Liquefied natural gas , better known as LNG , has become a volatile issue in Southern California and on the West Coast. But San Diego business leaders are viewing it as a key element in their energy portfolio.
“The topic has gained speed as Chevron, Shell and Sempra have begun to look at LNG prospects and how they can develop facilities,” said Mitch Mitchell, the executive vice president of public policy and communications for the San Diego Regional Chamber of Commerce. “In the end, these projects will be extremely important to the city, state, region and country.”
John Westerman, the chairman of the chamber’s energy committee and senior program manager for San Diego-based Science Applications International Corp., said that the chamber is working with a set of guidelines that include diversity of energy resources, market-driven forces, fair pricing for consumers, environmental safety and energy conservation.
“The major issue in San Diego is that we’re lacking in a lot of infrastructure that would let us take advantage of the market structure,” he said. “The chamber is in favor of any development that supports opening up those markets and providing additional resources in transmission, including LNG. LNG supports another source of supply into the region. If we don’t have additional resources, prices will go up.”
What exactly is LNG? It’s a natural gas that has been cooled below minus 260 degrees Fahrenheit and condensed into a liquid. LNG is unloaded at the receiving terminals and stored until it can be vaporized back into natural gas and moved by pipeline to customers.
Sempra LNG is the new subsidiary of Sempra Global, the umbrella for Sempra Energy’s businesses operating in competitive energy markets. Sempra LNG now is developing two LNG terminals, the $700 million Cameron LNG, near Lake Charles, La., and the $600 million Energia Costa Azul, in Baja California, Mexico, with Shell International Gas Limited. Construction on both projects is slated to begin in 2005 with commercial operation expected in 2008. Together, they have the capacity to process 2.5 billion cubic feet of natural gas a day.
Also in the pipeline are plans for a $600 million LNG receiving terminal near Port Arthur, Texas, on a 3,000-acre parcel that has been owned by Sempra since 1989. The terminal will be capable of processing 1.5 billion cubic feet of natural gas a day, according to the company.
“Sempra LNG has committed to covering the infrastructure to get natural gas to the California border,” said Doug Kline, director of public relations for Sempra Energy. “Ultimately, it will be up to the California PUC and the state’s utilities to determine how that gas will enter California, if it does at all.”
Supply And Demand
The question is, does California in particular, or the United States in general, need all of that supply?
Irene M. Stillings, the executive director for the San Diego Regional Energy Office, said, “I believe there is potential for natural gas shortages that could result in extreme price volatility for the West Coast. It’s worth looking at all the options.”
The SDREO is an independent nonprofit corporation that provides information, research, analysis and long-term planning on energy issues. The group manages more than $30 million in public funds through rebate, incentive and education programs.
On the state level, Gov. Arnold Schwarzenegger has been encouraging new energy investments to increase reliable power supplies, while lowering expenses. He’s also pushing the utilities to speed up their renewable energy portfolios in order to supply 20 percent of their power needs through renewable energy by 2010.
LNG is likely to play a part in the big picture, according to Claudia Chandler, the assistant executive director for the California Energy Commission. Even after the goal of renewable energy is achieved, she said, other issues must be addressed.
“We need to retire the old power plants that are burning natural gas, and we need to repower and rebuild those old dogs,” she said. “They use way too much natural gas, compared to the new plants. Then we need to improve our infrastructure and expand to the degree that it’s cost effective, with storage facilities and pipelines. We still might be wise to lock in supplies of cheap gas from the Pacific, and the only way is an LNG terminal. Whether this needs to be in California still needs to be addressed. One or two terminals could help us stabilize our prices.”
One terminal, she said, would satisfy from 10 percent to 15 percent of the state’s existing natural gas demand, adding, “That would meet our moderate growth of 1 to 2 percent” a year.
Looking at it from a market perspective, Chandler said that natural gas is the preferred fuel for California, and “we are always going to be depending on shipping it from someplace else.”
She added: “Drilling has increased, but we are not seeing that much more production. We’re always going to be in a tight relationship of supply and price. We here in California need to recognize that the rest of the nation has figured out that natural gas is the preferred fuel. California would love to be an island, but we’re not. Natural gas demand is growing in states like Nevada, Arizona, Texas, Washington and Oregon at a much faster pace than in California. That impacts the supply availability in California.”
The Western Governors Association said Chandler is now working on a regional forecast for natural gas to better gauge the market.
Build Them If UCAN
Michael Shames, the executive director of the Utility Consumers’ Action Network, a San Diego-based consumer watchdog, said he’s all in favor of building LNG terminals , as long as private developers foot the bill and don’t stick it to utility ratepayers.
“If anyone wants to build an LNG terminal and can pass environmental muster, I invite them to do it, as long as no utility customers are locked into a long-term commitment,” he said. “That’s the real gotcha. I have yet to see a viable LNG terminal proposal funded unless developers lock in long-term contracts with a utility.
