So, are LNG terminals old hat?
Last October a brand-new, bulky vessel topped with a convoluted network of pipes was welcomed at the port of Klaipeda, Lithuania, by that country’s president who was surrounded by officials from Estonia, Latvia, Finland, Norway, Sweden, the United States, and the European Union – plus a lot of enthused Lithuanians (Try to say: “enthused Lithuanians” real fast without tripping over your tongue. But enthused they were!) The center of their attention was what in the gas trade is known as a FSRU, or Floating Storage & Regasification Unit: essentially a floating LNG import terminal, with the capacity to store and re-gasify a big load of LNG.
FSRUs have been around for only a few years; the first ones were simply modified LNG tankers. The one built for the Lithuanians is a new, purpose-built vessel, almost a thousand feet long and with a draft of over 41 feet. This FSRU was built for Hoegh LNG, a Norwegian firm that is leasing it to the state-controlled Lithuanian gas company. Once moored at a terminal in the harbor of Klaipeda, it will substitute for a land-based LNG import terminal. Incoming LNG tankers, initially from the Norwegian gas fields, will tie up at the FSRU’s other side to unload their LNG cargoes into that vessel’s hold. Meanwhile the FSRU, using water from the Baltic Sea, will warm the LNG to turn it back into gas, and forward it through a pipeline into Lithuania’s natural gas network. This FSRU can store 70,000 m3 of LNG on board, slightly less than half of what each of the two storage tanks at Jordan Cove is expected to hold.
A Declaration of Independence
Lithuania’s FSRU has more than enough capacity to fill all of that country’s gas requirements, causing Lithuanian president Dalia Grybauskaitė to boast: “After Lithuania’s 25 years of independence, we can again be proud of our determination, courage and political will.” She explained that the FSRU would be “. . . the Baltic region’s energy security, we can always come to the aid of our neighbors if needed. This terminal will be able to cover 90 percent of all three Baltic countries’ demand. And no one else will be able to dictate the price of gas, to purchase our political will or to bribe our politicians.”
Her bold declaration of independence was symbolized by the FSRU’s given name: “Independence”, and her “no one else” was code for “Russia”. There was a lot of history behind her speech, much of it tragic as is common in eastern Europe. A tiny but proud nation today, in the fourteenth century Lithuania was one of Europe’s largest countries. But during the centuries since, all the Baltic countries – from west to east, Lithuania, Latvia and Estonia, with some geographers including Finland – had to swallow expanding amounts of abuse by the growling, growing Russian bear who finally swallowed them all, some three hundred years ago.
After World War I the Baltics regained their independence, but for only twenty years. In 1939 Russian dictator Stalin made the infamous deal with German dictator Hitler that enabled the second dictator to invade Poland without Russian interference. Stalin’s reward – which started World War II – had been the eastern half of Poland for himself plus a free hand in the Baltic countries, which he promptly annexed and colonized by importing large numbers of Russians. Mass shootings and deportations to icy Gulag camps were part of the Russian embrace. But in 1989, the three Baltic countries commemorated the criminal 1939 “pact” between Stalin and Hitler by means of the “Baltic Chain”, in which two million Lithuanians, Latvians and Estonians joined hands in a line over 400 miles long to protest their overlords. The Kremlin huffed and puffed but did not interfere, not even when the following year Lithuania declared its independence, a good call because within a year the bankrupt Soviet Union fell apart.
In America many large corporations have made themselves unpopular, at times for reasons which may be unavoidable, like being seen as thoughtless, overbearing, and in bed with crooked politicians. But we should contemplate how much worse our corporate bullies might behave if, as is customary in today’s Russia, they were directly linked to the country’s authoritarian regime which unashamedly uses them for political ends. Those political ends included blackmail and intimidation, as the Russians have done to half a dozen countries besides the Ukraine, by having their gas and oil companies shut off pipeline deliveries, often during frigid winters.
Until now, the Lithuanians have obtained their natural gas through a pipeline from Russia, but with considerable grumbling because they were being charged about a third more than other countries including Germany. The arrival of the FSRU “Independence” was intended to solve two problems, one being taken advantage of by the Russian gas moguls (who have recently lowered their prices), and the other the prevention of future political intimidation.
The hazards of staying in place
Until a few years ago America’s only LNG import terminals were those in Boston, Maryland, Georgia and Louisiana, which were all built in the seventies. In 1980, market changes caused the closure of the Maryland and Georgia terminals, which sat idle for over twenty years. By 1984 the Boston terminal was the only working one left; through market ups and downs that one has stayed viable mostly because pipelines in that part of the country cannot fill Boston’s demand.
Because, on close examination, Boston has been the exception that confirms the rule, a prudent investor looking at the profitability of American LNG terminals might be inclined to put his money into something else. Remember, just in the last ten years we’ve already lived through the beginning and the end of an LNG import mania, and now it looks like LNG exports may follow the same scenario.
