[NGW Magazine] The US Warms to Small-Scale LNG

This article is featured in NGW Magazine Volume 2, Issue 21

In the wake of new technologies and potential new customers, US senators are trying to popularise small scale LNG to benefit state economies. This needs rule changes as well as an innovative approach to markets.

The US president, Donald Trump, signed March 28 an executive order (EO), Promoting Energy Independence and Economic Growth, requiring all heads of agencies to review policies that may hinder the development of domestic energy resources. Responding to this broad EO, the US Department of Energy (DOE) issued a call for comments and October 24 it released a final set of recommendations for the department to follow.

A key part was a renewed focus on streamlining LNG export approvals, following a similar rule change in early September on the same topic.

Under the Natural Gas Act, the DOE must conduct a public interest review before authorising gas exports to countries that are not covered by free-trade agreements. Exports to countries covered by free trade agreements are automatically considered to be in the national interest.

Provisions like this are a symptom of anti-monopoly sentiment, dating back to the original Natural Gas Act in 1938, which was cautious on interstate gas trade owing to the high cost of pipelines and hence the likelihood of regions having one sole provider.

Of course, the US as a whole was careful with energy exports for decades following the energy crises of the 1970s, and major LNG export projects have only begun to be approved in the 2010s, owing to the glut of gas from the shale revolution. Cheniere Energy’s Sabine Pass project was the first mover, shipping its landmark first cargo in early 2016.

In the final recommendation report, the DOE reaffirmed its September proposal and called for quicker approvals for projects with quantities of up to 51.1bn ft³/yr, or 140mn ft³/d, that do not require a National Environmental Policy Act (Nepa) environmental report. These export requests, if they meet the criteria, will be treated automatically as being in the national interest. 

Senators seek to codify DOE guidelines

Seeing opportunity to develop industries and sites critical to the states of Florida and Louisiana, US Republican Senators Marco Rubio and Bill Cassidy respectively teamed up and introduced legislation October 18 to try to put these proposed guidelines and regulations into law. The bill is called the Small Scale LNG Access Act and largely uses the same logic as the DOE recommendation: it would treat small scale LNG export applications as being, by default, in the public interest. The bill includes language that prevents it from applying to deals with countries subject to US sanctions and, as of yet, has made no progress in the US House.

Both senators are from states with much to gain from LNG development. Louisiana is the launch-pad for the US LNG export boom, with the aforementioned Sabine Pass in operation, plans from Venture Global for an $8.5bn LNG facility, G2 LNG developing an $11bn project and Magnolia LNG announcing a $3.45bn facility.

Senator Rubio, for his part, put some emphasis on the geopolitical concerns: "Expedited approval of small-scale natural gas exports would strengthen an emerging sector of Florida's economy. In addition to the economic advantages for Florida, this measure would bolster our existing ties with Caribbean and Latin American nations while ensuring that bad actors in the region, including Cuba and Venezuela, do not reap its benefits."

The text of the proposed bill contains no provisions that specifically modify approval procedures if the application is related to Caribbean or Latin American nations. Instead, language from Senator Rubio and others highlights growth in the nearby region as an example of – so they hope – an ample customer base that US producers can satisfy.

A letter from Cassidy, John Barrasso, R-Wy., and Lisa Murkowski, R-Ak., to DOE Secretary Rick Perry uses Jamaica as an example, noting that as of 2014 the country generated more than 90% of their electricity from fuel oil, and none from natural gas. Supply to isolated areas is one of the strengths of small-scale LNG, and island nations that cannot use pipeline supplies are an example of potentially strong LNG growth.

Price is a challenge but new buyers emerge

Given the huge costs and timeframes needed to construct LNG infrastructure, US exporters are anxious to streamline the process. A thorough analysis of global LNG market predictions over the next few years is beyond the scope of this article, but generally low energy prices have crippled plans for new development, with few final investment decisions (FIDs) on export terminals being taken in 2015 or 2016.

The struggles of Canadian exporters are indicative: there are at least 17 proposed projects in Canada, representing more than 150mn mt/yr, but none have been able to reach FID status, and three have been delayed indefinitely. Analysts predict that the market may start to reach equilibrium between 2020 and 2024. Given that the time from FID to delivery for a typical greenfield project is four to five years, new FIDs will be needed by 2019 or 2020 to meet a possible LNG shortage by 2024.

The current period of price weakness has given power to purchasers, and trends are moving toward shorter average contract lengths, smaller contracts, and a variety of new customers. While global demand is primarily driven by huge markets like Japan or South Korea (existing) or China and India (with their massive potential growth), new technology allows for smaller customers to pop up in unexpected places. In particular, floating storage regasification units (FSRUs) can be bought that allow for purchasers to have an LNG import solution ‘off the shelf.’

One notable example is Lithuania, which leased an LNG carrier from Hoegh in 2014, named it Independence, and has used the supply diversification it provides as a threat, security blanket, and negotiation tool as they deal with Russian gas suppliers. If ‘start up’ costs of importing can be reduced, LNG is a flexible power source for isolated areas, whether they be Caribbean islands or places subject to an external monopoly.

A further development is the use of LNG for non-electricity uses, such as directly as fuel. LNG-as-fuel is a small but growing market for use in container ships, driven by increasingly strict sulphur requirements that prohibit the use of traditional heavy fuel oil. Trucks, as well, are a growth area – LNG fuelling stations have been popping up throughout Europe for a few years now, typically in or near LNG facilities such as the port in Zeebrugge, Belgium.

More significantly, one recent report states that demand for LNG-fuelled heavy trucks in China rose by 540% in the first half of this year, as the government prioritises combating pollution and smog. When considering these alternative sources of demand, it is easy to understand how traditional, long term contracts are seen as cumbersome and inefficient.

DOE guidelines provide US flexibility

All this reinforces the idea that LNG suppliers increasingly need to be flexible and able to quickly adapt to new customers and small contracts, and the industry argues that US regulation must evolve to meet this reality. Senator Cassidy has directly called out delays in the process, with one project apparently waiting 1,642 days for approval. The problem is exacerbated by the fact that many customers – both places with easily predictable demand growth, like China or India, but also unconventional/smaller purchasers – are not covered by appropriate free trade agreements with the US.

As mentioned, the Small Scale LNG Access Act does not yet have a counterpart in the US House of Representatives. Given the difficulties the House and Senate have sometimes had in passing legislation this year, there is no guarantee that the bill will soon become law.

This is somewhat of a moot point, however, as the rule changes the DOE is proposing are more easily implemented. Codifying them into law will just make it harder for future administrations to change the Department’s guidance. The global market is unavoidably changing, as new technologies and players emerge, and US regulators must keep up with the times.