Mailbag: An Environmental Battle Mounts Over LNG Exports

We’re back after three days of beautiful weather in Baltimore to celebrate Memorial Day weekend.

The mailbag received some great comments and questions last week. I felt obliged to answer one in particular – a follow-up question from a reader over the ongoing drama of exports from the United States.

Remember, if you have a question or a comment, be sure to register below and type your thoughts into the box.

Okay, question time.

Q: Since Cove Point was a working LNG import terminal in the past, can you please tell us why it is not acceptable now for it to be retrofitted as an export terminal? ~ Linda

A: Let me first put Linda’s question into context. Last week, I answered a question from Jim O. regarding the other companies – other than Cheniere Energy Inc. (AMEX: LNG) – that have filed for applications to export liquefied natural gas (LNG) from facilities around the country.

One of these facilities is Dominion’s (NYSE: D) Cove Point facility.

Constructed and certified in 1972, the terminal had been used to import natural gas from around the globe. Around the time of its construction, the Sierra Club, one of the most influential environmental non-profits in the United States, had sued to block construction of the facility.

The case was ultimately settled, but concessions were made to appease the plaintiff. One is that the Sierra Club has the right to approve or disapprove any plans to expand the existing facility, and expected that the terminal in Lusby, Maryland would remain a relatively minor import facility.

The key word here is import, because the facility was originally importing LNG from Algeria after certification in 1978. After various starts and stops over two decades, Dominion purchased the facility in 2002 with the goal of importing and storing natural gas on behalf of a number of global operators.

But then, a funny thing happened.

In the past few years, a swath of energy has been unlocked in the United States thanks to technological innovation in hydraulic fracking and horizontal drilling. In fact, so much natural gas has been unlocked, that the United States now has the capacity to begin exporting natural gas to energy-starved nations around the world, where prices are six or seven times higher than they are here.

This is one profitable venture.

No wonder companies are so eager to retrofit and expand existing import facilities to ship LNG instead. And Cove Point is an ideal location, given its access to the Chesapeake Bay and direct line across the Atlantic Ocean.

There’s just one problem: The Sierra Club says that it won’t approve any expansion to the lands.

As a result, Dominion has sued the Sierra Club. The company has gone on the attack, stating that the facility will generate and support nearly 15,000 jobs, generate $1 billion in federal, state, and local taxes, and lower the U.S. trade deficit by several billion dollars a year.

These are pretty compelling arguments, but the Sierra Club might have the upper hand right now. Predictably, the Club has stated that exporting natural gas will encourage fracking and drilling, which could have significant impacts on the environment, increase the cost of domestic natural gas, and has highlighted its own power in the original agreement.

In some ways, the Sierra Club is the landlord even without holding any ownership over the property.

The Strongest Lobby in Washington

I know this is a strong point of debate, but during my time in Washington, I cultivated a strong opinion.

It is my personal opinion that there is no stronger lobby in Washington than the environmental lobby. Here’s why.

In order to construct an export facility or retrofit an existing one, a company must jump through a number of regulatory hoops. They must get acceptance from the Department of Energy, the Environmental Protection Agency, the Federal Energy Regulatory Commission, Congress through acts of law, and a number of other administrative agencies.

Meanwhile, the environmental lobby is pushing big bucks to influence all of these regulators on what should and should not be allowed in energy production. They use a strong social and ecological message to supersede economic ones.

Even after all of those “permission slips” have been signed, even when the first construction worker is inches from dropping that first shovel into the ground, environmental groups can swoop in at the last minute, using the legal system and the courts to their advantage. Lawsuits can act as a strong deterrent here against companies and regulatory agencies. And any law suit against any company, in the end, is also a lawsuit against their shareholders.

Yet there’s no doubt that LNG exporting is going to be big business, one with strong profits for companies and investors alike.

That’s another reason why Cheniere, which has already cleared all the regulatory and legal loopholes and is ready to break ground, is still the best option in this space for now.

Still, there are external factors that underlying figures simply can’t provide. Dominion remains a strong company, one with attractive numbers to back it up. It has received authorization from the Department of Energy to export LNG, and tests are being done to determine if the company can retrofit the facility without expanding on the existing land.

Still, we’ll have to continue to watch this legal situation closely and dissect the original agreement before thinking about pushing off into the Chesapeake.

Sincerely,

James