LNG: Challenges Facing The Bahamas

In a recent radio interview, Prime Minister Christie stated that the government was close to announcing approval for the AES LNG project located on an isolated cay off Bimini.

He indicated that the other proposed plant slated for Grand Bahama needed a more suitable site.

It has been known for some time that the government has been concerned about the fallout from an accident. One source with some knowledge of the government’s thinking noted that the government is concerned about the impact of an accident on the country’s number one industry, tourism.

Following 9/11, Tractebel one of the group of companies vying for government’s approval to build in Grand Bahama and which has a terminal in Boston harbour was forced to close its facility until US security agencies were satisfied that the shipment of LNG in double hull tankers did not pose a security risk.

Tractebel secured the services of Lloyds of London to undertake an independent study of the security risks posed by Tractebel’s Boston facility. Starting from the product’s natural characteristics, namely that LNG cannot explode and is not flammable as a liquid, Lloyd’s went on to point out that not only had there been no accidents involving the movement of liquid natural gas in ships but that the ships were constructed to prevent just such an accident.

However, AP reported that a government study by the Sandia National Laboratory concluded that, “terrorists could blast a large hole into a double-hulled LNG vessel which would release millions of gallons of fuel that would quickly turn to gas and ignite.”

An LNG fire is fierce and deadly. According to the AP report such a fire would, “within minutes, give second degree burns to persons a mile away” (emphasis added).

“The fire would be so intense that it could cause major injury and burn buildings one-third of a mile away,” the AP reported.

Given its location, the AES plant, which sits out in the ocean on an industrial cay would pose an immediate threat to residential or commercial dwellings or human life, other than that of the workers. It is believed that it is this concern for injury to people in Grand Bahama in case of a catastrophe that has caused the government to hesitate and ask that a different site be found.

A US organization, the Conservation Law Foundation, shares The Bahamas government’s concerns. The Foundation has lobbied against placing LNG facilities in residential areas, the AP reported, basing its position on the lack of information on the industry’s vulnerabilities.

"The risks of a catastrophic accident ... is a real one. Far too little is known about the vulnerability of LNG terminals and ships to terrorist attacks," says Philip Warburg, president of the Conservation Law Foundation.

Industry officials point to its history and without conceding the possibility of Mr. Warburg’s concerns note that not only has there “never been a leak of LNG from a double-hull tanker” but that “protection of LNG shipments has improved since the attacks of Sept. 11, 2001”, according to the AP report.

The storage facilities are of particular concern to the government of The Bahamas, especially the one seeking approval on Grand Bahama.

AP reports that according to one industry spokesman, Daniel Donovan of Dominion Resource Inc., which has storage facility, at Cove Point, on Chesapeake Bay, Maryland, the storage tanks are designed so “burning fuel would be confined within the facility’s boundaries”.

The technology confines the fire but does nothing to mitigate its intensity. Buildings within a third of a mile of the facility would still burn and persons up to a mile away would still suffer second-degree burns “within minutes” of the fire starting.

Yet the stakes are big. Associated Press quotes industry executives who state that a single LNG “train” - gas production, liquefaction and export facility, tankers and re-gasification plant - can require $4 billion to $6 billion. And according to the International Energy Agency, the energy industry expects to invest $250 billion in the global LNG industry.

US demand for LNG currently stands at 61 billion cubic feet per day. With its national supplies on decline and annual consumption expecting to top 31 trillion cubic feet over the next two decades, the push for alternative sources of supply is on.

AP reported that by 2025 it is expected that LNG imports will rise from its current 3 percent of daily consumption to as much as 30 percent. With current prices ranging between $5 and $6 per 1000 cubic feet, the push is on to supply the world’s biggest LNG consumer market.

AP reported that US experts, including Federal Reserve Chairman Alan Greenspan, are concerned that declining US domestic energy supplies of both oil and natural gas could result in volatile prices and hence severe economic disruption if reliable supply alternatives are not found over the next few decades to meet the US domestic annual shortfall of 7 trillion cubic feet of LNG, which is the difference between the projected annual consumption of 31 trillion cubic feet and the US domestic supply of 24 trillion cubic feet.

Trinidad and Tobago is presently the leading supplier of LNG to the US, according to a New York Times report, for which it gets $6 per 1,000 cubit feet. But the AP reported that even if the price were to drop to $3.50 per 1,000 cubit feet, the companies would still be making a profit.

According to a Ministry of Industry and Trade official the Government of The Bahamas is looking to receive revenues of approximately $1 billion over 25 years or an average of $40 million.

A Tractebel funded study under taken by KPMG stated that the government stood to make $15 million per annum from revenues or $375 million over 25 years. To make $1billion over 25 years, the government would have to either take an equity position in the companies since, if the KPMG study is accurate, $15 million is what is to be expected.

A recent report announcing Florida Power and Light agreement to take all the LNG from the proposed El Paso/Tractebel facility in Grand Bahama stated the expected daily supply would be in the region of 56 million cubic feet per day. At between $5 and $6 per 1000 cubit feet the Grand Bahama facility would be earning between $102 million and $123 million.

Recently, Trinidad and Tobago’s Prime Minister, Patrick Manning, publicly lamented the difficulty his government faces in renegotiating royalties from the LNG companies. The companies are loath to change the agreements upward. The government has little maneuvering room. It cannot possibly close the facility, nor can it tell the company to move nor can it nationalize. Frankly there is little a government can do to renegotiate once agreements of this magnitude, in both time and amounts involved, are signed. The company will want to lock in its royalties for the duration of the agreement.

The implication for the Government of The Bahamas is that it gets the best possible deal for the life of the agreement. And in his recent interview, Prime Minister Christie indicated that there were some economic issues yet to be settled. Presumably revenues to be paid are just such an “economic issue”.

The 25-year contract corresponds with the position taken by the LNG suppliers in Qatar, which has the world’s largest LNG resources - a 25-year supply. The government is giving 25-year supply contracts to the major oil companies such as ExxonMobil, a major mover in getting LNG through facilities along the southeastern US coast.