WASHINGTON - The Obama administration on Friday cleared the way for broader natural gas exports by approving a $10 billion facility in Texas, a milestone in the U.S. transition into a major supplier of energy for world markets.
The decision shows how the boom in U.S. natural-gas production has caused a 180-degree shift in a key area of energy trade.
Five years ago, many companies built natural-gas import terminals, anticipating greater U.S. demand for imported fuel. Now a group of private investors that includes ConocoPhillips (COP) plans to turn one of those terminals--in Quintana Island, Texas--into an export facility to ship natural gas to Japan and other nations. The project, known as Freeport LNG, is expected to require more than $10 billion in investment, according to the owners.
In giving Freeport the green light, the Department of Energy signaled that it found the prospective benefits from exporting energy outweighed concerns about possible downsides for the U.S. economy.
Proponents of greater exports, including the oil and gas industry, say that exporting inexpensive natural gas from the U.S. will help the U.S. trade balance, help advance the adoption of clean-burning fuels around the world and shore up energy-poor U.S. allies.
Opponents counter that exports may cause domestic prices to rise, hurting consumers and some industries such as chemicals that have benefited from cheap natural gas.
Dow Chemical Co., which has vocally opposed unrestricted gas exports, said it supported the DOE's decision because it reflected a careful approach to export approvals rather than the blanket approvals some proponents have called for.
"Dow will adopt a wait-and-see approach regarding further approvals," the company said. It maintained that using natural gas for domestic manufacturing creates "far more" value "than exporting it as a fuel."
The American Petroleum Institute urged the Energy Department to approve the remaining applications without delay "so that the U.S can achieve its full energy and economic potential."
The Department of Energy said it had given preliminary authorization to the Freeport project to export up to 1.4 billion cubic feet per day of liquefied natural gas. The approval is needed for exports to countries with which the U.S. doesn't have a free-trade agreement, a category that includes major trading partners in Europe and Asia. The project still requires final approval from the Federal Energy Regulatory Commission.
The Freeport terminal is the second export facility approved by the Obama administration. Cheniere Energy Inc.'s (LNG) Sabine Pass facility in Louisiana won approval in May 2011 to export LNG to the countries without free-trade agreements.
The first approval got relatively little notice, but the issue gained prominence as export applications piled up and leading companies on both sides of the issue began to clash over the merits of exports. The Department of Energy spent much of 2012 waiting for a report it commissioned on the issue, which was released in December 2012 and concluded that exports would benefit the U.S. economy overall.
Friday's decision is an important harbinger for the remaining 19 applications to export gas to non-FTA countries. That's because according to law, gas exports are presumed to be in the public interest unless shown otherwise.
Freeport LNG has signed preliminary 20-year contracts to sell much of the export facility's capacity to Chubu Electric Power Co., Osaka Gas Co. and BP Energy Co., and the company says it expects to announce a deal for the rest of the capacity this summer. Chubu Electric and Osaka Gas, both major Japanese utilities, have a partial stake in the portion of the facility that is feeding the Japanese demand.
The combination of hydraulic fracturing and horizontal drilling has unleashed a natural-gas bonanza that made the U.S. the world's largest natural-gas producer.
The Freeport permit approval opens up the dam for other pending applications, but the pace of upcoming decisions is still unknown, said Randy Bhatia, an analyst at Capital One Southcoast.
"This is an encouraging step," Mr. Bhatia said. "But you need more than one to get a better idea of what pace we can expect them to process the remainder of that queue."
The Energy Department will next consider the application of a slightly larger export facility in Lake Charles, La. While there are nearly a score of outstanding applications, analysts expect that only a handful will be built, due to the high cost of gas liquefication facilities.
Moody's Investor Service has said that projects building from existing facilities, including Cove Point LNG in Maryland and Cameron LNG in Louisiana, are best placed to secure approval and financing from the private sector.
Further complicating the picture for U.S. exports are uncertainties over future global demand for LNG. Australia and Qatar, among other countries, have expanded their own gas exports in recent years and are well-placed to supply potential customers in Asia and Europe. Due to the cost of liquefying and transporting gas, U.S. exports may not be cost-competitive if domestic prices rise in coming years.
The DOE said it conducted an "extensive, careful review" which considered "the economic, energy security, and environmental impacts," and found that the project was "not inconsistent with the public interest."
The department said that in considering future export applications, it will consider market conditions, including projections about natural-gas prices, supply and demand. All remaining permit applications will be considered on a case-by-case basis, the department said, keeping in mind the cumulative amount of authorized gas exports.
Ben Lefebvre and Tennille Tracy contributed to this article.
Copyright (c) 2013 Dow Jones & Company, Inc.
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