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Liquid Assets: The State of U.S.

LNG Exports
July 2013

Prepared by Edelman Energy

To learn more about Edelman Energy, please contact Amy Malerba Hemingway, senior vice president and global energy lead, at amy.hemingway@edelman.com or call (202) 371-0200.
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BACKGROUND
After years of dwindling production and foreign dependence, the United States now leads the world in natural gas production and overall reserves which has led to the ironic, yet heated debate over whether liquefied natural gas (LNG) exports stand to benefit or harm the domestic economic outlook. In order to maintain competitiveness and meet global demand, companies hoping to export abundant U.S. natural gas must navigate the political waters of the federal permitting process to obtain approval for LNG exports to non-free trade agreement (FTA) countries, where the bulk of demand exists. This process is further complicated by diverse, yet committed opposition groups at the local and national levels. As it stands, companies looking to construct or expand facilities for the export of LNG from the United States need to satisfy a number of federal regulatory requirements, which has proven a lengthy process. These include the requirement for companies to seek export authorization from the Department of Energys (DOE) Office of Fossil Energy if the importing country is not subject to a FTA with the United States. Operators looking to convert existing or construct new LNG import terminals must obtain approval from the Federal Energy Regulatory Commission (FERC). Currently, 15 of the 20 proposed projects have applied to FERC. DOE has said it is evaluating the applications in chronological order, but giving approval preference to those that started the FERC application process last year. With Freeport LNG Expansions (backed by ConocoPhillips) conditional approval to export to non-FTA countries from Quintana Island, Texas, there is indication DOEs year-long moratorium in issuing non-FTA permits has endedperhaps swayed by the multitude of studies that have concluded exports would provide net economic benefits, both in the short and long term. Nonetheless, as permits are considered on a case-by-case basis, estimated at 60 days a pop, delays persist.

"I've got to make an executive decision broadly about whether or not we export liquefied natural gas at all."

President Barack Obama. May 6,


2013

The United States does not have time to spare if it wants to take advantage of its unique position to become a world-leading energy producer and exporter. Further permitting of LNG exports to non-FTA countries must come down the pipeline soon, so that the necessary construction and conversion measures can commence in order to begin exports while demand continues to grow and hungry importers still look to sign amenable, long-term supply contracts. Countries around the world with significant natural gas resources are rushing to beat America to the punch and are constructing LNG facilities at a much faster rate. If the conversion and construction of Americas proposed liquefaction facilities continues to be delayed, large-scale exports from countries like Australia and Canada will make U.S. LNG increasingly less competitive and destroy the nations global market share. The following outlines issues hindering U.S. LNG exports, followed by the benefits and arguments in favor of the policy. Specific examples of the issues and benefits for LNG exports come from Edelmans analysis of the Jordan Cove Energy Project in Coos Bay, Oregon and the Dominion Cove Energy Project in Lusby, Maryland. These cases help to better understand the situation on-the-ground as it relates to companies struggles to receive DOE approval to export to non-FTA countries.

ISSUES AT HAND
U.S. regulatory environmentOverall, the LNG export permitting process takes a significant amount of time due to complex and often redundant reviews by multiple agencies; environmental impact statements required by local, state and federal regulators; and lengthy public commentary periods. For example, Cheniere Energy began the permitting process in July 2010 (before LNG exports became a political issue) and received all the necessary approvals in April 2012, wherein construction could finally begin in order to convert the facility slated for completion in 2015. Long wait periods allow for opposition to organize and attack, as seen on the national level with the formation of the anti-export coalition, Americas Energy We are concerned that hasty government Advantage (AEA), as well as proposed legislation by Rep. Ed action, coupled with growing domestic and international demands for natural gas, will Markey (D-Mass.).

