NATURAL GAS

U.S. throws open doors to LNG exports with Cheniere approval

Cheniere Energy Inc. has cleared a major regulatory hurdle to building a $5 billion liquefied natural gas (LNG) export facility along the Gulf Coast of Louisiana.

The Federal Energy Regulatory Commission yesterday granted approval for Cheniere to build the first LNG export terminal in the lower 48 states, a project met with criticism from environmental groups concerned about pollution tied to the U.S. gas boom. It also faces concern in corners of the industrial sector that shipping gas overseas will increase domestic prices and make U.S. manufacturers less competitive.

U.S. gas producers will have the capacity to export up to 2.2 billion cubic feet of gas per day if Cheniere goes ahead with its Sabine Pass LNG project to be located at an existing import terminal in Cameron Parish, La.

Earlier yesterday, Cheniere Energy Partners LP, the Houston-based subsidiary developing the project, said it asked eight large financial institutions to help it arrange debt financing. After securing a $2 billion investment in a February deal with private equity firm Blackstone Group, Cheniere is searching for an additional $3 billion to $4 billion to start construction.

In recent months, the prospect that the United States could become a significant exporter of natural gas to Europe and Asia caught fire in an election-year atmosphere colored by energy issues. The Sierra Club, in particular, has tried to slow the permitting of Sabine Pass and other LNG export projects.

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Critics on Capitol Hill have said they are concerned that, despite today's rock-bottom U.S. natural gas prices, over time global demand for LNG could drive up prices for American households and for U.S. makers of steel, chemicals, plastics and energy-intensive manufactured goods.

Yet the FERC permit throws open the door to federal authorization of other LNG export projects that can land export approval from the U.S. Energy Department and meet safety standards. With at least eight applications before the federal government, the Obama administration so far has been reluctant to shut down U.S. LNG export potential.

Yesterday, FERC also vacated its 2009 approval of the Jordan Cove LNG import terminal proposed near Coos Bay, Ore., which had been stymied by flagging LNG demand. The developer plans to build an export terminal instead. DOE in December authorized Jordan Cove to export gas. The developer filed a preliminary application with FERC in February that kicked off the permitting process for the large Pacific Northwest LNG project.

In its Sabine Pass order, FERC settled on DOE's earlier findings about potential energy security issues tied to LNG exports. "Among other things," the commission said, "DOE found that natural gas production associated with exports in the Sabine Pass application will result in increased production that could be used for domestic requirements if market conditions warrant such use, and this will tend to enhance U.S. domestic energy security."

Further, FERC dismissed charges by the Sierra Club and the Gulf Coast Environmental Labor Coalition that the commission shortchanged its environmental and safety reviews. Super-chilling gas into a liquid is an industrial process that can be just as polluting as other forms of energy and chemicals production. But the commission cited conditions that Cheniere comply with the federal Clean Air Act, including rules governing greenhouse gas emissions and the use of "best available" pollution control technology.

The Sierra Club sent a 62-page protest to DOE yesterday challenging another proposed export terminal near Freeport, Texas. Shale gas production in Texas has caused significant air pollution, it asserts, and exports will exacerbate it by encouraging more gas production.

Financing

LNG project financing has been a hurdle to building out worldwide capacity to turn natural gas into a liquid that can be loaded onto giant tankers bound for Asia. Because of their large cash reserves and partnerships, multinationals like Exxon Mobil Corp. and Chevron Corp. are weathering the multibillion-dollar price tags for building liquefaction plants and LNG export terminals along the coasts of Australia, Papua New Guinea and Qatar. Royal Dutch Shell PLC is investing big in plants that turn gas reserves into petrochemical products.

For its part, Cheniere has had a tough time absorbing costs, struggling to stay afloat while deeply in debt. Earlier last decade, Cheniere built its business on the assumption that the United States would have increasing demand for LNG imports. Instead, newly minted LNG import terminals in Texas and Louisiana faced a surge of onshore U.S. shale gas production and the economic recession in 2008. U.S. gas supplies boomed, and demand dropped off.

U.S. natural gas prices are near record lows. U.S. LNG imports have dropped 23 percent in the past two years, according to FERC, and three of the 12 U.S. LNG terminals are operating at more than 5 percent of their capacity.

The United States is the world's largest gas producer, recently surpassing Russia. But U.S. gas producers are shifting their resources to higher-priced oil, and they are pressing the U.S. government to give the green light for LNG exports to Asia and Europe, where rising gas demand and price premiums could mean significant profits for U.S. producers.

Large Asian economies such as India, Japan, South Korea and China are signing long-term contracts for gas imports. Cheniere has signed a contract with Bechtel Oil, Gas and Chemicals Inc. to build the Sabine Pass liquefaction facilities, and Cheniere says it has signed LNG supply contracts with utilities in the United Kingdom, Spain, South Korea and India.

The eight banks Cheniere said it is working with to secure more financing are the Bank of Tokyo-Mitsubishi UFJ Ltd., Credit Agricole Corporate and Investment Bank, Credit Suisse Securities LLC, HSBC, J.P. Morgan Securities LLC, Morgan Stanley, RBC Capital Markets and SG Americas Securities LLC.

"Obtaining financing is one of the last steps to complete before proceeding with the construction of the first two liquefaction trains being developed at the Sabine Pass LNG terminal," said Cheniere CEO Charif Souki in a statement.

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