Skyrocketing costs plague push to 'liberalize' LNG market

With the campaign to use U.S. liquefied natural gas exports as a cudgel against Russian aggression in full bloom, "liberalizing" regional gas markets is the talking point du jour.

In this corner of the vast energy markets, liberalizing gas means shipping greater volumes of LNG to Europe and Asia. It means building a big, liquid global trading business that offers allies easy access to LNG cargoes sloshing around on the open seas. If that can happen, according to advocates for expanding U.S. energy exports, President Vladimir Putin and his pipeline monopoly OAO Gazprom lose their iron grip over Europe's energy supply.

But conspicuously missing from the torrent of editorials and Twitter feeds extolling the idea of using gas exports as a hedge against authoritarian rule is the steep cost of doing so.

Multinational oil and gas companies building LNG export facilities have bristled at the rapidly rising price tags for projects aimed at consumers in Asia. In Australia, seven projects are under construction at a total cost of about $150 billion, a staggering figure even for the enormously profitable oil and gas industry.

For its part, Saudi oil can be produced for about $20 a barrel and sold overseas at a premium. LNG is more expensive to produce and to ship. Further, much of the upfront financing for LNG plants and terminals is tied to contracts committing a percentage of gas supplies to electric utilities. The market is tied up.


Meanwhile, Japan is pushing for better prices. China is acting cool toward imported LNG.

"The total amount of LNG trade compared to the total amount of pipeline trade is small," said James Jensen, a Boston-based independent energy economist who consults globally on the LNG trade. "It says an awful lot about how that develops."

Scary cost scenarios

When Chevron Corp.'s Gorgon LNG project in Australia is completed, the total cost is expected to be about $52 billion. Next door in Papua New Guinea, Exxon Mobil Corp. is building a $20 billion LNG export terminal.

Costs for building what's called liquefaction plants -- facilities used to supercool gas so it can be loaded onto football-field-length ships -- are high everywhere. Project costs for building gas export infrastructure in Australia have gone up between 20 and 40 percent.

Liquefaction plants are only one part of the LNG investment chain. There's drilling in deepwater gas fields to get the gas in the first place. In the United States, there's the rising cost of onshore shale gas drilling. Terminals to unload the supercooled LNG and convert it back to gas must be built in the countries accepting LNG shipments. Ukraine, for example, has no LNG import capacity.

For U.S. financial institutions, building out the LNG market hasn't been cheap, either. Since 2009, the Obama administration has quietly supported the expansion of LNG export projects in the Asia-Pacific region through $8 billion in U.S. Export-Import Bank loans.

"You're beginning to see some project sponsors in Australia getting cold feet," Jensen said. Projects are based on pricing formulas tied to high oil prices. More gas from the United States and elsewhere boosting competition could change that formula. "I think that all the major [LNG developers] are scared."

Russia's attempt to occupy Ukraine's Crimea region has recharged a political argument over whether the United States should fast-track permits to build more LNG export terminals and to ship more of that gas to allies. On Monday, Sen. John Barrasso (R-Wyo.) said he plans to insert language into an aid package for Ukraine that would expedite exports of U.S. gas to members of the North Atlantic Treaty Organization and other allies.

Barrasso, a fleet of conservative commentators and some energy experts are keying off the nation's gas glut to press for swift action by the Obama administration to eliminate export barriers. The domestic shale gas boom has made U.S. natural gas the cheapest gas in the world. U.S. production has continued rising with the use of advanced drilling technology, good geological conditions and favorable regulations.

"We should encourage as much construction as we can to encourage more flexibility in the system," said Michael Wara, a law professor and energy policy researcher at Stanford University. "It's really hard to predict the way that flexibility would be utilized, but with greater flexibility comes increased security."

Caution among policymakers

Still, financial analysts and people with ties to the White House continue to point out that the Energy Department has already approved six proposed LNG terminals, at a rate of about one every two months. Only one, Cheniere Energy Inc.'s Sabine Pass LNG project in Louisiana, has the permits, financing and contracts in place to start construction.

Energy Secretary Ernest Moniz has noted that DOE doesn't have any authority over where privately owned LNG cargoes ultimately end up.

"Many policymakers remain cautious about using exports to offset Russian leverage," energy analysts at FBR Capital Markets & Co. pointed out in a note to clients yesterday. "Liberalizing exports and linking the domestic and international gas markets would expose domestic natural gas prices to international supply disruptions, and even saber rattling from foreign leaders."

DOE has been cautious about LNG exports. Since catching fire in Washington, a policy of more exports has been pushed by developers like Cheniere, which helped build a fleet of U.S. LNG receiving terminals last decade with the idea that the U.S. would import more natural gas. Big shale gas producers are also pressing for export authority, including Exxon and Chesapeake Energy Corp.

Those powerful interests have gotten some push-back from large industrial gas users like chemical companies. They'd like to see U.S. gas stay in the country so prices stay low.

In a private gas market, cost still dictates some of the decisions about what gets built and what's left on the drawing room floor.

"The cost of LNG plants is enormous," said Jason Bordoff, the director of Columbia University's Center on Global Energy Policy and formerly a member of President Obama's National Security Council.

Cheniere has some financing in place. Others are still lining up customers and financing, "not because the government's standing in the way, but because it's hard to pull together an $8 [billion] or $10 billion project," Bordoff added.

Twitter: @JoelKirkland2 | Email:

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