the prospect that the US will be an increasingly important supplier of energy to the rest of the world.

The Department of Energy on Friday authorised the Freeport LNG project in Texas to export to countries that do not have a trade agreement with the US, including Japan and the members of the EU. It was the first such approval to be granted for two years and only the second ever.President Barack Obama had been expected to approve worldwide sales from the Freeport project, as the administration sees rising energy exports as providing economic benefits and strengthening the global influence of the US.

However, a vocal lobby of companies in industries such as chemicals and steel has urged restrictions on gas exports to ensure US manufacturers continue to derive a competitive advantage from cheap energy.

Freeport has signed deals to sell its gas to Osaka Gas and Chubu Electric of Japan, and BP of the UK. The export project is owned by a consortium including Osaka Gas and Michael Smith, Freeport’s founder and chief executive.

Separately, Japanese and European companies said they would invest billions of dollars in another proposed gas export project, the $10bn Cameron LNG plant in Louisiana.

Mitsui, Mitsubishi and Nippon Yusen of Japan, andGDF Suez of France, which had already agreed to buyLNG from Cameron, will provide construction financing in return for equity stakes totalling 49.8 per cent.

Mark Snell, president of Sempra Energy, the project developer, said the deal “promotes a favourable balance of trade for the national economy, and supports national and internationalenergy security by assuring reliable long-term gas supplies to US allies and trading partners”.

He estimated the contribution of the Japanese and French groups at between $6bn and $7bn of the facility’s $9bn-$10bn construction cost.

Shale gas production has soared in the US in recent years, creating a supply glut that has driven prices down to about $4 per million British thermal units from a peak above $13 in 2008.

Cargoes of LNG, supercooled to minus 160 degrees so it can be transported on tankers, are selling in Asia for the equivalent of about $15 per mBTU, creating an attractive opportunity for exports from the US.

Twenty-six proposed US LNG plants have applied to the Department of Energy for export permits, but before Friday, only one – Cheniere Energy’s Sabine Pass development in Louisiana – had been granted permission to sell to countries that do not have a trade agreement with the US.

The US energy department said it would work through the remaining applications in order. The Cameron project is towards the top of the list and analysts believe it is likely to win approval for global exports this year. However, the department added that at the end of this year it would “assess the impact of any market developments” on future decisions, a concession to fears that the cumulative impact of allowing a series of LNG export developments might push US gas prices higher.

Japanese utilities have been particularly interested in projects such as Sabine Pass because its gas is priced off Henry Hub, the US benchmark, which is much cheaper than the oil-indexed price in many of the world’s long-term LNG supply contracts.

We are proud to be able to contribute not only to the development of stable energy trade between the US and countries around the world, including Japan, but also to the growth of the US economy

– Jun Nishizawa, Mitsubishi

Japan is already the world’s largest importer of LNG, and the crippling of its nuclear industry by the 2011 meltdown at Fukushima Daiichi atomic power station has only increased its demand. Tokyo Electric Power, owner of the Fukushima plant, signed a deal to buy Cameron gas in February.

Mitsui and Mitsubishi are the largest of Japan’s huge trading and investment houses. Mitsui is to take a 16.6 per cent stake in Cameron, while Mitsubishi and Nippon Yusen, a shipping company, will together take 16.6 per cent through a joint venture. GDF Suez, the French utility, will also take 16.6 per cent.

Jun Nishizawa, vice-president of the global gas business department for Mitsubishi, said: “By participating in this LNG export project, we are proud to be able to contribute not only to the development of stable energy trade between the US and countries around the world, including Japan, but also to the growth of the US economy.”

Jean-Marie Dauger, head of GDF Suez’s global gas and LNG business, said the project would serve to “expand and diversify the group’s LNG portfolio and increase its flexibility for supplying existing or future markets in high-growth areas”.

GDF Suez is Europe’s largest LNG importer and the world’s third-largest seller of LNG with a portfolio of 16m tonnes a year.

