Demand for Diverse Energy Sources Fuels BHP Billiton's Bid to Locate LNG Terminal off Oxnard

Up to four proposed liquefied natural gas terminals along the Southern California coast have become an issue and an opportunity for the area's public policy makers. Why does California need LNG terminals?

Fundamentally LNG terminals will provide a new source and a new way of delivering natural gas to the California energy marketplace. California has increasingly relied on natural gas as part of its environmental and energy strategy. Natural gas is by and large a clean-burning fossil fuel – cleaner than fuel oil and other alternatives -- it is a critical part of most regions' air quality strategies, and is even moving into other markets, such as the transportation market. Over the last 20 years, the increased reliance on natural gas to achieve environmental objectives obviously has driven up demand, but the infrastructure to deliver that natural gas really hasn't kept pace.

Pipelines have comprised the natural gas infrastructure to date. What advantage does California gain from an ocean terminal?

Natural gas that we've relied on over the years has come from domestic supply basins by pipeline from the U.S. Southwest, Gulf of Mexico, California, and to some extent from the pan-Alberta region in Canada. All of our supply essentially comes from the continent by pipeline. We're now looking at bringing natural gas in its liquid form by tanker from sources abroad because the supply basins in the United States are being depleted. The increased demand in California and elsewhere – other metropolitan areas are also looking to move away from dirtier fossil fuels – has created a situation essentially where the supply basins aren't producing at the future rate of consumption, and we're likely facing a future supply deficit.

Many other parts of the world, though, are awash in natural gas. There's tremendous supply around the globe, but in order to bring it to the market in California, you're not going to build a pipeline under the ocean. Hence, LNG. Producers have natural gas in Australia or Southeast Asia or other parts of the world, and they then chill it into liquid form, which reduces the size by about 600 times – imagine a Volkswagen being reduced to the size of a dime. They liquefy natural gas, put it in specially made tankers that keep the LNG cold – like thermos bottles – and then traverse the ocean and deliver the LNG to a supply point with an LNG receiving terminal. The LNG is returned to its gaseous form – natural gas – at the terminal using equipment that heats the LNG and puts it into the existing natural gas infrastructure.

Before we turn to the possible terminal sites, tell us a bit about such terminals around the world. What's the experience with LNG terminal facilities along coasts and in ports?

Worldwide there's a tremendous amount of experience. All the natural gas that moves into Japan is delivered as LNG. Japan probably has the most advanced LNG infrastructure, but throughout Europe and other parts of the world, there are dozens of these receiving terminals, and there have been for decades. The United States over the past several decades has had four terminals, but they haven't been in heavy use because there's been a ready supply domestically. But now as demand increases, the terminals in the U.S. – there are three on the East Coast, one in Louisiana and a fifth facility recently added offshore in the Gulf of Mexico– are modernizing and beginning to receive more and more natural gas. And there are many, many recent proposals for new terminals along the eastern seaboard and down in the gulf region.

Let's turn to this market. You're representing one of the potential supplies and operators. Tell us a little bit more about your company's interest as well as other possible projects.

BHP Billiton is the world's largest diversified natural resources company headquartered in Melbourne, Australia. Australia has huge supplies of natural gas, which we have been supplying to Japan and South Korea as LNG for decades. We're seeking approval to construct and operate Cabrillo Port, a deepwater LNG terminal here in California as an additional market for our natural gas.

Our proposed project, Cabrillo Port, is a floating storage and regasification facility that would be permanently moored off the coast of Ventura County, well outside the shipping lanes, and far from the Channel Islands National Marine Sanctuary. Cabrillo Port is a structure designed similarly to an ocean-going ship. It will receive and store LNG onboard, where it will be turned back into natural gas and transported to shore through underwater pipelines to meet demand of consumers onshore. At the shore, near Ormond Beach the gas will connect into Southern California Gas Company's infrastructure to deliver natural gas – not LNG – throughout Southern California.

With regard to other potential projects there are three we are aware of being proposed for southern California. Sound Energy Solutions, in partnership with Conoco-Philips and Mitsubishi, is a conventional onshore project that would receive LNG and regasify it on land. It is proposed for a location in the Port of Long Beach.

A second project, by Crystal Energy, is proposed as a conversion of the existing offshore oil platform Grace also near Oxnard.

And Woodside was recently in the news with another proposed offshore concept. Although few details were given, it appears that Woodside is proposing some form of offshore floating LNG terminal that will deliver natural gas into a subsea pipeline for transport to shore.

