TRANSACTIONAL: Corporate / London: UK Looks to US for LNG Imports: US Regulatory Approvals Required

by King & Spalding

UK energy providers have signed deals to buy LNG from the Sabine Pass and nearby Golden Pass LNG export facilities in the US. The supply of LNG from these export facilities to regasification terminals in the UK is conditional on securing US regulatory approvals from the Department of Energy (DoE) and the Federal Energy Regulatory Commission (FERC). We look at the role that US natural gas may play in the UK's future energy mix, and the regulatory approvals that are required to facilitate the export of US LNG to the UK.

UK LNG Import Statistics

Production of domestic gas in the UK, largely from the North Sea, has been in decline since its peak in 2000, and in 2006 the UK became a net importer of gas. In July 2005, imports of LNG commenced at the Isle of Grain import facility in South East England. In 2009, the South Hook and Dragon LNG import terminals at Milford Haven in Wales became operational, and the second phase of the Isle of Grain terminal expansion was completed.

LNG made up 25 percent of the UK's gas imports in 2009, 35 percent of imports in 2010, and 47 percent of imports in 2011. LNG imports into the UK declined in 2012 due to increased LNG demand in Asia leading to increases in LNG prices. In 2012, 98 percent of the UK's LNG imports came from Qatar and 72 percent of total imports were delivered to the South Hook terminal, which is part of the Qatargas 2 integrated value chain.

Imports of LNG increased again in the first quarter of 2013 due to an unusually cold winter in the UK and the fifth coldest spring on record. During this period natural gas stocks fell to dangerously low levels, causing major price spikes and calls for more robust gas supply into the UK. There is a lack of firm, long-term supply deals into the UK's regasification terminals, which makes the UK vulnerable to sudden shortages when LNG exporters in the Middle East divert cargoes to higher-paying markets in Asia, especially in winter.

The UK's Secretary of State for Energy and Climate Change recently said that energy security in the UK "lies in diversity". As well as LNG, the UK imports gas by pipeline from Netherlands and Norway. LNG is expected to continue to be a significant part of the UK's energy mix.

UK Imports from the US

A slump in US natural gas prices caused by increased shale production has created an opportunity for US gas suppliers to sell LNG into Europe and Asia. US benchmark natural gas prices have remained below US$4 per million BTUs since October 2011, compared to the current benchmark price of approximately US$10 per million BTU in the UK.

In March 2013, Centrica, one of the UK's main energy suppliers, signed a deal with Cheniere Energy Partners to import 1.75 million metric tons of LNG a year to the UK for 20 years commencing in 2018 from Cheniere's Sabine Pass LNG export facility. This supply would be enough to power around 1.8 million UK homes.

In May 2013, Exxon Mobil and Qatar Petroleum announced an agreement to send up to the entire annual production of 15.6 million tonnes of LNG each year from their proposed US$10 billion export project at Golden Pass in Texas to the South Hook import terminal. South Hook, which is jointly owned by Qatar Petroleum and Exxon, has the capacity to take all of that LNG, which would meet about 25 percent of the UK's gas requirements.

US Regulatory Requirements

LNG export projects in the US undergo rigorous application and permitting processes imposed by FERC, which authorizes the construction and operation of LNG terminals, and the US DoE, which grants export permits, including permits to export to countries without a free trade agreement with the US. Some of the largest LNG importers in Asia and Europe are non-FTA countries, including the UK and other EU member states.

The deals between Centrica and Cheniere regarding LNG from Sabine Pass, and between Exxon Mobil and Qatar Petroleum regarding LNG from Golden Pass, are conditional on the LNG suppliers obtaining further US regulatory approvals.

Sabine Pass is one of only three LNG export projects in the US authorised by the DoE to date to export LNG to non-FTA countries. Earlier this year, Cheniere applied to FERC for a permit to develop its fifth train, which would supply LNG to Centrica. Any contract between Cheniere and Centrica is subject to a number of conditions precedent, including Cheniere receiving the necessary regulatory approvals, securing financing, making a final investment decision, and issuing a notice to proceed with the fifth LNG train.

In September 2012, Golden Pass received DoE approval to export LNG to countries with whom the US has free trade agreements. The following month, Exxon Mobil and Qatar Petroleum applied for authorization to export LNG from Golden Pass to non-FTA countries. This application put Golden Pass in 13th place on DoE's list of projects applying for such permits and the DoE has said it will process applications in the order in which they were received. DoE approval is a condition precedent to the supply of LNG from Golden Pass to South Hook.

 Nina Howell
 +44 20 7551 7543

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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