Opposition o Corporate oppositionAEA is a coalition backed by Dow Andrew Liveris, president and CEO, Chemical, Nucor, Alcoa, Eastman, Celanese, the American Dow Chemical Company Public Gas Association and Huntsmansome of the largest manufacturers operating in the U.S.who are against LNG exports, as they believe it could lead to a rise in domestic natural gas prices and therefore harm domestic manufacturing. Taking advantage of the permitting lull, AEA has commissioned a study that supports its concerns, released survey data demonstrating a lack of public support for LNG exports, garnered significant media attention, and recruited thought leaders, including some powerful members of Congress.
o Congressional oppositionWhile not a cut-and-dry partisan issue, the topic of LNG exports is controversial in the 113th Congress, especially due to Sen. Ron Wydens (D-Ore.), chairman of the Senate Energy and Natural Resources Committee, initial vocal skepticism of the benefits to exporting U.S. natural gas. Wydens position originally helped fuel both corporate and environmental opposition, but he now straddles the issue, suggesting that officials seek a sweet spot for LNG exportsallowing enough to spur drilling and increase gas supplies, but not enough to create export-driven price hikes. He continues, Under the right approach, energy companies can make enough money to continue producing, U.S. manufacturers have an affordable, stable supply of natural gas, and the environment is not only protected, but actually benefits from greater use of natural gas and lower CO2 emissions. Most congressmen that have spoken out against hydraulic fracturing have also raised concern about LNG exports, including congressional heavyweights like Rep. Rush Holt (D-N.J.), Rep. Ed Markey (D-Mass.) and Rep. Henry Waxman (D-Calif.), the ranking member of the House Energy and Commerce Committee. Rep. Markey has gone so far as to initiate a campaign, Drill Here, Sell There, and Pay More: The Painful Price of Exporting Natural Gas. He has also introduced H.R. 1189, The American Natural Gas Security and Consumer Protection Act, which would prohibit the exportation of natural gas without authorization from the Secretary of Energy, as well as H.R. 1191, the Keep American Natural Gas Here Act, which requires that the Secretary of the Interior accept bids for new oil and gas leases on federal lands only from bidders

trigger a severe supply pinch that will send the U.S. back to the days of higher and more volatile domestic natural-gas prices.

Exporting LNG requires increased natural gas production and more unsafe fracking, making a dirty fuel more dangerous and putting more American families at risk.

certifying that natural gas produced under the lease will be offered for sale exclusively in the U.S.

o Environmental oppositionWhile LNG exports have not been as aggressively targeted by environmentalists in the same manner as Keystone XL or offshore drilling, specific projects have faced significant opposition. Many environmental groups like the National Resources Michael Brune, executive Defense Council (NRDC) and the Environmental Working Group have director, the Sierra Club expressed their concerns about LNG exports via comment submissions to the DOEs LNG Export Impact Study. However, their major focus remains on hydraulic fracturings role in the life cycle of exports. That being said, other groups like Greenpeace and the Sierra Club have created national campaigns against LNG exports and could activate more than 850,000 members if they determine the issue salient enough as the debate continues. Locally, nearly all proposed liquefaction facilities have faced environmental opposition. Two examples are the Dominion Cove Energy Project in Lusby, Maryland and the Jordan Cove Energy Project in Coos Bay, Oregon. Dominion Cove: In 2012, when Dominion proposed to convert the terminal to a liquefaction plant, Sierra Club blocked the proposal citing a 2005 legal settlement involving permitted activities at the Cove Point site that they claim prohibited Dominion Resources plan to export liquefied natural gas. Dominion successfully countersued and the Maryland circuit court sided with Dominion Resources in 2013, stating that the 2005 agreement unambiguously allows the energy company to construct, operate and maintain additional facilities for the liquefaction of natural gas, and to export the liquefied gas by pipeline from the Cove Point terminal to tankers docked at an offshore pier. Despite this victory, Sierra Club has filed an appeal and continues to actively protest against the project. Jordan Cove: LNG terminals in Oregon have been a controversial issue across the state since 2003, when work began on the construction of the import facility at Coos Bay. Landowners and environmentalists in the region mounted a fierce campaign to block the three proposals to build LNG import terminals in Oregon, including the Jordan Cove facility. At the time, they insisted there was no need for imported gas, and now say backers are pulling a bait and switch by converting to export projects. Either way, they believe the terminals and associated pipelines will harm forests, farms and salmon habitats. After a decade in the trenches, citizen groups opposed to the project are well organized and well versed on the issues, and capable of activating a substantial amount of opposition if they feel the need arises. Oregons chapter of the Sierra Club, which boasts 20,000 members alone, has threatened legal action and targeted protests if LNG exports were to be allowed from Coos Bay. While small in size, Citizens Against LNG is an environmental group that was formed to directly protest the Jordan Cove Energy Project and Pacific Connector Gas Pipeline, which could generate negative media coverage if the projects profile is raised at the regional and national level.

