Even US and Canadian LNG Will Take Time

Ok, North America has developed into a natural gas Eldorado in the past five years. However, the giant but “land-locked” North American gas market has not been enough to comfortably absorb shale gas. The global natural gas price differentials have created an export scramble with over 20 non-FTA applications in the US and 14 in Canada (as of 4Q2013). While the tolling model of LNG exports from the US is now firmly established, and some even publicised, there is still no uniform Canadian model. The apparent speed of development of the US LNG export market belies that export the permitting process has taken about 700 days for each of the five permits granted, while only 300 days for the three permitted projects in Canada. While there are substantial regulatory and project differences between the US and Canada, our recent analysis highlights that the net effect will be a much more gradual build-up of LNG export than conventionally believed. Clearly, a sequenced permitting process, that has become formalized in the US, gives a strong guide for assessing when LNG can be brought to the market, but it is also a tool for the authorities to control if new projects are in the national interest. In fact, after a realization of some early projects in 2015–2017, there may be a lull for 1–3 years of smaller increased before another major step takes place. In the US this is because of the strict phasing, in Canada because of the need to build and reinforce infrastructure at a much greater extent, and therefore a more formalized oil-company driven FID process. This sequencing will make it possible for the authorities – and also project sponsors – to assess the market effects of exports and actual investment costs. The US DOE has already given signs that quasi-frivolous applications will not be approved, as the recent Freeport LNG expansion case showed. The clear parallelism of projects in both the US (e.g. Brownsville) and Canada (Grassy Point) will certainly need to be resolved. In addition, there will be a more naturally timed process for negotiating commercial frameworks, that inevitably will become more complex as the long term security of gas supply must be formalized. The inherent complexities of natural gas project development will again be the norm after the early easy opportunities – “slacks” – have been used up. This already appears to steer the process for application review processes and further detailed planning and investment decision. Significant volumes of North American LNG will reach international markets quite early, but a larger step in quantity will therefore most probably come later than many optimists have believed to now. In this picture, an increasing domestic gas use in the power sector and industrial users will also be important. Please contact us for further details.

2 Comments

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Lars Sørum
2013-12-06 at 09:15

I would agree that there are substantial question marks as to what level and volume of export will come out of the US.
First of all, it is a common misconception that once a project has DOE approval you have a “license to export”. This is only partly true. The “approvals” are conditional and all applicants are expected to receive conditional licenses. Obtaining FERC approval and signing commercial agreements has become the deciding factor. The DOE/FE Order No 3331, September 11, 2013 states that approval is given subject to completion of NEPA analysis by FERC as lead agency in addition to provision of first cargo commences within 7 years and submission of all relevant long term commercial arrangements. FERC may therefore be seen as the gating regulatory approval. There are significant investment required to complete the FERC process ($50mm to $100mm) as per above conditions, and the applicant has to demonstrable experience and project quality required for a customer commitment.
In my mind there is also a big question mark as to the actual market for US LNG, the actual US supply that will be made available and the number of companies obtaining FERC approval. Given the projected rate of market growth of 3-5 Bcfd of market opportunity in the expiration window given

There is also an unanswered questions pertaining to DOE’s assessment of Cumulative impact assessment and how this will influence the number of approvals that ultimately will be given.

Finally I cannot see why these LNG projects will be delivered on time and budget – LNG projects do not exactly have a brilliant track record in that regard.

Kjell Eikland
2013-12-06 at 11:07

Thank you for your insights, Lars. I take them to broadly agree with the assessment in the post, adding important – and complicating – practical and formal aspects og the LNG project approval and realization process.

The basis of the post was work to derive an optimistic time schedule for the introduction of NA LNG into the market, which some observers still appear to see as a deluge hitting the global market. Your comments suggest a longer actual time frame, possibly also with more of the proposed projects dropping out, and I agree.

The US Cumulative impact assessment and conditionalities are precisely the tempering tools that I see coming into play as a “relief valve” if prices increase uncomfortably in response to new domestic demand and exports.

Most of the export applications use (or refer to) a cost-curve rationale for arguing that supply is elastic and that US gas prices will not increase significantly, The typical expected price increase is 0.10 $/MMBtu for the lifetime of a 10-15 mtpa project.

Our supply/demand based gas price model gives a much higher price response, and with an accentuated seasonal profile. The possible price increase could certainly also temper commercial development of projects not already approved.

Several of the arguments also apply to Western Canadian projects, but the regulatory regime, technical and commercial basis (e.g. reserve-backed, green-field development and no tolling) gives different reasons for why project realization will take time, and some may be dropped.

Unfortunately, a long time-line for LNG project realization may drive some countries into alternative energy supply solutions.