Updated May 17, 2013, 7:16 p.m. ET

U.S. Approves Expanded Gas Exports

By KEITH JOHNSON And BEN LEFEBVRE

The Obama administration on Friday cleared the way for broader natural-gas exports by approving a $10 billion facility in Texas, a milestone in the U.S. transition into a major supplier of energy for world markets. The decision reflects a turnaround in the U.S. energy trade. Five years ago, many companies built natural-gas import terminals, anticipating greater U.S. demand for imported fuel. Now, a group of private investors that includes ConocoPhillipsCOP +1.41% plans to turn one of those terminals—in Quintana Island, Texas—into an export facility to ship natural gas to Japan and other nations. Cheniere Energy Inc.’s Sabine Pass facility in Louisiana won approval in May 2011 to export LNG to the countries without free-trade agreements. It expects to begin exporting in 2015. In giving the project, known as Freeport LNG, the green light, the Department of Energy signaled that it found the prospective benefits from exporting energy outweighed concerns about possible downsides for the U.S. economy.

Proponents of greater exports, including the oil and gas industry, say that exporting inexpensive natural gas will help the U.S. trade balance, help advance the adoption of clean-burning fuels around the world and shore up energy-poor U.S. allies.

Opponents counter that exports may cause domestic prices to rise, hurting consumers and some industries such as chemicals that have benefited from cheap natural gas. Some environmentalists oppose exports for a different reason, saying the U.S. shouldn’t encourage more fossil-fuel production.

“I hope this means that more facilities will get approval in due time, sooner rather than later,” said Freeport LNG Chief Executive Michael Smith in an interview. “The country needs these exports for jobs, for balance of trade and for geopolitical reasons—our allies are asking for them.”

Dow Chemical Co., DOW +2.05% which has vocally opposed unrestricted gas exports, and Sen. Ron Wyden (D., Ore.), another skeptical voice who wields sway as chairman of the Senate Energy Committee, said they supported the Department of Energy’s decision because the department said it would weigh applications case-by-case.

“Dow will adopt a wait-and-see approach regarding further approvals,” the company said. It maintained that using natural gas for domestic manufacturing creates “far more” value “than exporting it as a fuel.”

The combination of hydraulic fracturing and horizontal drilling has unleashed a natural-gas bonanza that has made the U.S. the world’s largest natural-gas producer.

President Barack Obama has welcomed the boom, and his administration showed in Friday’s decision it was ready to buck environmental groups in order to spur further production. Deb Nardone of the Sierra Club called the move a “bad deal all around” and a “giveaway to the dirty-fuel industry.”

The Department of Energy said it had given conditional authorization to the Freeport project to export up to 1.4 billion cubic feet a day of liquefied natural gas. The approval is needed for exports to countries with which the U.S. doesn’t have a free-trade agreement, a category including major trading partners in Europe and Asia. The project, which is expected to begin exports in 2017, still needs approval from the Federal Energy Regulatory Commission.

The Freeport terminal is the second export facility approved by the Obama administration. Cheniere Energy Inc.’s LNG +0.89% Sabine Pass facility in Louisiana won approval in May 2011 to export LNG to the countries without free-trade agreements. It expects to begin exporting in 2015.

The first approval got relatively little notice, but the issue gained prominence as export applications piled up and leading companies on both sides of the issue began to clash over the merits of exports. The Department of Energy spent much of 2012 waiting for a report it commissioned on the issue, which was released in December 2012 and concluded that exports would benefit the U.S. economy overall.

Friday’s decision is an important harbinger for the remaining 19 applications to export gas to non-FTA countries. That’s because, by law, gas exports are presumed to be in the public interest unless shown otherwise.

Freeport LNG has signed preliminary 20-year contracts to sell much of the export facility’s capacity to Chubu Electric Power Co., 9502.TO +0.07% Osaka Gas Co.9532.TO +0.22% and BP Energy Co., and the company says it expects to announce a deal for the rest of the capacity this summer. Chubu Electric and Osaka Gas, both major Japanese utilities, have a partial stake in the portion of the facility that is feeding the Japanese demand.