Keystone XLIt would seem that the approval of the Keystone XL pipeline extension would usher in a more supportive environment for the overall endorsement of LNG exports. However, there is concern that logic used to pass Keystone could end up harming the exports debate. Many of the points made in support of Keystone XL center around the prospect of American energy security and
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independencethe idea being that a stable, secure energy supply from Canada would lower foreign imports from politically unstable countries. It is only logical that Keystone opponents would use this argument against LNG exports by questioning why, after so much struggle to secure U.S. energy supplies, would we then rush to export them. That said, expert economists note that the country would export LNG only after we meet demand here in the U.S. and if the market demands it. Another insight gleaned from the Keystone XL debate is environmentalists lack of consideration of potential job growth from energy projects. Environmentalist groups have dismissed the labor agreements made with Keystone backers that would ensure approximately 20,000 new jobs. This will most likely roll over to agreements made between unions and LNG construction facilities. Simply put, environmental opposition has demonstrated they will not be swayed by job growth figures, large or small. Lastly, once the Keystone debate is settled, the question must be asked: whats next for environmental groups? LNG exports would seem the most prominent issue with the greatest amount of salience as increased exports could be connected to increased hydraulic fracturinga topic that has not enjoyed popular support across the U.S. and could cause the DOE to limit export approvals.

Financial woesMany commodity analysts (Moodys, Seeking Alpha, Dow Jones) believe that the majority of companies seeking permission to export U.S. natural gas are likely to fail in their efforts to secure financing, obtain permits or overcome market forces. Only three of the projects pending before the Energy Department are likely to succeed in large part because theyve signed long-term contracts with customers and would be built at sites with existing infrastructure. According to Moodys, the export projects likely to move forward are Freeport LNG Expansion, Dominion Cove Point LNG and Cameron LNG. Short-term natural gas pricesWhile an overwhelming volume of research concludes domestic natural gas prices will rise only marginally in the mid to long term across various export scenarios, the volatility of short-term prices could sway public perception and boost opposition. As Henry-Hub prices edge closer to four dollars because of weather and a slow-down in drilling due to supply gluts, many have used this opportunity to exclaim that current prices will only rise with LNG exports. While this reflects a misunderstanding of how natural gas prices are determined, without a clear explanation as to the difference in short-term and long-term pricing, this argument could swell and ultimately harm LNG export approval.

Despite the significant issues mentioned above, there are several organic opportunities that can be taken advantage of in order to bolster support.

OPPORTUNITIES

Strategic locationThe U.S. is well positioned to supply LNG to markets both via the Atlantic and Pacific with relative ease as compared to its competitors. Unlike other major exporters, American LNG exports would not have to pass through tenuous straits or unfriendly waters. The potential for U.S. LNG exports in the next five to ten years is timed perfectly with the2015 completion of the expansion of the Panama Canal. The expanded canal will result in greater integration of the

worldwide LNG trade and give U.S. natural gas producers access to prime Asian markets with shorter, more direct transit routes. Overall, the countrys position between Asia and Europe gives it a leg up over other major exporters like Australia, who must transport over greater distances and at higher costs. Specific locations in the U.S. are especially well suited to particular markets. For example, Jordan Cove in Oregon is well positioned to export to hungry Asian markets, while Dominion Cove can quickly transport LNG to Europe, Latin and South America. Dominion Cove: The Dominion Cove project is the only facility positioned on the east coast to export LNG to hungry global markets. The facilitys proximity to and relationship with production in the Marcellus and Utica Shale gives the project a leg up. The terminal is tied directly by pipeline to Pennsylvanias Marcellus Shale gas field, which promises abundant, secure natural gas for decades to come. Jordan Cove: As one of only two proposed export terminals on the western seaboard, the Jordan Cove Energy Project is better positioned than the U.S. Gulf plants to serve Asian markets.
The net effects on U.S. employment from LNG exports are projected to be positive with average net job growth of 73,100 to 452,300 between 2016 and 2035, including 1,700-11,400 net job gains in the specific manufacturing sectors that include refining, petrochemicals, and chemicals.

