Gauging LNG Terminals’ Risk

Developers proposing to build facilities to reconstitute frozen natural gas imports along the coast of California and Mexico are facing growing opposition as new terminals get closer to the building stage. Lending gravity to opponents' arguments is a recent explosion at a liquefied natural gas (LNG) facility in Algeria, which left 27 dead and dozens injured (see sidebar below). While onshore LNG proposals and the accompanying opposition are hardly new, the increased political, social, and market pressures to expand natural gas supplies as domestic costs skyrocket (recently reaching $15/MMBtu on the East Coast) put a fresh twist on the issue. Developers, policy makers, and potential neighbors are contemplating the new risks and rewards. "If I was a cynic and wanted to make a lot of money, I'd push siting onshore LNG facilities" in the state, said Jan Smutny-Jones, Independent Energy Producers executive director. Smutny-Jones learned the energy business from fighting LNG terminal proposals along the Southern California coast in the 1970s. Recent proposals include Mitsubishi subsidiary Sound Energy Solutions' (SES) Port of Long Beach regasification project, which took the first permitting step when it submitted an application to the Federal Energy Regulatory Commission January 26. Other proposals in the works along the California coast include Calpine's onshore Humboldt Bay project and the floating port off the coast of Oxnard proposed by BHP, an Australian firm. BHP announced last week it was ready to file for requisite permits. Unlike the case with onshore facilities, the Coast Guard, not FERC, is the head federal agency for deepwater terminals. A number of onshore LNG projects are also slated for the Mexican coast. Three decades ago, LNG projects on the table included ones on Humboldt Bay and the Port of Los Angeles. The risk of LNG explosions caught the public's attention in the 1970s. At the time, an oil tanker blew up in the port of L.A., killing numerous soldiers and knocking out windows for miles, increasing concerns about LNG's potential to do the same. But what sank the coastal projects was a lack of demand. Around that time, some of the natural gas market was deregulated and supplies shot up, particularly in Texas, causing the Golden State's gas proposal to wither on the coastline. Opposition in California today, which is further fueled by the possibility of terrorist attacks, creates more formidable hurdles to federal and state permitting processes for onshore projects. "The Mitsubishi proposal is a litmus test and will determine the fate of the onshore concept in California," said Bill Powers, chair of the Border Power Plant Working Group, a watchdog organization in San Diego. LNG developers in Mexico are also having their fair share of trouble. Sempra Energy's and Shell's joint proposal in Baja California, which received needed permits from Mexican authorities, is now tangled up in Mexican court. The country's environmental agency, Secretaria de Medio Ambiente, Recursos Naturales y Pesca, carried out a risk analysis of the Costa Azul terminal that reportedly found that an accident there would be on par with the Port of L.A. explosion years ago. Sempra spokesperson Art Larson said he could not comment on the risk assessment because he had not seen it. However, many have little doubt that internationally shipped frozen gas, later thawed, will play a role in the energy market because tapped domestic wells are past their prime. Just how big a role remains to be seen. "For the first few projects in the U.S., demand will not be an issue," predicted Swami Venkataraman, Standard & Poor's associate director of utilities. Many analysts agree LNG's price tag must be in the $4.50/MMBtu to $5.50/MMBtu range to make the market work. The numbers add up for investors if $3.50/MMBtu is the floor. Whether the gas from LNG facilities will sell at the projected price remains to be seen. "It is a crap shoot," said Rich Ferguson, policy director for the Center for Energy Efficiency and Renewable Technology. The gas market could turn out to be a "bonanza" for LNG suppliers, but "uncertainty about the magnitude and direction of gas price movement and the drivers that influence price may persist," states a Standard & Poor's April 2003 report. The numbers being put out by LNG developers, which are generally in the above-mentioned range, cannot be tested because gas companies keep price data secret. LNG involves multibillion-dollar capital expenditures, and there are ongoing questions about its financial viability. "There is a lot more to the industry than import terminals," said Bob Nimocks, president of Zeus Corporation, which is studying how equity markets are reacting to LNG development. The study released last month by the energy research consulting firm found "a lack of market understanding." For instance, the proposed SES Long Beach facility is estimated to cost $400 million. The figure does not include the fleet of LNG tankers needed to transport the gas between countries, hemispheres, and continents, or other infrastructure costs and risks linked to getting the gas out of the ground and en route. Making the high price of investment work is one thing; convincing the public that it is not too dangerous a path to take to warm and power homes, businesses, and vehicles is another. Offshore facilities address both. In Southern California, many of the Long Beach LNG terminal opponents are not averse to an offshore LNG facility. "Natural gas goes a long way to clean up the air," said Don May, president of California Earth Corps, an environmental organization. His and others' support for a floating facility built miles from dense population centers grows if seawater is not used to heat up the extremely chilled gas, thus avoiding marine impacts. According to the California Energy Commission's David Maul, manager of natural gas and special projects, the costs of building onshore and offshore facilities are comparable. The main difference between the two is capacity, with onshore capacity significantly higher. The floating facilities can, however, get around that notable limitation by building onshore storage, Maul noted. As for the demand part of the picture, companies pushing LNG on and off California's coast compete with each other as well as with gas pipeline developers. Warren Buffet's MidAmerican company recently proposed building a pipeline that would send gas from the massive Alaskan fields on the North Slope to the lower 48. The pipeline comes with a mega price tag -estimated to be $22 billion-but daily exports could be about 6 Bcf/d. In addition, the state of Alaska may build an LNG facility that also taps into the North Coast for southern transport. Alaskan representatives have met with California officials about selling the gas for in-state use at $3.50/MMBtu, Maul said. Nothing is certain in the volatile gas world, but an Alaskan LNG facility is more than a pipe dream. Alaskan voters approved authorizing $15 billion to support the deal. Cognoscenti bet that only a few of the LNG facilities being pitched will see the light of day, and those that do will be offshore plants. Sidebar: Algerian LNG Plant Explosion The January 19 explosion in Skikda, Algeria, was likely caused by a faulty high-pressure steam boiler, according to a draft assessment by the California Energy Commission staff. "The information is still sketchy and needs to be corroborated by an independent investigative team," but the tragedy was apparently caused by a mechanical explosion, not a chemical explosion," said CEC manager of natural gas and special projects David Maul. The steam boilers are parts of the production train that produce high-pressure steam to move the turbines that power refrigerant compressors that in turn change natural gas into very cold liquid. A steam boiler accident would not occur at the proposed LNG import terminals because they would not involve high-pressure steam boilers, according to Maul.

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Gauging LNG Terminals’ Risk

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