Oregon LNG terminal plans reverse from importing to exporting gas

By Ted Sickinger, The Oregonian

Two years ago, energy companies trying to build terminals to import liquefied natural gas to Oregon laughed at the notion of using their projects instead to export burgeoning supplies of U.S. and Canadian gas to lucrative markets in Asia.

The idea, LNG backers said, was a conspiracy theory concocted by environmentalists and landowners who didn't want pipelines laid across public and private lands.

Today, those opponents can safely remove their tinfoil hats.

If natural gas producers and LNG terminal backers have their way, Oregon could become a significant hub in exporting domestic gas to Asia, joining a nationwide push that could have a meaningful -- and according to critics, disastrous -- impact on the price of natural gas for U.S. consumers.

With domestic reserve estimates surging because of successful drilling in tight shale formations, gas producers and terminal developers are pushing hard to export what they describe as surplus gas.

Two LNG terminals on the Gulf Coast have already applied for -- and in one case received -- regulatory approval to retrofit their idle facilities for export. In British Columbia, energy companies are contemplating multiple liquefaction terminals to export gas produced from that province's shale formations.

Backers of the proposed Jordan Cove LNG import terminal in Coos Bay, which has already received conditional approval from federal energy regulators, are considering converting the project into a dual-use terminal with liquefaction and export capabilities. Backers of the Oregon LNG project at the mouth of the Columbia River in Warrenton say they're watching the market.

"It's not a question of whether we want to do it," said Bob Braddock, Jordan Cove's project manager. "It really depends on whether customers step up and say they want to do it. We've been in discussions with potential terminal users."

Oregon produces no meaningful quantities of natural gas and has no shale formations to tap. But it sits on the Pacific Rim, between three major supply basins and Asia, the world's most lucrative gas market.

Experts say export economics from Oregon are a slam dunk, potentially doubling the price that Canadian and U.S. producers net for their gas domestically. A $5 billion export terminal could also double the local jobs and tax revenues discussed under an importing scenario -- a handsome prospect given Oregon's economic stagnation.

"The market advantages of a Pacific Basin LNG terminal cannot be denied," said Gordon Pickering, director at Navigant Consulting, which has worked with Oregon LNG and one of the export projects on the Gulf Coast. "The question is whether you can get it done. Local land use is the biggest issue."

That's a big but.

An export project comes with all the same environmental impacts on rivers, forests and farmland. And LNG opponents have proved a potent force in Oregon, mounting effective legal challenges to local land-use approvals and mobilizing political opposition.

The coalition of landowners and environmentalists is also joined by new, politically connected allies, including industrial energy users and publicly owned utilities who fear gas exports will raise prices.

"In the end, it's going to be every homeowner, every farmer buying fertilizer, and every manufacturer trying to create jobs who is going to be hurt by this," said Paul Cicio, president of the Industrial Energy Consumers of America. "America needs to wake up. We're about to export one of our only competitive advantages."

Any discussion of LNG exports starts with shale.

Producers' success using hydraulic fracturing -- pumping a high-pressure brew of water, sand and chemicals down wells to crack and prop open fissures in shale formations so gas can flow -- has completely flipped the tenor of North America's supply debate. Forecasters who warned of looming shortages now predict a century of surplus.

The sustainability of the shale boom is debatable. Some experts say it's a sham, that production from "fracked" wells will be expensive and peter out more quickly than wells drilled conventionally. Fracking also faces stiff environmental opposition due to heavy water use and groundwater contamination issues.

For now, however, the shale boom is real and is quickly reshuffling gas flows around the United States and Canada. Shale production in Appalachia, the South and the upper Midwest is displacing supplies from producers in the Rockies and Canada. Meanwhile, development in British Columbia's Montney and Horn River shales could become a game changer in this region.

"BC is about to drag the region into the same kind of market change that the U.S. shales did two or three years ago on the mid continent and the East Coast," Pickering said.

Marry BC shale production with traditional Northwest supplies from Alberta and the Rockies, and then add the Ruby pipeline. Ruby opens this summer and will bolster deliveries of Wyoming gas to a distribution hub at Malin, on Oregon's border with California.

As it happens, the proposed Pacific Connector gas pipeline, which would serve the Coos Bay LNG terminal, also connects directly to Malin.

Experts say the business case for an export terminal in Oregon is compelling.

Gas that sells for $4 per million Btu in Alberta or Wyoming can be piped to the Oregon Coast, liquefied, and delivered to Japan via tanker for about $9, they say. That beats what a Gulf Coast terminal can deliver due to shorter shipping distances.

The spot price for natural gas in Japan, which has no gas or pipeline access of its own, is currently in the range of $11 or $12. The price under multiyear contracts is even higher, as those contracts are indexed to crude oil prices. Bottom line, U.S. producers can double or triple their net by exporting to Asia versus selling domestically.

Asian LNG demand is expected to increase, driven by economic growth in China and India, fuel switching from coal to natural gas, and events like the Japanese nuclear disaster.

Critics of LNG export say the export model is a holy grail opportunity for the gas industry, and not just because it offers access to new customers. With sufficient U.S. export capacity, they believe, the industry would unlock North America's secluded gas markets, where prices are set based on regional supply and demand conditions. Instead, gas prices would increasingly be set based on international demand and market speculation, just like prices for crude oil.

"This is the bastard marriage of our oil industry and the financial industry," said Paul Sansone, a former energy company executive and LNG opponent who lives in Gales Creek. "All along, the goal has been getting gas to be like oil; to break up these regional markets and have a world price so they can speculate on it."

Gas industry consultants like Pickering say that's not the way it would work. He acknowledges -- as industry analysts have -- there would be some price increases. But the industry says the main advantage would be to stabilize gas prices at a higher level and encourage more shale production. Increased supplies would keep a lid on prices, they maintain, while improving the U.S. balance of payments and creating jobs.

Experts expect an onslaught of applications for export licenses from owners of existing terminals. The Federal Energy Regulatory Commission is widely expected to rubber stamp such applications. While the U.S. Department of Energy has approved one export license, it says it will examine each terminal's potential impact on domestic markets.

Oregon politicians have pushed to give the state more say in licensing and permitting LNG terminals. And its two senators say they have concerns about the prospect of exports.

"I am already on record opposing the export of natural gas from Alaska," said Sen. Ron Wyden in an e-mailed statement. "I have the same concerns today that exporting natural gas will benefit gas companies at the expense of the American consumer."


--Ted Sickinger