Economic stimulusStudies completed by MIT, Deloitte, the Bipartisan Policy Center, the Brookings Institution, the Council on Foreign Relations, the National Regulatory Research Institute, the Congressional Research Service and NERA Economic Consulting all Harry Vidas, vice president, ICF conclude that LNG exports would have a net economic benefit to International the U.S. A study by ICF International concluded that the U.S. could witness net job growth between 73,000 to 452,000 jobs by 2035 with the approval of LNG export projects. According to the U.S. International Trade Administration, every $1 billion in LNG exports could result in more than 6,000 U.S. jobsjobs that would not be created if the country cannot export, according to expert economists. The findings of these national studies, coupled with local economic research discussing the specific benefits of each project, will help companies engage Washington thought leaders and encourage DOE action.
Dominion Cove: Dominion says the Lusby liquefaction plant would generate 4,000 direct and indirect jobs during construction, produce an estimated $9.8 billion in royalty payments to mineral owners over 25 years, and spin off $1 billion annually in federal, state and local government revenues. In Calvert County alone, the project could produce additional property tax revenue of up to $40 million per year and would make Dominion the countys largest taxpayer. Over the life of the project, it would have an estimated economic impact of $1.3 billion on Calvert County. The project would generate 2,500 to 3,100 construction jobs and 70 to 100 permanent jobs in Calvert County. Jordan Cove: Jordan Cove and its associated infrastructure would be the single largest private investment in Oregons history. The $7.5 billion project would be built over 42 months and bring much-needed economic benefits to Coos County. The facility would have an estimated peak LNG terminal construction workforce of more than 2,100 and approximately 150 permanent LNG facility jobs with average wages of $75,000/yr. Property taxes would contribute $20 million to Coos County for the first three years and $30 to $40 million each year thereafter.
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Growing support from the administrationThe Obama administration has signaled support for more plants to export liquefied natural gas, as the U.S. embraces its surging energy production as a key new element of its national security policy. In May 2013, President Obama told reporters that the U.S. was likely to be a net gas exporter by 2020, the strongest sign yet that the president is swinging his support behind higher energy sales overseas.

Legislative supportMany on Capitol Hill realize the economic benefits of LNG exports and have voiced their support for DOEs speedy approval of non-FTA permits. Several congressmen have formed the LNG Export Working Group, made up of eight vocal congressmen from both parties, including Rep. Tim Ryan (D-Ohio), Rep. Bill Johnson (D-Ohio), Rep. Jim Matheson (R-Utah) and Rep. The chance to sell more natural gas Mike Doyle (R-Pa.). In addition, more than 110 congressmen signed a to foreign customers is an opportunity letter in January, 2013 calling on the DOE to authorize the export of to really help tilt the balance of trade natural gas to non-FTA countries. This support has been mirrored by in our favor for the first time in governors and state legislators across the United States. decadesThe economic gain that
could be offered for the American worker (and) the geopolitical benefits that could come are positives. Senator Lisa Murkowski, (R-Alaska)

Dominion Cove: U.S. House of Representatives Democratic Whip Steny Hoyer (D-Md.) has said the project has the potential to make a significant contribution to Southern Marylands economy.

Jordan Cove: While Senator Wyden has been skeptical of LNG exports at the national level, he has voiced support for the project in Coos Bay as a driver of the states economy and jobs. His initial support has since been muted. Rep. Greg Walden (D-Ore.) is one of the 110 members of the House of Representatives that has signed a letter to the DOE urging exports.

Local supportAcross the board, the 20 projects awaiting approval to export LNG to non-FTA countries have received support at the local level from a myriad groups and interests. Stakeholders are most often swayed by the economic opportunity and potential job growth that comes with a new or converted liquefaction facility.
Jordan Cove: Labor unions have come out in strong support of the project because it would be constructed under a signed Project Labor Agreement. Dominion Cove: Calvert County commissioners have expressed their support and anticipation for Dominions proposed LNG liquefaction project. The Calvert County Board of County Commissioners is especially thrilled that the expanded facility would increase Dominions property tax payments by about $40 million per year, which represents a 27 percent increase over current county property tax revenue collected from the existing LNG terminal. The board has expressed it stands ready to be at Dominions convenience for any time you need any of us to do anything, including testifying or submitting comments to relevant studies or reviews.