“I don’t believe that LNG terminals can be built unless all the risks are shifted to customers,” he added. “I desperately want to see private developers take all the risk. If they do, I say, ‘Go for it, guys.’ But no one would be able to do that. There is no compelling need for LNG terminals.”
A more compelling argument in favor of LNG, he said, would be selling it as a hedge against spiking natural gas prices in the future.
“But my argument is, if that were the case, you’d see large industrial customers thinking in terms of hedging, locking in sure prices for the future,” said Shames. “You’d think they’d be screaming for the product brought in by terminals, and lined up with contracts.”
The fact that they’re not, he said, “is the proof of the pudding, and it’s revealing and disturbing.”
As for Sempra’s involvement, Shames said, “Sempra eats, drinks and breathes gas, and I expected them to push for LNG heavily. They’ve forged alliances with other countries. That is their mantra, their Bible. But it’s hard to be sure whether Sempra’s self-interest is what California really needs.”
Shames said he isn’t surprised that the PUC hasn’t held a public hearing on the issue.
“If they had hearings, and a lot of questions are raised about the need, this thing would die a slow death,” he said.
Kline, the Sempra spokesman, disagreed.
“That gas will only enter the state if it’s competitively priced,” he said. “There is a whole process for utilities to do resource planning and have competitive bidding for suppliers. LNG is simply another source for the state’s utilities, which can only be a good thing.”
Said Mitchell: “You’re always going to hear the argument of who should bear the cost. In this situation, we’re looking at a natural improvement to the infrastructure. This situation will take a mix of everything green energy, fuel cells, we need a portfolio that includes a little bit of everything. We are growing at a rapid pace. Thank God for technology.”
On Feb. 15, PUC President Michael Peevey was in Washington, D.C., testifying before a subcommittee of the Senate Committee on Energy and Natural Resources. At issue is who should have jurisdiction over where LNG terminals are built.
In September, the PUC voted to open the state’s energy market to fuel from LNG terminals in Baja California.
Peevey urged Congress to “not pre-empt the states’ historic police powers to protect the health and safety of their citizens from any potential hazards from intrastate LNG facilities.” He added that the PUC is “confident that sufficient LNG facilities can be safely located and constructed on the West Coast to meet the market’s needs.”
But Bill Powers, a member of Ratepayers for Affordable Clean Energy, a coalition of environmentalist, human rights and clean energy activists, said that the issue of safety in connection with the LNG terminals has taken on special resonance since the terrorist attacks of Sept. 11, 2001.
“If someone went after a facility, you could have impacts two or three miles away, depending on what happens,” he said. “Risk assessors just can’t assume that the worst that can happen is a pipe breaks for 10 minutes.”
Said Kline: “Mexico has embraced the idea of having its own natural gas for the first time in the history of Baja California. The company has put this project through a very stringent review process in Mexico, which has its own stringent environmental review process.”
Mitchell said he’s confident that the safety and environmental issues will be carefully analyzed.
“People are beginning to make claims that we are avoiding environmental oversight,” he said, “but I think that the officials in northern Baja have said, ‘We will work with you, but you cannot ruin our environment.’ Every project will face scrutiny. In the end, these facilities need to meet the needs of a growing population and the business community.”
Surfer activists, who have joined the coalition, are especially concerned with Sempra/Shell’s Costa Azul site, the largest stretch of undeveloped coastline between Tijuana and Ensenada in Mexico and home to “Harry,” a shallow-water “epic backdoor barrel,” revered by surfers who say it will be destroyed by the terminal.
“Any major industrial facility has environmental issues,” said Kline. “But we have done everything we can to ensure that this project is going to meet the strictest environmental standards. It also will help improve the environment of Baja by providing more clean fuel for use in electricity and industrial generation it uses.”
The Ratepayers for Affordable Clean Energy, on its “LNG: Wrong Choice for California Tour,” convened on the City Hall concourse Feb. 15, raising a number of issues. In addition to safety and environmental concerns, the group cited human rights violations in connection with LNG extraction abroad in Russia, Indonesia and Peru; the impact of further dependence on fossil fuels on global warming; and exporting billions overseas to buy LNG when “our state has made a commitment to using these moneys to accelerate energy conservation and renewable energy sources at home.”
The group was joined by two members of the San Diego City Council who have asked the PUC to hold evidentiary hearings on whether California should be involved in importing LNG to the state. Open government activist and 6th District City Councilwoman Donna Frye criticized the PUC for its “closed door aura” regarding the LNG issue.
“Where is the public process?” asked Frye. “Why is it that the CPUC refuses to have open sessions on something so important? What are they afraid of? We need an open hearing immediately.”
Deputy Mayor and 2nd District Councilman Michael Zucchet criticized the PUC for making “decisions in a vacuum,” and said that he was concerned that construction of LNG terminals could seriously hinder efforts to develop renewable energy alternatives.
No public hearings have been scheduled on the subject, according to a PUC spokeswoman, but Peevey, in his remarks to the Senate, said, “The state’s hearing process will also provide more transparency of our work so that the public can become better informed and more fully participate in the process.”