Summary of the National Petroleum Council's (NPC) LNG Report
September 2003
With the outlook for production from the U.S. lower-48 and non-Arctic Canada flat to declining, new sources of supply will be required to meet the projected growth in natural gas demand.
These new sources also diversify the natural gas supply beyond traditional indigenous sources, and provide access to the rapidly developing global LNG market.
Liquefied natural gas is already a significant supply source for many countries in the world, including Japan, South Korea and several west European nations. Fortunately, the world's gas resource base is large. The NPC analysis concludes that significant quantities of LNG will need to be imported into the United States in the future to meet the expected demand for natural gas. LNG has a proven safety record with 33,000 carrier voyages covering 60 million miles with no major accidents over a 40-year history. Historically, LNG imports into the United States have contributed less than 1 percent to U.S. supply, primarily due to low gas prices and the relatively high cost of LNG. This situation has changed. New technology has reduced the cost of making and transporting LNG. New LNG supply sources have also begun to enter the market and, because of higher gas prices, are now competitive in the North American market.
LNG provides access to the global supply of natural gas, which has been estimated to contain over 30 times the resource volume of North America. Advances in liquefaction and transportation technologies have driven down the unit cost of LNG by 30 percent over the past decade and LNG is now viewed as cost competitive with domestic supplies. To meet future demand, the NPC is projecting LNG imports will grow to become 14-17 percent of the U.S. natural gas supply by 2025. This will require the construction of seven to nine new regasification terminals and expansions of three of the four existing terminals.
LNG imports require alignment of the entire supply chain from development of foreign source gas reserves, to liquefaction of the supply, to construction of specialized LNG carriers, to regasification and delivery into the North American transmission infrastructure. Capital requirements for a typical LNG development from source to an interconnection with an existing pipeline grid are on the order of $5-10 billion per BCF/D of capacity.
The typical regasification terminal in the United States is estimated to take over five years from initial permit application to commencement of imports. Under current regulations, permitting can take from one year (offshore terminals) to over two years (onshore terminals) assuming minimal resistance and a well-coordinated permitting process.
Recently, the U.S. government implemented two policy changes to facilitate development of new LNG import regasification terminals. First, the Deep Water Port Act was amended to include natural gas/LNG/CNG; this resulted in two significant changes for offshore LNG import terminals. Such terminals will now be under the jurisdiction of the Unites States Coast Guard, and permit applications will have a discrete timeline. Second, the Federal Energy Regulatory Commission, which has the jurisdictional authority for onshore LNG import regasification terminals, ruled that two such terminals will be treated similarly to gas processing plants, no longer requiring open-access regulation. The latter policy allows companies to develop integrated LNG projects which is important in reducing the risk associated with these larger, complex, projects.
These efforts, while encouraging new LNG import terminal development, will not overcome all the hurdles faced by the industry. New terminals may face substantial local opposition. Permits for new terminals, particularly onshore terminals, will only be issued in a timely fashion with the support of local governments and communities. A continued leadership role, as demonstrated by FERC in the recent reactivation of the Cove Point and Elba Island facilities, will be needed to move the permitting process forward in a timely manner. Any setbacks from what the NPC projects as substantially successful development of LNG supply would reduce projected supplies and increase gas prices.
To evaluate the impact of potential setbacks, a sensitivity case was evaluated in which only two new LNG terminals were constructed due to permitting difficulties. In this case, LNG import capacity was reduced by 6 BCF/D and the average gas price increased by 10 percent. Clearly the ability to import increasing volumes of LNG is important to achieving a more comfortable supply/demand balance.
NPC LNG POLICY RECOMMENDATIONS
Expediting the approval process throughout all agencies (federal, state, and local) is critical to overcome the many obstacles that may surface, including local opposition. Leveraging off the recent positive shifts by FERC (positive changes on regulatory process, active leadership role in recent reactivation of Cove Point and Elba Island, and implementation of Memorandums of Understanding [MOUs] among federal agencies working together) and changes made to regulatory policies in late 2002 governing both onshore and offshore LNG import terminals, will provide a springboard for impacting positive changes down through the local level. The goal of the following recommendations is to reduce the time required for LNG facility permitting to one year.
- Agencies must coordinate and streamline their permitting activities and clarify positions on new terminals construction and operation. Project sponsors currently face multiple, often-competing state and local reviews that lead to permitting delays. A coordinated effort among federal, state, and local agencies led by FERC would reduce permitting lead-time. Similarly, streamlining the permitting process by sharing data and findings, holding concurrent reviews, and setting review deadlines would provide greater certainty to the overall permitting process. FERC should further clarify its policy statement on new terminals so as to be consistent with corresponding regulations under the Deep Water Port Act, including timing for the NEPA review process and commercial terms and conditions related to capacity rights.
- Fund and staff regulatory agencies at levels necessary to meet permitting and regulatory needs in a timely manner. The expected increase in the number of terminal applications will require higher levels of government support (federal, state, and local) to process and avoid delays. Additional agency funding/staffing will also be required once these new terminals become operational, particularly to support the large increase in LNG tanker traffic.
- Update natural gas interchangeability standards. Standards for natural gas interchangeability in combustion equipment were established in the 1950s. The introduction of large volumes of regasified LNG into the U.S. supply mix requires a re-evaluation of these standards. FERC and DOE should champion the new standards effort to allow a broader range of LNG imports. This should be conducted with participation from LDCs, LNG purchasers, process gas users, and original equipment manufacturers (OEMs). DOE should fund research with these parties in support of this initiative.
- Undertake public education surrounding LNG. The public knowledge of LNG is poor, as demonstrated by perceptions of safety and security risks. These perceptions are contributing to the public opposition to new terminal construction and jeopardizing the ability to grow this required supply source. Industry advocacy has begun, but a more aggressive/coordinated effort involving the DOE and non-industry third parties is required. Emphasis should focus on understandings, safety, historical performance, and the critical role that LNG can play in the future energy supply.
- LNG industry standards should be reviewed and revised if necessary. In order to promote the highest safety and security standards and maintain the LNG industry's safety record established over the past forty years of operations, FERC, the Coast Guard, and the U.S. Department of Transportation should undertake the continuous review and adoption of industry standards for the design and construction of LNG facilities, using internationally proven technologies and best practices.