Three of the projects that I mentioned -- BHP Billiton, Mitsubishi and Crystal -- have submitted applications, although the application submitted by Crystal Energy wasn't complete and is not moving forward. The lead agencies reviewing our project issued a joint draft environmental impact statement/ environment impact report (EIS/EIR) in October 2004 and held public hearings, and will be recirculating a Revised Draft EIR in early March 2006. Additional public hearings will occur in April. A final EIS/EIR is expected by early summer. For Sound Energy Solutions' proposed Long Beach facility, the agencies recently released a draft EIS/EIR and held public hearings. The agencies are now preparing responses to comments in preparation of a final document. The Woodside announcement did not give any details on proposed location, specifics of the concept and intended timing of an application.

Who are the stakeholders, and what legal review process do these projects have to go through?

Jurisdictional review depends upon where the project is sited. If the project is sited on land, the Federal Energy Regulatory Commission has the jurisdiction for the review and approval of an LNG facility.

LNG facilities proposed for offshore in federal waters, fall under the federal Deepwater Port Act, because these projects essentially function as a deepwater port. The Deepwater Port Act requires review and approval by the U.S. Coast Guard/ Maritime Administration. Because offshore projects are usually associated with pipelines that bring the natural gas to shore, they typically cross state lands and require a state review. Our project requires a state land lease for our pipelines in state waters from the State Lands Commission, which is reviewing the project as joint lead agency with U.S. Coast Guard/ Maritime Administration.

Investments such as an LNG receiving terminal involve an intricate balancing act of stakeholders. How are you finding the conversation about this particular BHP Billiton facility? What are the voices and arguments? Is there common ground?

When we first entered into discussions with a variety of stakeholders, and particularly environmental and energy stakeholders as well as statewide regulators, legislators and other policy-making bodies, there was a lot of interest and excitement about an offshore LNG project because it avoided the issues of an onshore project, specifically being close to population centers and presenting a potential danger to the population. We talked to a lot of environmental and energy constituencies that understood the need for more natural gas and understood the role of natural gas in California to ensure clean air and other environmental objectives. We found lot of support for bringing LNG to California in a way that would address the perceived safety and security concerns.

When people understand that Cabrillo Port will be built to the highest environmental and safety standards they will understand that it is a clean, safe, reliable source of natural gas to meet California's growing energy needs.

Who are the intermediary institutions that you, as a representative for BHP Billiton, turn to to find the common ground to support public policies that are constructive for California?

In terms of the political structure of the state, obviously you look to the California Energy Commission, the Public Utilities Commission, and the Governor's Office. The California Energy Commission has noted that the state will have a critical need for new sources of natural gas beginning as soon as 2008. We believe Cabrillo Port is the best solution because of its remote location, minimal environmental footprint, and proven technology. As the first offshore solution proposed for the state, it's also best positioned to safely meet the urgent needs of California for a clean, reliable supply of energy in the most efficient delivery means as quickly as possible, particularly because Cabrillo Port will store its gas offshore.

Under the Deepwater Port Act, the governor of a state does have the ability to approve or disapprove a project. Further, the CEC has authored several reports that acknowledge the need for LNG as a new supply opportunity as well as a new way to deliver natural gas. The PUC as well has agreed with the need for LNG. Commissioners of both the Energy Commission and the Utilities Commission have expressed support for the concept of an LNG facility. We've received a lot of statements of support for it being offshore because it avoids the perception about safety issues and environmental impacts.

You said that your project's EIR process is nearing completion. A year from now by what criteria should we judge the project's success?

I think a year from now we'll be looking at the final details of going to market on our project. After recirculation of the Revised Draft EIR in early March, we expect that agencies will prepare a final EIS/EIR, and that it will go to both federal and state hearings for decision sometime this summer. We fully expect to receive a license to operate as a port from the U.S. Coast Guard/MARAD, and we fully expect to receive a land lease from the State Lands Commission to build the pipeline. At that time we can begin final engineering design and construction of Cabrillo Port and the associated pipeline, and we expect to begin delivery of natural gas to California by about 2011.

At the end of the day, at least one and probably two facilities will likely be permitted because the need is there. We're not building new interstate pipelines, and even if we were, the supply in the southwest can't continue to fulfill the demand and the future demand. We're going to have to bring in LNG, and a couple of these facilities will be needed in California.

Editor's Note: Rick Abel is no relation to MIR publisher David Abel.