U.S. LNG: NO CHINA
The U.S. Department of Energy has advised American companies not to allow Chinese companies to invest in U.S. liquefied natural gas export projects, the head of one such venture told Reuters on Thursday.
The advice contributed to a lack of lucrative U.S. gas export deals with Chinese companies, said Michael Smith, the chief executive of Freeport LNG. Some existing deals for liquefied natural gas, or LNG, are worth billions of dollars.
Smith said his privately owned company, which is building an LNG export project on the Texas coast to supply customers in Asia starting in 2018, was encouraged during the federal approval process to avoid inviting Chinese participation in case of a political backlash.
"We were advised by the DOE to be careful who our customers were, because this is very political," he said, calling the prospect of Chinese interest in a major U.S. export project as "a political hot potato we couldn't take the risk on."
The issue of exporting U.S. LNG has revealed a sharp divide between energy companies that want to sell the U.S. commodity on world markets and consumes who say it would push up prices at home.
Each LNG project is subject to a tough approval process by the Energy Department, which weighs the impact that each project will have on the domestic gas market and on the environment.
The agency, contacted by Reuters, would not confirm or deny giving the advice, but said it has granted approval to seven projects to export U.S. LNG globally, including to China.
"The final destinations for LNG cargoes will be dependent upon commercial arrangements and factors, and are only reported to the department after delivery," a department spokeswoman said in an email.
Customers from across the world have signed up to buy future shipments of U.S. LNG as a drilling boom causes a supply glut and pushes domestic prices far below global levels. Some customers have taken equity stakes in the projects, the first of which is expected to start up later this year.
However, despite forecasts of growing gas demand in China, and U.S. projects expected to begin exporting to Asia beginning this year, no Chinese companies have signed up for U.S. exports directly. (Some U.S. LNG will end up on Chinese shores, but only through secondary deals.)
That is not because of a lack of interest. Freeport has turned down potential Chinese customers, heeding the Energy Department's advice, Smith said.
Attracting Chinese lenders would likely have meant Chinese companies acquiring a stake in the export project, Smith said. Chinese equity in the project would almost certainly have led to exports to China.
"You could potentially get into the position of Chinese ownership of U.S. LNG," Smith said. "The DOE said the last thing you guys want is having a bunch of (U.S.) senators saying our gas is going to China.
"We had a lot of interest from other customers, so we elected to not send gas directly to China," said Smith.
Construction is already under way on Freeport's $12.5 billion plant comprised of three production units, called trains, that will be able to ship nearly 2 billion cubic feet of gas per day overseas.
On Friday, the Freeport, Texas-based, privately owned company will file for a permit to build a fourth train, Smith said during a panel discussion on Thursday at the FT Energy Strategies Summit in New York.
Marketing is yet to begin on production from the fourth train. Still, interest in U.S. LNG remains strong even though a fall in global oil prices has threatened the competitiveness of U.S. supply.
"There is a lot of competitive interest," Smith said.
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