It’s not even clear that the praise recently lavished on the Chenière Company’s Sabine Pass LNG terminal in Louisiana will improve the record much. During the first mania Chenière had built an import terminal to convert received LNG back into gas for domestic use, just like the cancelled Coos Bay import terminal would have done. When Chenière’s terminal was ready for business in 2009 the import market had evaporated. But with the aid of powerful politicians, an energetic CEO proposed to convert the empty facility to exports, meaning liquefying gas to ship overseas as LNG. FERC approval was obtained in 2012; due to the advantage that most of the facility was already built, the conversion is nearly done and Chenière’s first shipment is expected to leave late this year. During this wild ride the company’s stock twice sank into penny territory but lately it’s been riding high, in the seventies. On the other hand, Chenière is $9 billion in debt and has never made any money, only lost hundreds of millions; so who knows what’s in its future? And having a terminal that can do both operations, liquefaction for exports and re-gasification for imports, may not be a panacea, either. It’s not difficult to visualize market conditions that would make both activities unrewarding; it all depends on the spread between buying and selling prices, which depend on market conditions largely out of anyone’s control, and also on the location of the terminal. No wonder one Chenière stockholder describes it as “one tiger whose tail I wish I’d never grabbed.” And an investment expert warns: “. . . we believe investors should steer clear [of the LNG business] for the foreseeable future.”
The lesson to be drawn from the LNG terminals’ story could have been taught us by both Glenbrook Nickel and Oregon Resources (ORC), even though those companies’ stories were not written with billions but millions. Glenbrook’s idea was to import nickel ore from the south Pacific and dry it at a facility in Bunker Hill, so it could be trucked to a smelter it owned in Riddle, up highway 42. The round tower that was used for loading the trucks is still there; the French engineer who supervised its construction was one of my lunch customers, in the early 1990s. Trucking ore is a very expensive operation, which is why it’s usually moved by rail; but a rail connection never existed between here and Riddle. And after a few years Glenbrook got caught in a financial vise. The Russians, who desperately needed foreign currency, started dumping nickel on the world market. Prices tanked, Glenbrook became unviable, and shut down for good in early 1998.
Then, in 2011, ORC acquired the Glenbrook property to build a plant for sorting the local chromite sand it wanted to sell. But ORC didn’t last long either; the exact reason was never clear to me, but it seems to have been an unfavorable adverse market.
In any case, the lesson to be drawn from Glenbrook, from ORC and from the LNG terminals is that in a free-trade world, making a huge investment in a stationary facility that depends on global commodity prices is extremely risky. An idle asset that is unmovable cannot pay for itself, let alone make money. And with specific regard to LNG, this is why the future may belong to floating LNG processing plants, both for imports like the “Independence” now moored in Lithuania, and the new vessels presently being built for LNG exports. Economically and politically they make sense, and the permit process is much, much simpler. The “Independence” cost $330 million to build. That’s not chump change, but it looks like a steal when contrasted with the billions that promoters have dumped into stationary LNG terminals of both types.
A World of Skepticism
It was refreshing to see The World (on January 31) devote considerable space to an investigative article about the Jordan Cove LNG terminal’s chances of making it, while at the same time publishing an editorial advising us to quit hoping for Santa Claus. Nobody, whether it’s The World or Veresen or I, can be 100% certain that JC will NOT be built. We won’t know until the official announcement – if there is one.
But at this point I’m comfortable with 90% certainty. Once the demise is final, finding a more classic case of a town’s “leaders” counting their chickens before they were hatched will be difficult. The maniacs who went to such lengths to divert JC’s future property taxes through the CEP should have remembered our previous industrial pipe dreams: the coal export schemes, the chromium smelter, Daishowa paper, Nucor Steel, Maersk Containers; and on and on. All were worshipped by obsequious politicians and noisy dreamers at public meetings, and all were flops. The noisy dreamers are still at it, as shown by a big ad in the same paper that carried the article. This ad showed several excessively smiley members of B.S. Oregon, JC’s bought-and-paid-for “grassroots” fan club. Ignorance is bliss, especially ignorance of market developments. And curing ignorance by writing books, I have to admit, can be a fool’s errand.
But let’s remain fair: our “leaders” had good intentions. They didn’t mean for JC to fail! They wanted only the best for us! They had such high hopes that Coos Bay might be able to live the dream of the only successful LNG terminal, the one in Boston:
“Every time a tanker . . . enters Boston Harbor, everything stops. Traffic on the Tobin Bridge. Planes in and out of Logan International.
That’s not all.
To guard against a terrorist attack, each tanker is escorted by two Coast Guard patrol boats with mounted machine guns, a 110-foot cutter, a helicopter, six tugboats, a fireboat, police cruisers. State police divers check piers for bombs, while sharpshooters stand guard on rooftops. And all other ships must stay at least a mile away.”