The Freeport permit approval opens up the dam for other pending applications, but the pace of coming decisions is still unknown, said Randy Bhatia, an analyst at Capital One COF +2.84% Southcoast. “This is an encouraging step,” Mr. Bhatia said. “But you need more than one to get a better idea of what pace we can expect them to process the remainder of that queue.”

The Department of Energy will next consider the application of a slightly larger export facility in Lake Charles, La. While there are nearly a score of applications outstanding, analysts expect that only a handful will be built, due to the high cost of gas liquefaction facilities.

Moody’s Investors Service has said that projects building from existing facilities, including Cove Point LNG in Maryland and Cameron LNG in Louisiana, are best placed to secure approval and financing from the private sector.

Further complicating the picture for U.S. exports are uncertainties over future global demand for LNG. Australia and Qatar, among other countries, have expanded their own gas exports in recent years and are well-placed to supply potential customers in Asia and Europe. Due to the cost of liquefying and transporting gas, U.S. exports may not be cost-competitive if domestic prices rise in coming years.

The Department of Energy said it conducted an “extensive, careful review” that considered “the economic, energy security, and environmental impacts,” and found that the project was “not inconsistent with the public interest.”

The department said that in considering future export applications, it will consider market conditions, including projections about natural-gas prices, supply and demand. All remaining permit applications will be considered on a case-by-case basis, the department said, keeping in mind the cumulative amount of authorized gas exports.

Gas Export Approval Not Seen Signaling U.S. Permit Flood

By Jim Snyder and Edward Klump  May 17, 2013

The conditional approval of a natural gas export terminal in Texas doesn’t necessarily open the floodgates for overseas sales as the U.S. weighs how best to use its growing energy resources.

The U.S. Energy Department said yesterday that exports from the Freeport LNG project, partly owned by Dow Chemical Co. (DOW) andOsaka Gas Co. (9532), according to the venture’s website, offered net economic benefits and reflected the “transformative impact” of record gas production from hydraulic fracturing in shale rock formations.

How much of that bonanza should be sold to non-U.S. customers has been hotly debated in Washington in recent months as the Energy Department weighs 20 applications for export terminals. While industry groups welcomed the decision, analysts were split on how quickly the export facilities will go forward.

“I think we need to see more than one to get an idea of what the pace is going to be,” said Randy Bhatia, an analyst with Capital One (COF)Southcoast in Houston. The size and scale and complexity of a project may effect the pace of review, he said.

“We don’t think it’s going to open the floodgates” for the department’s approval of other applications, Mihoko Manabe, vice president and senior credit officer for Moody’s Investors Service Inc., said in a phone interview.

Manabe said she expects the Energy Department to approve LNG export facilities proposed by Dominion Resources Inc. (D) of Richmond, Virginia, and Sempra Energy (SRE) of San Diego.

Sabine Pass

In addition to the Freeport project, the agency has already approved Cheniere Energy Inc. (LNG)’s Sabine Pass export terminal inLouisiana.

“The four facilities, we believe, have a good chance of going forward,” said Manabe, lead author of a Moody’s report issued May 1 on the prospects for natural gas exports.

The decision drew wide praise from industry groups, as they called on the department to quickly approve the remaining applications. The announcement was “welcome news,” said Bill Cooper, president of the Center for Liquefied Natural Gas in Washington. Natural gas is cooled to a liquid so that it can be transported by tanker to overseas markets.

“The rain cloud in that otherwise beautiful sky is we don’t know the timeline for moving forward,” Cooper said in an interview.

Erik Milito, director of upstream and industry operations for the American Petroleum Institute in Washington, said in a statement that the announcement was a “step in the right direction.”

More Pollution

The Sierra Club criticized the decision, saying it would lead to more development of natural gas.

