Access to gas markets: a comparative study on access to LNG terminals in the European Union and the United States.

• Author: Talus, Kim

1. INTRODUCTION II. DEMAND FOR NATURAL GAS IN THE EU AND THE UNITED STATES III. GLOBAL LNG MARKETS A. Access to US LNG Terminals 1. U.S. Natural Gas Markets--An Overview 2. Import Facilities for LNG 3. LNG Terminals--Licenses and Permits B. Access to EU natural gas markets 1. EU Natural Gas Markets--An Overview 2. EC-level and national-level regulation of markets 3. Access to existing LNG terminals in the European Union IV. NEW LNG TERMINALS V. EU AND U.S. ACCESS REGIMES--A COMPARISON VI. CONCLUSION I. INTRODUCTION

   World energy markets are going through a profound change. Many countries have moved from a state driven system to a market based system, the prime example being the European Union (EU), where the objective is to create liberalized pan-European energy markets encompassing twenty-seven previously separated and largely monopolized member state markets. (1) This direction, "from-state-to-market," is contrasted with another trend: resource nationalism. (2) Led by many significant petro-states such as Russia and Venezuela, resource nationalism is currently at its heights. (3)

   Energy markets have become more international, which has resulted in increased international energy trade and inter-linkages in energy networks. (4) The general trend in the member countries of the International Energy Agency (IEA) is that they become increasingly dependent on the inter-regional gas trade. (5) This is particularly true in Europe, where the indigenous production is rapidly decreasing and dependency on external natural gas suppliers is increasing. (6) The situation in the United States is not as bad, but dependency on external producers is increasing. (7)

   Environmental concerns have finally been recognized and now form an integral part of national energy policy objectives. (8) This means increasing reliance on natural gas as the "environmentally friendly" fossil fuel. (9) Coupled with high energy prices and rapidly rising demand for energy, all this has raised concerns over security of supply. Questions that are surfacing include how to manage the international competition over recourses, how to attract the urgently needed investments, and, at the very heart of the discussion, how to maintain the western lifestyle?

   This Article focuses on the international competition for liquefied natural gas (LNG). More specifically, it examines the access conditions to LNG re-gasification terminals in the European Union and the United States. After an overview of the current trends in natural gas consumption and LNG trade, the access regime of both the United States and the European Union will be examined. This Article will conclude that the increasingly real competition over LNG and associated investments have had a profound effect on the regulation of LNG terminals in the European Union and the United States. While there are certain differences at the ideological level, the United States being more openly in favor of proprietary use of LNG facilities, (10) the realities of global natural gas markets have aligned practices on both sides of the Atlantic.

2. DEMAND FOR NATURAL GAS IN THE EU AND THE UNITED STATES

   Global demand for natural gas is growing much more quickly than the supply. (11) Illustrating this phenomenon, European and North American import levels are rising much faster than export levels. (12)

   Imports:

   Region Imports (million cubic meters) 2002 2006 1990 OECD Europe 178347 329719 415057 OECD North- 44489 127510 139004 America OECD Total 276663 1557535 676957 World Total 534503 711879 868095 Data extracted from IEA, Natural Gas Information 2007. (13) Exports levels:

   Exports levels: Region Exports : (million cubic meters) 2002 2006 1990 OECD Europe 64096 142500 171544 OECD North- 43113 122391 122971 America OECD Total 110000 274725 310384 World Total 534312 714866 884047 Data extracted from IEA, Natural Gas Information 2007. (14)

   As the above tables indirectly show, global energy consumption is growing rapidly. According to the IEA, global energy consumption has doubled from the 1970s (15) and will keep growing at a faster pace in the foreseeable future. (16) The current estimate is that energy consumption in 2030 will be approximately fifty percent higher than in 2006. (17) In addition to the increasing demand of the emerging economies, China and India in particular, (18) demand in the European Union and the United States is also rising. (19)

   In the European Union, expected growth in consumption is not as high as the globally expected growth, but a rise of forty-three percent from 2002 to 2030 is expected to take place. (20) According to the European Commission (EC), most of this growth is to be met through increasing reliance on natural gas and increasing use of renewables. (21) Additionally, the current revival of nuclear-based generation may play a role in meeting this future demand. (22) Much of the increasing demand for natural gas in the European Union is due to the growing use of natural gas as the primary energy for the electricity generation. (23) In Europe, almost two-thirds of new electricity plants are gas-fired. (24) Through this growing linkage between electricity and gas, a shortage in gas supply will have a wider and more serious impact on energy supply generally. (25) This has highlighted the gas supply issues relating to dependency on external suppliers.

