Natural gas liquefaction dates to the 19th century, and the first commercial plant was built in Cleveland in 1941. Natural gas becomes a liquid at minus 260 degrees Fahrenheit. Storing it as a liquid has great advantages; natural gas in its gaseous state takes up 600 times as much space as it does when a liquid.
In 1959, the first specialized LNG tanker — a converted World War II freighter — carried LNG from Lake Charles, La., to Britain. In 1964, Britain began importing LNG from Algeria. Five years later, the United States shipped LNG from Alaska’s Kenai Peninsula to Japan.
But until now, the U.S. focus has been on imports. Four LNG import terminals, including Cove Point, were built in the United States during the 1970s. Then imports fell because of the boomlet in domestic gas production following price deregulation. Importers also became locked in contract disputes with Algeria. Cove Point was mothballed.
It was bought by Dominion and reopened in 2003 as the United States started to import supplies from such places as Trinidad and Tobago. Today, Cove Point is the nation’s largest gas storage facility, with rows of spotless storage tanks, each built like a giant thermos bottle with four feet of insulation to keep the gas cold enough to stay in liquid form.
The unwieldy nature of LNG facilities — both costly and time-consuming to build — makes the global natural gas market a peculiar animal, different from markets in oil or commodities such as sugar. Those prices are international; natural gas prices are negotiated project by project. Long-term, fixed-price contracts, rather than fluctuating spot markets, help give exporting companies the certainty they need to get financing for facilities and the special refrigerated tankers needed to ship the gas.
Eighteen countries have the infrastructure and resources to export LNG, and 27 can import it.
Dominion Resources already has billions of dollars worth of tanks, boilers, pipelines and docks at Cove Point, so conversion to export is cheaper than starting from scratch. (There is a low-tech touch: a 1.2-mile-long, six-foot-wide underwater tunnel through which workers bicycle to get from shore to the receiving dock.)
Even so, by the time export terminals are finished, market conditions could be upended yet again. If private companies haven’t been good at figuring this out, will the Energy Department do any better at recognizing the tipping point at which exports will drive up U.S. prices to unacceptable levels?
How much can go abroad?
That’s exactly what worries much of corporate America about LNG export plans. Energy experts doubt that all 15 projects awaiting permits will be built because of financing and market uncertainties. But if even half are built, the new terminals could ship 10 billion cubic feet a day of U.S. natural gas — equal to about 15 percent of U.S. consumption in 2011. The NERA report estimates that after five years, exports could raise U.S. prices by 22 cents to $1.11 per thousand cubic feet.
U.S. industrial firms worry about even steeper price increases.
“We’re reluctant to say our concern is exports,” said George J. Biltz, Dow Chemical’s vice president of energy and climate change. “We believe in free trade. We export chemicals.”
But, he said, the United States should use cheap natural gas at home to revive its industrial economy and then export manufactured products, capturing the value added at home. “Our view is we should export ‘solid’ natural gas. We should create goods and export the goods,” he said.
“Some people say ‘no exports.’ People on the other side say ‘free market, free trade, let us manage this.’ Frankly, Dow is not at either one of those extremes,” Biltz added. “We see the right balance somewhere in the middle because you have a massive competitive advantage here. Companies should not be deciding for the United States what’s best for the country. We think that’s a role government can play.”
He said the Energy Department had to figure out the point where the appetite of foreign markets might endanger the cheap prices at home. “We’re creating very inflexible 20-year contracts for natural gas. It’s going offshore to Japan, China, pick your favorite,” Biltz said. “At some point, you start changing the whole price structure in the country and lose that competitive advantage. No one knows where that point is.”
Cheniere’s Souki brushed aside Biltz’s concern. “I’m really going to start crying for them,” he said. “They pay $3 for gas, and the poor bastard in India or China who wants to compete has to pay $3.50 for the gas plus $3.50 to liquefy it and $3.50 to $4 for transportation. So foreign companies are paying 3½ times more than Dow Chemical is paying for their gas. If Dow still can’t compete, it needs to revisit its business strategy.”