“More drilling means more fracking, more air and water pollution, and more climate fueled weather disasters like last year’s record fires, droughts and superstorms,” said Deb Nardone, director of the San Francisco-based environmental group’s Beyond Natural Gas campaign.

While oil and gas producers have lobbied for unfettered exports, companies including Dow that use natural gas as an ingredient for their products have argued for limits on overseas sales, fearing they could cause prices to rise domestically.

Dow issued a statement supporting the Energy Department’s decision, saying it reflected a “measured and balanced” review of the issue. George Biltz, Dow’s vice president for energy and climate change, said the U.S. should neither block exports entirely nor open the floodgates to overseas sales.

“We like the decision because it’s not in either extreme,” Biltz said in a phone interview.

Import Terminal

Less than a decade ago, when U.S. demand for gas looked like it might outstrip supply, Dow invested in a Freeport import terminal that would now be converted for exports. That investment may mean the company would get revenue from sales to non-U.S. customers, despite its opposition to large export levels.

Biltz said Dow isn’t investing in the multibillion-dollar effort to convert the terminal for exports.

Other limited partners in the Freeport LNG development are Zachry American Infrastructure LLC and Freeport LNG Investments, according to the venture’s website. ConocoPhillips (COP) and private investor Michael Smith are co-owners of the management company overseeing the original LNG import facility.

The Energy Department cited the changing energy landscape in announcing conditional approval of the Freeport terminal, which is jointly operated by Freeport LNG Expansion LP, and FLNG Liquefaction LLC. The project calls for the installation of refrigeration units,storage tanks and other equipment alongside its existing gas-import terminal on Quintana Island about 65 miles (105 kilometers) south of Houston.

Transformative Impact

“The development of U.S. natural gas resources is having a transformative impact on the U.S. energy landscape, helping to improve ourenergy security while spurring economic development and job creation around the country,” the department said in its news release.

Bill Gibbons, a department spokesman, said President Barack Obama’s administration was addressing the issue “in a responsible way” and would weigh applications on a case-by-case basis.

After a preliminary review, it seems “the order provides us everything that we requested in terms of the authorization and we commend the Department of Energy on the thoroughness of their review and consideration of exports and getting to the right result,” John Tobola, general counsel of Freeport, said in a telephone interview yesterday.

If all 20 projects were to win approval, they could ship the equivalent of 41 percent of the total U.S. production this year, according to Energy Department data.

FERC Approval

The Freeport LNG project must still win approval from the Federal Energy Regulatory Commission.

The big hurdle was thought to be the Energy Department, which must decide if the projects are in the national interest. The department concluded that exports from the Freeport facility are “likely to yield net economic benefits” to the U.S.

Freeport would be able to export as much as 1.4 billion cubic feet of natural gas a day for 20 years. In May 2011, the department conditionally approved Cheniere Energy Inc.’s Sabine Pass LNG Terminal in Louisiana for a rate of as much as 2.2 billion cubic feet a day.

The Energy Department’s action yesterday is “an indication that other projects, including our own Cameron LNG, will receive this authorization soon,” Mark Snell, president of Sempra Energy, said in a statement.

The power company is awaiting federal approval for exports from a $6 billion to $7 billion expansion of its Cameron LNG project in Hackberry, Louisiana.

‘Narrow Window’

“There is a narrow window opportunity for U.S. companies to participate in the global LNG market,” Snell said.

In its release, the Energy Department cited an Energy Information Administration forecast projecting production to reach a record 69.3 billion cubic feet a day in 2013.

Senator Ron Wyden, an Oregon Democrat and chairman of the Senate Energy and Natural Resources Committee, said the Energy Department’s decision to review applications individually was consistent with his view that a “measured approach on exports will provide the greatest advantage for the U.S. economy.”

To contact the reporters on this story: Jim Snyder in Washington at jsnyder24@bloomberg.net; Edward Klump in Houston ateklump@bloomberg.net

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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