Market Forces Mire Md. Gas Export Plan in Uncertainty


An aerial view of the Cove Point liquefied natural gas facility along the Chesapeake Bay. The offshore platform is in the background. Photo courtesy of Dominion.
An aerial view of the Cove Point liquefied natural gas facility along the Chesapeake Bay. The offshore platform is in the background. Photo courtesy of Dominion.

WASHINGTON—Lusby's natural gas import terminal is a victim of the boom in domestic production, and the industry's political and economic uncertainties are endangering its owner's efforts to rebound by adding export capabilities to the facility to take advantage of the plant's vicinity to the Marcellus Shale gas field. br>
The development of hydraulic fracturing ("fracking") and directional drilling technology has led to a more than 25 percent increase in American natural gas production over the last five years, according to the U.S. Energy Information Administration.

But fracking, the most significant development in the American energy industry in decades, has been disruptive to import facilities. Only three of the 16 liquid natural gas import terminals in North America are in use, said Zach Allen, president of energy consultants Pan EurAsian Enterprises Inc. Fracking has cut the demand for imports and turned the United States into a potential source of exports, he said.

Cove Point in Lusby was built in the 1970's, but demand for natural gas tumbled soon thereafter, and the facility stopped receiving imports after 1980. It was purchased by Richmond, Va., based Dominion for $217 million in 2002 due to an anticipated resumption of imports. The plant has received no imports so far this year, said Dominion's Director of Media Relations Daniel Donovan.

The company wants to export natural gas from Cove Point beginning in 2017 at an estimated cost of $2 billion to $3 billion. The plant would have the capacity to export as much as a billion cubic feet of natural gas per day.

The company website says that plant would create 14,600 jobs once it is built and reduce the trade deficit by at least $2.8 billion.

The plant's main competitive advantage is its proximity to the Marcellus Shale belt.

The Marcellus Shale is a natural gas-rich geological formation consisting of shale stone that covers western Maryland, eastern Ohio, West Virginia, most of Pennsylvania and southern New York. Its natural gas was not recoverable in significant quantities until the advent of fracking.

Another geographic advantage is the plant's proximity to Europe. Cove Point is the only planned export terminal on the Eastern Seaboard. A report by Citigroup Inc.—"Energy 2020 North America, the New Middle East?"—says that the export terminal could form a "natural gas highway between Europe and North America."

But before that occurs, many hurdles must be overcome.

Few expect all of the planned terminals to be approved, including Dominion Vice President Donald Raikes, who said at an energy conference in Pittsburgh that he expects about half of the United States' planned export capacity to become operational. However, he said Cove Point has an advantage over the competing proposals because of its location, according to Natural Gas Intelligence newsletter.

The company must receive a license to operate the export facility from the Federal Energy Regulatory Commission and obtain permission to export natural gas from the Department of Energy.

"All of those (export) approvals are backlogged," said Christine Tezak, energy and environmental analyst at financial management firm Robert W. Baird & Co., because the DOE is studying the economic impact of exporting natural gas.

There are nine planned export terminals that have requested approval. "Do they (the DOE) approve two more? Do they do five more? Do they do all nine?" she asked rhetorically. Cove Point will be considered third.

Dominion has approval to sell natural gas to countries that are in free trade agreements with the United States.

Allen said the approval is routine and not very meaningful because of the top export destinations, only South Korea has a free trade agreement with the United States.

The Waterkeeper Alliance, a coalition of environmental organizations, has filed comments with the Department of Energy opposing natural gas exports from Cove Point.

"You need to get all your ducks in a row and understand the environmental consequences, and that's something that hasn't happened with unconventional hydraulic fracturing," said Guy Alsentzer, an attorney with one of the coalition members, the Lower Susquehanna Riverkeeper. He called fracking an "inherently polluting process" that needs to be stringently regulated.

Industry groups have benefited from abundant and cheap domestic natural gas, and are also lobbying against exportation, making it a rare point of agreement between industry and environmentalists. The Citigroup report states that "the most momentous change on the demand side could be the re-industrialization of America and Canada based on dramatically lower cost of feedstock and fuel."

Natural gas prices are around $2/MMBtu (millions of British thermal units) down from around $7/MMBtu between 2003 and 2008. The U.S. Energy Information Administration published a study in January 2012 concluding that exporting liquefied natural gas will raise domestic gas prices by 3 to 9 percent and electricity bills by 1 to 3 percent.

Rep. Edward Markey, D-Mass., ranking member of the Committee on Natural Resources, has introduced legislation to ban natural gas exports, but Tezak does not expect Congress to interfere.

On the issue of natural gas exportation, "there's a division between the natural gas consumers and the energy companies," she said, that has divided Republicans as well.

"If you have a division among the Republicans, and they are ones controlling the House, that is not a recipe for getting things done," she said.

Tezak said an export ban would harm the industry, leading it to adjust production downward until prices rise. "Trapping production at home is an attractive short-term option, but it doesn't necessarily mean prices will stay low forever," she said.

Tezak and Allen agree natural gas prices will rise regardless of whether exports are approved because drilling is slowing down due to oversupply. Donovan said the upgrades to Cove Point will "help end the boom and bust" because exporting the natural gas would alleviate the excess supply.

The development of additional uses of the newly abundant fuel, such natural gas powered vehicles, are also likely to drive domestic prices higher over the long term.

Even if domestic natural gas prices double, the prices in Asia and Europe are high enough to make exporting profitable, Allen said, because the price differential pays for transportation and other costs.

But Allen warned that other countries including Australia are also investing in liquefied natural gas exports.

Another pitfall is the prospect of fracking taking off abroad, especially in China, which has more recoverable shale gas reserves than any country in the world, according to the Citigroup report.

"The Chinese are the biggest growth market in Asia and if they start producing natural gas from a process like fracking that would reduce the growth in the LNG market," Allen said.

Although natural gas prices abroad are currently high enough to support American exports of natural gas, the question, Allen said, is "whether they'll still be there in five years."

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