Freeport LNG Export Terminal Approved; What Does it Mean?

The Department of Energy (DOE) announced this afternoon that it had conditionally approved the application of Freeport LNG Expansion LP and FLNG Liquefaction LLC to export up to 1.4 billion cubic feet of liquefied natural gas (LNG) to countries with which the United States does not have special free trade agreements. I’ve written at some length before about the potential consequences of LNG exports in general. But what might the exports from this particular facility mean?

First things first: This is just a DOE approval. Freeport will still need to get a permit from FERC. And, more important, it will still need a solid market for its LNG. There are a lot of credible people out there who believe that U.S. LNG exports will be very small – so small, perhaps, that Freeport will never ship any fuel despite having a permit and a set of contracts (PDF) lined up.

What would be the impact, though, if Freeport ultimately did sell LNG at its full approved capacity?

Analyses have typically suggested that prices might rise by $0.10-$0.20/MMBtu for every billion cubic feet a day in export demand. That points to a rise of $0.15-$0.30/MMBtu (against a likely base price of $4-6) if the facility ultimately sells LNG at full capacity.

Analyses also have typically suggested that somewhere between 50 and 80 percent of exported LNG would come from new production, rather than displaced domestic demand. That translates to 0.7-1.1 bcf/d in additional production. That’s equivalent to between 1-2 percent additional U.S. natural gas supply. With shale gas currently contributing about 30 percent of U.S. gas production, it’s about a 4-6 percent increase in U.S. shale gas output.

This increase will be the main source of environmental hazard – the climate impact of Freeport-sized exports will be very small.

What about broader economic impacts? Scaling from a study I published a year ago, my instinct is that this is good for the U.S. economy, but ultimately adds less than a billion dollars a year to GDP, and supports perhaps on the order of 10,000 jobs (many of which would employ people who would have been employed elsewhere otherwise). Most of this job growth would be in gas production and related industries. An export plant of this scale will also likely employ a couple thousand people at the peak of construction.

How about destinations? Freeport has contracted with BP for half of its capacity and with Osaka Gas and Chubu Electric (both Japanese) for the other half. At least half the output, then, would likely be headed to Asia. It’s also quite possible that much of BP’s capacity would be used to ship LNG to Asia too. This would help Asian buyers gain a bit more leverage with their traditional suppliers, and diversify their risks, but as I argued in congressional testimony a few weeks ago, it’s highly unlikely to be revolutionary. That’s particularly true if you’re looking at just one plant.

All told, this approval is good news, with benefits to U.S. relations with other countries even if Freeport never sells a drop of LNG, and the potential for some broader gains if it does. It also reinforces the importance of getting environmental protections right as shale gas production expands.