Cove point LNG export: A vision for our energy future?

A couple of weeks ago I had the opportunity to tour the Liquefied Natural Gas (LNG) facility at Cove Point, Maryland. Owned by Dominion, the Cove Point facility is currently an LNG import and storage facility.

As readers will know, there has not been that much demand for LNG imports to the U.S. over the last few years – the shale gas revolution has turned the U.S. from an economy looking to import increasing quantities of costly gas to one where a surplus of low-cost gas is looking to global exports. As such, Dominion has applied for the permits to expand the facility for LNG export. It has received approval from the Department of Energy for exports, but it is awaiting state, local, and final FERC approval before construction can begin. They expect to break ground on the new facility in the spring of 2014, with completion sometime in 2017.

A Brief History

When Cove Point was first built in the late 1970s, there was demand for imported gas from the only major supplier of LNG, Algeria. The 1970s had seen shortages of gas around the country. As it came on line in 1978, Congress passed legislation to deregulate the gas industry. With deregulation, domestic production increased and demand for imported LNG fell and most imports ceased by 1980. In the early 2000s, there was pressure in natural gas markets again, and Cove Point was reactivated as an import terminal in 2003. In ‘04 and ’05, Cove Point hosted almost 80 ships per year bringing in LNG from producers around the world. At that time, U.S. demand looked set to grow inexorably, with domestic supplies unable to meet demand. So, in 2004, Dominion embarked on a large expansion of Cove Point’s capacity, more than doubling its storage capacity. Once completed in 2009, markets had again turned against LNG imports, as the shale revolution pushed down prices and pushed up production. 2011 was the last commercial import of LNG; now two or three ships per year service the facility in order to keep their lights on and fulfil their secondary mission of providing a peak demand service (providing gas to markets in times of high demand).

The Plan for LNG exports

In recognition of the new market realities, Dominion has planned to invest between $3.4 and $3.8 billion in turning the Cove Point facility from an import and gasification facility into an export and liquefaction facility. It has signed deals with Sumitomo in Japan and GAIL India to buy 50% each of the export facility’s production.

Cove Point is uniquely positioned for LNG exports because, unlike other proposed export facilities that have thus far been approved by DoE, it is on the East Coast with a direct pipeline to the Marcellus Shale region in Pennsylvania. Producers in this region especially have had trouble getting their gas to markets, as there is not enough infrastructure. This would help

Enough background – how was the tour? 

After getting a full brief from Dominion representatives on the status of their applications and the schedule for construction, we left for a tour of the complex.

The facility has a storage capacity of 14.6 billion cubic feet of gas, enough to heat somewhere around 150,000 American homes for one year. Because the gas is stored as LNG, it does not take up 14.6 billion cubic feet: such a holding tank would be a cube almost a half mile long on each side. Regardless, the seven large holding tanks are still very large when you’re next to them!

We next drove to the on-site electricity generator – Cove Point is not attached the local electricity grid. Instead, all of its operations are powered by gas turbines running off the gas stored on site.

After driving around the storage facilities and seeing where the new liquefaction machines would be, it was time to go to the pier. The pier is just over a mile offshore in the Chesapeake Bay. We didn’t take a boat out there; in what I have to believe is a unique aspect of Cove Point, we descended to a tunnel, then hopped on bicycles to ride through the approximately five-foot wide tunnel to the pier. The pipes bringing gas on or off the ships were in housed in tunnels on each side of us.

As we took the elevator up to the pier, we emerged onto a large wind-blown dock with the ability to host two LNG ships. Sea gulls had colonized most of the area, leaving droppings and remains of Chesapeake blue crabs strewn across the decks. Overall the impression was one of massive, expensive infrastructure that has been left to elements. As you can see in the picture, it is a massive dock, capable of hosting two large LNG ships at one time.

Lessons for the Future?

As I was leaving, I was surprised to see that Cove Point is right next to Constellation Energy’s Calvert Cliffs nuclear power plant, and I reflected on the fickle nature of energy markets. In 2004, the market for LNG imports was so strong that Dominion authorized a massive expansion of capacity at Cove Point. By the time it was finished, there was no use for all that expenditure. Similarly, Calvert Cliffs was one of the prime examples of the nuclear renaissance when Constellation filed an application with the Nuclear Regulatory Commission in 2007 to build an AREVA-designed third reactor on the site. However, by 2010, citing problems with the government loan guarantee, Constellation pulled the plug on the new reactor.

Will the LNG export facility suffer the same fate? As I’ve written before, I am bullish on the potential for natural gas as both a source of energy in the U.S. and as an export commodity. I think that there is a clear demand for American exports, and there appears to plenty of supply here in the U.S. The impacts of building a global market for gas will be nothing short of revolutionary. However, looking at these two facilities on the Chesapeake as an energy analyst, it makes me aware that it truly is difficult to predict the future!

http://www.energytrendsinsider.com/2013/11/27/cove-point-lng-export-a-vision-for-our-energy-future/