LNG

Dow's peculiar position in spotlight as export debate rages on

Dow Chemical Co.'s position as one of the country's most outspoken opponents of unfettered exports of domestic natural gas overseas wouldn't be so curious but for one thing.

The petrochemical giant still indirectly owns a stake in a proposed export facility in Texas.

The position is a hot potato for Dow.

On one hand, the Michigan-based company has been careful to distance itself from ownership of an export terminal -- and last year sold off half its 15 percent limited partner interest in Freeport LNG Development LP, which is developing the export terminal on Quintana Island in Texas. Dow holds the position through its subsidiary Texas LNG Holdings LLC.

Dow, a roughly $60 billion global specialty chemical, advanced materials, agro sciences and plastics company, has also argued that exporting liquefied natural gas is not part of its business strategy and that it's not involved in or consulted by FLNG about the daily operations of the export project as a limited partner, including the export application and investment activities.

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But Dow hasn't completely handed off the project -- yet.

Freeport said Dow through its stake in Freeport LNG indirectly has holdings in the export project. And Dow through its subsidiary is named in filings before the Department of Energy and other permitting entities. That's raised eyebrows among some industry groups, export proponents and analysts who say such tricky straddling of the issue could have ripple effects in ongoing debates -- especially as the call for LNG exports grows louder on and off Capitol Hill.

Dow's position was made more interesting after the Obama administration enlisted Andrew Liveris, CEO of Dow, to advise the White House -- as a member of the president's Export Council -- on doubling exports over five years. Dow also is a member of America's Energy Advantage, a group that has warned allowing unchecked LNG exports, even to U.S. allies, will raise gas, electricity and propane prices across the country. The group also includes the American Public Gas Association and steel producer Nucor Corp.

Last year, Dow split with the diverse membership of the National Association of Manufacturers, an industry group that has thrown its support behind fast-tracking LNG exports.

Some observers think the chemical giant's stance could have broader implications.

"You can't argue for an open market for your goods, but a closed market for the goods that you want to buy. And that's made that whole line of discussion pretty unreasonable, really," said Michelle Michot Foss, a chief energy economist with the Bureau of Economic Geology at the University of Texas. "The repercussions of arguing for export control on a raw material like this are huge. The domino effect across the entire international trade space is just huge, and you risk creating political acrimony in ways that could come back to hurt you in other ways."

Others say Dow's position is one of strategy.

William Frohnhoefer, an analyst at BTIG LLC, said he doesn't believe Dow is having difficulty selling its share of the facility, adding that "Freeport would be happy to let them go unless Freeport would lose value." Frohnhoefer said it's more likely that Dow is waiting to see what the most lucrative outcome will be -- and whether it's good to be long in LNG capacity.

"They're not going to get hurt by waiting," he said, adding that Dow's shareholders want the company to hold onto valuable projects. "It behooves them to wait."

Seeking balance

Dow's position highlights the country's quickly changing energy landscape. Less than a decade ago, the country was facing a major shortfall in the supply of natural gas as declining conventional production and reserves were outpaced by rising demand.

In the early 2000s, Dow teamed up with other companies under the Freeport umbrella to invest in imports. But the blast of imports never materialized, even with about a dozen terminals in place, as the use of hydraulic fracturing and advanced drilling techniques led to a surge in domestic gas production.

That meant import facilities largely sat idle. Now backers want to expand some of the same locations to ship the country's newfound glut of natural gas to foreign countries.

Dow has said it's pushing for a measured and balanced approach "that considers both the potential price impact to consumers and meets robust public interest criteria."

"There will be exports, and there should be exports," Dow's Liveris said March 5 during a panel discussion at IHS CERAWeek in Houston. "We have to monetize this great wealth that we've created in this country."

He cited an estimated $100 billion of new investment possible because of low-cost U.S. energy and some 5 million new jobs, not counting job multipliers as others invest.

"We shouldn't put that at risk by exporting more than half of the production because we will bleed back the alternative energy price, which is oil," he said. Liveris also noted some gas price spikes in the United States during the recent winter.

"If you over-export, you will get disruption economics in the United States," he said. "And that'll threaten all those jobs. So I think balance is what's happened."

He said the Energy Department looks to approve projects based on the public interest.

"The criteria for the public interest is vague," he said. "So we all need to jointly help on what the public interest means."

Liveris said "that's a balance between value-add and exports, and we're all for that."

'Both sides of their mouth'

A group of petrochemical companies raising questions about U.S. LNG exports is trying to keep prices low to boost profits at the expense of producers, the chief executive officer of Freeport said March 4.

People in the natural gas business "shouldn't be penalized so that the petrochemical industry that deserted the United States can come back," Freeport's Michael Smith said in an interview at the IHS CERAWeek energy conference. "We all should be able to prosper together."

Smith's comments appeared aimed in part at America's Energy Advantage.

He said a lot of companies "are talking out of both sides of their mouth" if they rely on exports and question sending natural gas out of the country.

At the core, a company such as Dow wants low-cost natural gas because it helps its business in the United States, said Ken Medlock, a fellow at the James A. Baker III Institute for Public Policy at Rice University.

"It's strategic. It makes sense for them," Medlock said. "But in general, when you have constraints on trade, you're not achieving the full benefits of what trade can provide."

Medlock said most of the price action is going to be overseas, and Dow's assets in other parts of the world might stand to benefit if gas prices outside the country fell with exports. Medlock estimated that the Lower 48 states may be exporting about 5.5 billion to 6 billion cubic feet a day of LNG by the early 2020s.

The market will determine how much gas flows, he said, and it's hard to justify why Energy Department approvals haven't been faster.

If the government were to hand these "licenses out like candy," it might not make a difference in the volumes sent out, Medlock said.

Freeport is planning an LNG export project that will cost about $14 billion and include three trains, or production units, according to Smith. Construction may begin this year after regulatory approvals, and the first unit may open in 2018, with others in 2019, he said.

Smith said natural gas will have to get to a price where a company can drill it and make a profit. That means gas can't be expected to be $2.50 per thousand cubic feet, he said.

"America's [Energy] Advantage wants to keep natural gas prices artificially low so they can make an extra profit and other people in America do not make a profit," he said.

Smith said there may be a handful of U.S. export terminals up and running in 2020 or 2021, with a total approaching 9 billion cubic feet a day. He called that the first wave of U.S. LNG exports, though he has plans for a possible future project if there's an interest in combined exports that exceed 12 billion cubic feet a day.

Although the process on Freeport has taken time, Smith said he's looking forward to the development of his LNG project. He said Freeport might look to go public as a master limited partnership, though it wouldn't be until sometime in the future.

"We are close to a dream come true," he said. "Let's face it, we're a private company and we're about to build a $14 billion export facility."

Twitter: @edward_klump | Email: eklump@eenews.net

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