ANALYSIS-Europe trade deal no fast track to US gas export bonanza

Fri Feb 22, 2013 6:52pm GMT

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* US and Europe to explore free trade agreement

* Despite FTA, quicker natgas exports to EU unlikely

* Exporters seeking approval to export to non-FTA nations

By Edward McAllister

NEW YORK, Feb 22 (Reuters) - A free trade agreement between the United States and Europe could open new markets for domestic natural gas, but without access to big growth Asian markets there still may not be enough demand to launch the export revolution that the industry desires.

President Barack Obama, in his State of the Union speech, said the United States wants to foster closer trade relations with Europe, sparking speculation that an FTA could create an easy path to shipping liquefied natural gas (LNG) to the continent.

Morgan Stanley energy analysts this week said an FTA could quicken the timeline for LNG projects targeting Europe and even increase volumes heading there.

But other experts say few, if any, of the more than a dozen planned U.S. projects will go ahead before they receive approval to export gas to major buyers in Asia such as China and India, which do not have FTAs with the United States.

"Global LNG operators need access to 100 percent of the markets. Restricting the trade would reduce the value of the U.S. supply," said Lafayette Herring, an LNG analyst at Waterborne Energy consultants in Houston.

U.S. LNG exports are tightly restricted and projects must be approved by Washington. Deals to ship to FTA countries are typically rubber-stamped; only one project has been approved to export to a non-FTA country, amid concerns about driving domestic prices too high.

FTA nations that import LNG represent 20 percent of global demand, according to Waterborne, most of which is made up by the world's No. 2 LNG importer, South Korea. Adding Europe to that list would bring it up to 50 percent.

Financing of export projects, which cost billions of dollars to build, hangs on companies securing supply deals. Such deals are far more likely if all the world's importers can be approached. Without deals, it becomes very difficult to convince investors that the project will make money.

At stake is the fate of proposed projects run by Royal Dutch Shell, Exxon Mobil, Sempra Energy and other smaller ventures.

Some experts said that projects hoping to export from the United States will already be under construction by the time any trade deal with Europe is formalized.

"Negotiating a trade agreement is a long-term process. Most LNG projects in the U.S. will have to pull the trigger much before this trade deal is even close to being finalized," said Nikos Tsafos, analyst at PFC Energy in Washington.

EXPORT DEBATE

Gas export has become a pivotal political question in the United States as output of the fuel hit record highs over the past year. Gas producers want to capture higher prices abroad, but consumers and industry worry exports would push up fuel costs at home.

Gas prices in Asia are six times higher than the United States, prompting a string of about 15 export proposals that hope to exploit the price difference by liquefying the gas for shipping to higher paying markets overseas.

A government report in December concluded that unfettered LNG exports from the United States would have a net beneficial effect on the U.S. economy. The report, currently open for a comment period, has generated nearly 200,000 responses expressing strong opinions for and against exports.

So far one project - Cheniere Energy's plant under construction in Sabine Pass, Louisiana - has the go ahead to export to FTA and non-FTA countries. Cheniere, which expects to begin exporting by 2016, has already signed deals to supply companies in India, Great Britain and South Korea. One deal with BG Group will likely see U.S. gas exported wherever the British company has supply deals.

NO PERMITS, NO CUSTOMERS

Even companies without non-FTA supply approval, or the go-ahead to start construction on their plants, are taking steps toward completing the commercial side of the projects, lining up buyers outside the FTA umbrella in expectation that such an approval will come.

Freeport LNG, which plans to produce LNG on the site of its existing import terminal in Texas, has signed a supply deal with two Japanese utilities and, most recently earlier this month, with Britain's BP, which, like BG Group, supplies to consumers across the world.

Dominion Resources, which has government approval to export LNG to FTA countries and is waiting for approval to export to non-FTA countries, is in talks with potential European and Asian buyers - including Japan trading house Sumitomo Corp , company spokesman Dan Donovan said. It plans to file for a construction permit for its proposed plant at Cove Point, Maryland with the Federal Regulatory Energy Commission in the next two months, before receiving Department of Energy approval.

Donovan said it was unlikely that the Cove Point project would go ahead without a permit to send gas to non-FTA countries. "I don't think you would get the customers," he said. (Reporting By Edward McAllister; Editing by Matt Robinson and Leslie Gevirtz)

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