Organized advocacy Companies with a vested interest in U.S. LNG exports have come together to form The Center for Liquefied Natural Gas (CLNG)a trade association of LNG producers, shippers, terminal operators and developers, and energy trade associations. CLNG serves as a clearinghouse of educational and technical information addressing the positive impacts of future exports. It also facilitates rational issue discussion and the development of public policies that
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support LNGs contribution toward economic growth in the United States. Bill Cooper, the president of CLNG, regularly addresses the media in order to support the exports issue and encourage the DOE to adopt a timelier, efficient approval process. CLNG can be seen as a counter coalition to Even if the volumes exported from Americas Energy Advantage, outlined above.

PartnershipsThe signing of long-term supply contracts with foreign buyers continues to demonstrate to relevant parties and naysayers that global demand for U.S. natural gas is high and will remain so in the long term. Proposed liquefaction facilities that have signed long-term supply contracts are most likely to gain approval first to export LNG to non-FTA countries. Most facilities that have formed partnerships have entered into 20-year agreements, demonstrating their commitment to operate over the long term to both domestic and international stakeholders.

for free trade.

the United States arent large, there is an ideological geopolitical benefit to U.S. LNG exports. Exports will provide certainty to allies and economic partners around the world that the United States is a steadfast advocate

Charles Ebinger, director, Energy Security Initiative, The Brookings Institution

Dominion Cove: Dominion has fully subscribed the marketed capacity of the project with the signing of two 20-year terminal service agreements. Pacific Summit Energy, LLC, a U.S. affiliate of Japanese trading company Sumitomo Corporation, and GAIL Global (USA) LNG LLC, a U.S. affiliate of GAIL (India) Ltd., have each contracted for half of the marketed capacity. Sumitomo in turn has announced agreements to serve Tokyo Gas Co. and Kansai Electric Power Co., Inc. GAIL is the largest natural gas processing and distributing company in India. These partnerships are significant not only because of their size, but also because they strengthen relations with two important American alliesJapan and India. Dominion Cove is expected to receive approval to export to non-FTA countries in large part because of these partnerships.

GeopoliticsOverall, U.S. LNG exports will bolster economic and trade ties with countries around the globe. A more diverse supply market will help to ease regional dependence on sole influential suppliers as engendered by Russias energy stranglehold over the European Union. More specifically, LNG exports to hungry markets in South Korea, Japan and Singapore would bolster the Administrations pivot to Asia by further solidifying trade relations and shoring up soft power in the region at a highly contentious time. According to Tom Donilon, the White House National Security Adviser, the new energy bounty affords the U.S. a stronger hand in pursuing and implementing our international security goals. Large, diverse support networksIn addition to congressional support, LNG exports have been endorsed by various editorial boards across the U.S. including the New York Times, the Washington Post, Bloomberg and Investors Business Daily, as well as international outlets like the Financial Times and the Economist. Furthermore, a broad array of powerful organizations and corporations like the National Association of Manufacturers, Caterpillar, GE, the U.S. Chamber of Commerce and the U.S. International Trade Administration believe that LNG exports will benefit the United States. This diverse support network allows for ample opportunity to partner on engagement activities, media placements and influencer events in order to raise awareness of liquefaction projects as advantageous to the U.S. economy.

Public opinionDespite the findings of one Americas Energy Advantage poll, natural gas production enjoys widespread public support, as a Gallup poll concludes that nearly two-thirds of Americans want U.S. officials to put more emphasis on producing natural gas from domestic shale plays.

CONCLUSION
While the saber rattling continues, it remains to be seen whether LNG exports will become the next energy policy showdown in the United States. Although the economics seem to support exports, environmentalists and industry alike have several salient messages thatif leveraged effectively could deter American public and policymaker support. The threat of rising gas prices, along with the specter of hydraulic fracturing could swing the balance in favor of limited global gas exports, despite domestic benefits ranging from job growth to geopolitical leverage. Though, even with an organized opposition in play, it seems FERC, DOE and the administration are starting to lean in favor of at least moderate levels of LNG exports from diverse locations across the country. The next few permit approvals (or denials) will paint a clearer picture of future American energy policy, as well as the energy security for several nations desperate to import abundant, affordable natural gas from a stable trading partner. There is plenty of opportunity for those with a stake in this debate to promote, protect, respond and pressure, engaging with policymakers, community members and opposition at the national, regional and local levels. Please let us know how Edelman can assist you in achieving the results you seek with respect to LNG exports.

To learn more about Edelman Energy, please contact Amy Malerba Hemingway, senior vice president and global energy lead, at amy.hemingway@edelman.com or call (202) 371-0200.

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