DOE Allows Wider Exports Of Domestic Gas As LNG; Fracking Initiatives Begin To Gel

July 2011, Vol. 238 No. 7

Stephen Barlas, Washington Editor

With domestic supplies of natural gas overwhelming domestic demand, LNG terminals – in a dramatic reversal from just a few years ago – are looking to build liquefaction facilities and export, not import.

Evidence of that turnaround is Department of Energy approval of the first such LNG export application – albeit – conditionally – from Sabine Pass Liquefaction, LLC, on May 23, 2011. Sabine Pass, owned by Cheniere Partners, will not export liquefied domestic gas until at least 2015, if then. But the DOE’s go-ahead is the first time the department has allowed a domestic terminal to export U.S. gas to countries with whom the U.S. does not have a Free Trade Agreement.

In May, Cheniere signed a Memorandum of Understanding with the Lithuanian energy company Klaipedos Nafta to supply an LNG terminal that company is building. That was the latest in a string of MOUs Cheniere has signed.

Most sectors within the natural gas industry seem to be happy with this emerging possibility: But some gas producers are neutral, such as Shell, which could benefit from having additional markets for its gas, but could be hurt perhaps as a major holder of LNG import rights at U.S. LNG terminals.
Other similar applications are in the DOE queue from Freeport Expansion L.P., FLNG Liquefaction, LLC (FLEX) and Lake Charles Exports, LLC, a subsidiary of Southern Union Co.

Cheniere says exports won’t start flowing until at least 2015. Not only does Sabine need FERC approval of an environmental impact study of the construction and operation of the liquefaction facility, Cheniere needs to get satisfactory construction contracts and enter into long-term customer contracts sufficient to underpin financing of the project.

The conditional authorization approves the export of up to 2.2 Bcf/d of natural gas over a 20-year term. But the DOE said that if LNG exports do hurt domestic supplies it has the authority, following a hearing and for good cause, to take “necessary and appropriate action,” presumably limiting or even prohibiting further exports.

The Sabine Pass application was opposed by a couple of major gas consumer groups because of their concern that exports would end up increasing domestic prices. The critics included the Industrial Energy Consumers of America (ICEA) and the American Public Gas Association (APGA), who argued that the DOE’s approval of a 20-year export term could prove problematic if current estimates of U.S. domestic natural gas supplies prove erroneous. They noted there could be U.S. regulatory challenges to shale gas production, and perhaps local landowner protests, in either case putting a kink in projected gas supplies.
The $2 billion FLEX liquefaction project, adjacent to Freeport’s existing LNG import terminal in Freeport, TX, would export about 1.4 Bcf/d of natural gas. Freeport has a partnership with Macquarie Energy, the North American energy marketing and trading arm of Macquarie Group, to sell the LNG abroad.

Future Of OSHA, PHMSA Regulatory Reform Efforts Uncertain
The American Gas Association gave a rhetorical raspberry to the Obama administration’s ballyhooed 21st Century regulatory reform agenda announced in late May. Federal regulatory agencies will be re-examining current rules to see whether they are still justified.

The Pipeline and Hazardous Materials Safety Administration (PHMSA) is taking a non-committed approach to the AGA’s request that it incorporate the latest version of ASTM D2513-09a Standard Specification for Polyethylene (PE) Gas Pressure Pipe, Tubing, and Fittings into its pipeline standard, which now cites the 1999 and 1987 versions of the ASTM standard. “Operators cannot take advantage of the properties of modern plastic pipe with a standard that is decades old,” says Christina Sames, vice president, operations and engineering, of the AGA. “The use of this obsolete standard is inconsistent with the stated goal of Transportation Secretary LaHood to modernize the nation’s pipeline infrastructure.”

In its response to the AGA request, the PHMSA said it will look for ways to address the AGA concerns “in the safest and most efficient manner possible.”

An AGA official says his group is not satisfied with that response.

PHMSA’s somewhat uneventful regulatory reform agenda seems to contrast with the more muscular reactions of other agencies, all of which were responding to President Obama’s initial Executive Order issued on January 18, 2011 called “Improving Regulation and Regulatory Review.” It stated that: “Some sectors and industries face a significant number of regulatory requirements, some of which may be redundant, inconsistent, or overlapping.” He ordered all federal agencies to promote “simplification and harmonization.”

Agencies such the PHMSA, the Occupational Safety and Health Administration (OSHA) and the Environmental Protection Agency (EPA) then undertook a three month review of their regulations and chose some to be re-examined, based on requests from industry. One of the regulations OSHA will take a look at is its approach for assessing oil and gas sector safety. It will assess the effectiveness of what is referred to internationally as the “safety case” approach to see whether it can be applied to current OSHA oil and gas regulations. The OSHA did not say which regulations it would be reconsidering. Neither was the OSHA press office able to shed any light. Over the past few years, OSHA has formed information exchange alliances with gas and oil industry groups such as pipeline contractors and the Louisiana and Texas energy industries. But OSHA has not eased compliance efforts or adjusted regulations for any members of those alliances.

Federal Fracking Initiatives Starting To Gel
The fracking debate is moving forward on two separate stages in Washington. The Department of Energy’s natural gas subcommittee is expected to make recommendations on fracking liquid disclosure in August. Meanwhile, the EPA is laboring to retool its initial proposal for a fracking study— where Congress has charged it to look at fracking’s impact on groundwater – in the light of industry, congressional and even its own Scientific Advisory Board’s (SAB) criticism.

The DOE subcommittee chaired by John Deutsch, a former top Energy and Defense Department official first under President Jimmy Carter and then under President Bill Clinton, held hearings on June 1-2 to get industry, environmental and state regulator opinions on where fracking disclosure at the state level currently stands and what enhancements might be needed. The subcommittee has to come up with any immediate steps to improve the safety and environmental performance of fracking by the first week of August. It has another three months to develop “consensus recommended advice” to federal agencies on the subject.

Deutch declined to give any indication of where the subcommittee might be headed in an e-mail to P&GJ. Subcommittee sources say they expect to meet the early August deadline for initial recommendations.

While the DOE is making recommendations on fracking chemical disclosure, the EPA will be conducting a year-long study looking at the impact of fracking on groundwater, if in fact there is any impact. But in May, Rep. Ralph Hall (R-TX), chairman of the House Transportation and Infrastructure Committee, called the soon-to-get-under way EPA study on fracking “useless to regulators and risk managers and as such a waste of taxpayer money.” Hall held hearings on the EPA’s preliminary study design on May 11.

At the House hearings, Elizabeth Ames Jones, chairman of the Texas Railroad Commission (RRC), the energy regulatory body in Texas, criticized the EPA study – which the agency initially designed to look at the “full life cycle” of oil and gas wells–as overly broad. She noted the EPA SAB agreed, and said the study should be restricted, at least initially, to researching sources and pathways of the potential impacts of hydraulic fracturing on water resources. “Our two main concerns about the EPA’s study are that it proposes to delve into areas beyond the reach of federal law and that it also proposes to study areas beyond the practice of hydraulic fracturing,” she said.

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