   The European Union is increasingly dependent on natural gas imports from three countries. (26) Because of this dependence on imported energy, incidents like the brief interruption of the supply of natural gas from Russia during the Russia-Ukraine dispute in January 2006 (27) raise much concern over security of supply. (28) These concerns put emphasis on the increased volumes of LNG imports. According to IEA estimates, Europe's LNG imports will grow to 60-100 billion cubic meters ("bcm") in 2010 and 80-160 bcm in 2015. (29) The wide margin is a result of the many uncertainties surrounding international gas markets: upstream investments, pipeline developments, demand in China and India, etc. (30)

   The use of natural gas is projected to increase until 2016 and then decrease as prices increase. (31) The U.S. Energy Information Administration (EIA) projects that "the natural gas share of the total energy consumption [will drop] from 22 percent in 2006 to 20 percent in 2030." (32) However, similarly to EU estimates, due to a large number of uncertainties, the figures are not likely to be entirely accurate. For example, the recent price increases and the political drive to reduce energy dependency may affect the demand. (33) The discussion on lifting the moratorium on offshore drilling (34) may also have a significant effect. One of the main factors affecting future demand is the need for natural gas in the power sector. EIA forecasts price increases for natural gas and, as a consequence, decreases in gas-based power production. (35) Despite this decrease, the share of LNG is projected to increase; net LNG imports are projected to grow from 0.5 trillion cubic feet in 2006 to 2.8 trillion cubic feet in 2030. (36) The reasons behind the increasing reliance on LNG in the United States include the decreasing volumes of pipeline imports from Mexico and Canada, the possibility of domestic shortages, rising natural gas prices, price volatility, and rising demand due to an increase in gas-fired electricity generation. (37)

   Because of these developments, the global LNG market is increasingly important for both the European Union and the United States. The global LNG market is currently developing faster than before, and several significant changes have taken place or are on their way. These issues will now be briefly examined.

3. GLOBAL LNG MARKETS

   Initially, the LNG market started to develop in Asia where, contrary to the European Union and the United States, no domestic gas resources are available. (38) Today, an increasing amount of natural gas is traded through LNG shipments, a trend which is likely to continue in the near future. (39) Factors that have helped to turn this previously marginal transportation mode into a pipeline gas alternative include: (40)

   * Growing energy prices. The steady rise in primary energy prices has profoundly affected the LNG business. (41)

   * The global initiative to reduce gas flaring. This translates into a need to either re-inject the gas or to transport it to markets. (42)

   * Cost decreases though expansion of the supply chain. In order to ship gas over a long distance, it needs to be converted into LNG. (43) This is costly and one of the keys to global markets achieving expansion of the LNG supply chain. Expansion is facilitated through technological advances, economies of scale (more trade, larger LNG trains, and LNG ships), and, recently, through a rise in pipeline gas prices. (44) The LNG trade was started in 1960 and has continuously grown in volume. (45)

   * The evolution of demand and supply of natural gas. The growing use of natural gas in electricity production is the result of various factors: it is perceived as an environmentally friendly option (especially compared to coal and crude oil), the use of oil for electricity production declined rapidly after the price shocks during the 1973 oil crisis, its low cost in the past (compared to other fossil fuels), and the low cost of constructing and maintaining gas-fired power plants. (46)

   It is important to note that even if LNG trade is often perceived as a global trade, this is only partially true. LNG is not a truly global commodity, even if the current price levels enable LNG transportation around the world at a competitive price. There are two basic markets: the Atlantic Basin market, where both the European Union and the United States compete for shipments, and the Asia-Pacific Market, where Japan and South Korea compete over shipments. (47) In the Atlantic Basin, the European Union is in a better position to receive African supplies, whereas the United States...