Kinder Morgan and Shell U.S. Gas & Power Plan to Modify Elba Island LNG Terminal for LNG Marine Export

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Written by Edward Weatherly for Industrial Info Resources (Sugar Land, Texas)--Kinder Morgan Incorporated (NYSE:KMI) (Houston, Texas) and Shell U.S. Gas & Power LLC, a subsidiary of Royal Dutch Shell plc (NYSE:RDS.A) (The Hague, Netherlands), have agreed to modify Southern Liquefaction Company LLC's Elba Island liquefied natural gas (LNG) receiving & regasification terminal. The agreement will convert the LNG receiving terminal into a bi-directional LNG facility by constructing a new natural gas liquefaction plant at the existing facility, which is near Savannah, Georgia. The new LNG production plant will be able to produce 2.5 million tons per year of LNG for export, which is approximately equal to 350 million cubic feet per day of natural gas.

In June 2012, Kinder Morgan received approval from the U.S. Department of Energy (DoE) to export up to 4 million tons per year of LNG, or 500 million cubic feet per day, to Free Trade Agreement (FTA) countries from the proposed Elba Island LNG plant. In August 2012, Kinder Morgan submitted a filing to the DoE seeking approval to export the same amount of LNG to non-FTA countries. Phase I of the project will require no additional DoE approvals and will encompass the export of 1.25 million tons per year of LNG, or 210 million cubic feet per day.

Once the project parameters are finalized, Kinder Morgan (through its subsidiaries) will take ownership of 51%, and Shell (through its affiliates) will own the remaining 49% of the new facility. To supply natural gas to the new LNG plant, El Paso Pipeline Partners LP, a wholly owned subsidiary of Kinder Morgan, will modify its Elba Express Pipeline.

The Elba Island LNG project is just one in a string of approximately 23 LNG export projects now in the planning pipeline. Not all of these projects will be constructed; although a closer look at the sheer export capacity in millions of tons annually for these facilities shows that it is impossible to construct the total tonnage. Total export capacity targeted for FTA countries is approximately 29 billion cubic feet per day, and the total export capacity targeted for non-FTA countries is estimated at 25.9 billion cubic feet per day. When combined, the total export capacity being proposed is 54.9 billion cubic feet per day, or 20.05 trillion cubic feet per year. It becomes obvious that many LNG export facilities will not be constructed, considering that during 2011, the U.S. consumed 66 billion cubic feet per day of natural gas, or 24.11 trillion cubic feet per year.

The facilities that progress to the construction phase first will have the best chance of continued expansions. Presently, the only LNG marine export facility under construction is Cheniere Energy Incorporated's (AMEX:LNG) (Houston, Texas) Sabine Pass LNG production plant, where trains 1 & 2 are being constructed by Bechtel Corporation (San Francisco, California). The trains have a combined export total of 9 million tons per year of LNG. Cheniere recently awarded the engineering, procurement and construction (EPC) contract for Sabine Pass trains 3 & 4 to Bechtel as well, and there is early talk of constructing trains 5 & 6. All six trains would total 27 million tons per year of LNG.

The facilities with the best chance of making it to the construction phase will be the plants backed by major oil & gas corporations like ExxonMobil (NYSE:XOM) (Irving, Texas), ConocoPhillips (NYSE:COP) (Houston), Kinder Morgan, and Apache Corporation (NYSE:APA) (Houston). The majority will be located on the Gulf Coast, Lower Atlantic seaboard and in British Columbia, to take advantage of the LNG demand growth curve for both Europe and the Asian Pacific Rim.

Of the 17 LNG export projects in stages of development that are awaiting DoE approvals and funding, the projects with the best chance of progressing through the permitting and approvals phases are the facilities that will be located on the Gulf Coast. The projects include:

• Cheniere Energy Incorporated--Sabine Pass LNG export terminal (under construction)
• Sempra LNG--Cameron LNG export terminal & 350-megawatt natural gas-fired power plant
• ExxonMobil--Golden Pass LNG export terminal (15.6 million tons/year)
• Gulf LNG Energy LLC--Pascagoula LNG export terminal (11.5 million tons/year)
• Freeport LNG Development LP--Quintana LNG export terminal (13.2 million tons/year)

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