Lake Charles Cameron LNG Terminal: Model for Success or Recipe for Disaster?

The port of Lake Charles, Louisiana is no stranger to the world of LNG. Situated squarely on the edge of the Calcasieu Ship Channel, the port already boasts one such facility, with two more in the planning, construction and / or regulatory approval stages. Elsewhere, and all across the coastal landscape of North America, the projected, future requirement for liquefied natural gas has spurred the initiation of no less than 45 proposed LNG projects. The lucrative market has attracted big names such as BHP, EXXONMOBIL and BP, along with a host of lesser-known consortiums. Arguably, none of them can rival the success and skill with which Sempra Energy has navigated the regulatory minefield that must be crossed before a single cubic feet of gas can be delivered to a downstream customer.

Before any proposed LNG project can become a reality in the United States, the myriad of requirements demanded by the Federal Energy Regulatory Commission (FERC), United States Coast Guard (USCG) and the U.S. Maritime Administration (MARAD) must be carefully navigated. Those projects fortunate enough to make it past this stage of the ordeal sometimes face ferocious opposition from local residents, environmental groups and other watchdog organizations. In Lake Charles, Sempra has managed to avoid much of the local problems which seem to dog other similar projects. Along the way, they’ve garnered support from the port of Lake Charles and the local marine pilots, as well as the United States Coast Guard; all of whom think, apparently, that the $750 million terminal as designed is a lucrative, safe and secure bet for the future of Lake Charles. And, Sempra’s Cameron LNG Terminal might be ready to receive in first ship in the summer of 2008.

Sempra has so far made the onerous approval process seem easy, both in Lake Charles and at their Baja California, Mexico (Energy Costa Azul) Terminal. In fact, in September of 2003, when Sempra received FERC authorization to move forward with the Cameron LNG facility, a Sempra press release quoted Donald E. Felsinger, group president of Sempra Energy Global Enterprises, as saying, “Sempra Energy stands alone as the first and only company to successfully acquire authorization from the federal regulatory commissions of the United States and Mexico for the construction of two new North American LNG facilities, Cameron LNG and Energia Costa Azul in Baja California, Mexico.” Preliminary FERC approval of the Lake Charles facility took little more than seven months, an enviable achievement after it was first applied for in May of 2002.

At both locations, the necessary permits have been secured and construction efforts are moving forward briskly. At Lake Charles, Sempra also issued an expansion proposal to the Federal Regulatory Energy Commission (FERC), “to amend the Section 3 authorization issued in Docket No. CP02-374, which authorized construction and operation of a liquefied natural gas import terminal near Hackberry, Louisiana, to modify the berthing facilities to accommodate larger LNG tankers.” It was this request for amendment, received in 2004 by FERC that solidified growing local opposition to the terminal by a consortium of local ship channel users.

The Cameron LNG marine facility is, by Sempra accounts, 20% complete, and in most places, this is as close to a "done deal" as it gets in the LNG game. Unlike the west and east coasts, the climate on the U.S. Gulf Coast for proposed LNG terminals has until recently been one of pragmatic realism, and most industry observers felt like the best prospects for building the much-needed terminals lay in the Gulf Coast states. The recent setbacks in Louisiana and other places - punctuated by a high profile veto by Louisiana’s governor of one such facility - has considerably dampened industry enthusiasm in recent months. And yet, Governor Kathleen Blanco is depicted in a Sempra on-line newsletter touring the Cameron facility just this summer.

Blanco recently vetoed a liquefied natural gas port proposed to be built by New Orleans-based Freeport McMoran Energy LLC. She cited concerns about potential adverse impact on Louisiana’s state fisheries. The billion-dollar project was to have been located about 16 miles off the coast of Louisiana and would have eventually supplied about 350 billion cubic feet of natural gas per year. Blanco insisted that the possibility that the terminal’s sea water reheating process for the gas might kill countless organisms was enough to outweigh the benefits of jobs and energy which would have boosted the local economy. Security and safety issues brought up by industry players about the Cameron terminal have not yet evoked the same level of concern on her part.

Blanco’s decision on the offshore facility has potential implications across the US Gulf, where in neighboring Alabama and Mississippi, similar projects are on the drawing boards. EPA and US Coast Guard approvals were not enough to sway Blanco’s opinion and environmental groups quickly stepped up to applaud the governor. In theory then, she could wield the same power in Lake Charles, but has shown no inclination to do so.

Curiously, the primary and most vocal opposition to Sempra’s Cameron LNG Terminal comes from unusual places. Located smack in the middle of the industrial petrochemical complex of the port of Lake Charles, the facility at least outwardly would not seem out of place. Industry usually gets its way here and the hundreds of thousands of barrels of oil passing through the refineries and petroleum terminals located up and down the Calcasieu River, every day, are ample testament to the pro-business mood. There’s even another LNG facility right up the river from this ongoing terminal project, which has completed an expansion of its own in recent months. Two thousand deep-draft ship movements already occur annually in the area and the expansion of one facility and the building of two others promises to bring another 800 movements a year to Lake Charles.

In usual practice, the crusade to prevent the building of an LNG marine terminal is usually led by environmental watchdog groups, politicians and outraged local residents. Not so in the Sportsman’s Paradise. Certainly, CITGO Petroleum Corporation is the highest profile entity to step forward in the 11th hour to voice opposition to a terminal which they say has serious safety, security and design flaws.

As a direct manifestation of this effort, the Lake Charles Harbor Safety Committee, spurred largely by CITGO Petroleum and other major channel users, have commissioned a “Calcasieu Channel Passing Study” for the facility. The $200,000 consulting project will attempt to determine whether previous studies and computer modeling were flawed or indicative of serious marine safety issues with the way the terminal’s docks are being constructed. Ron Foster, CITGO’s local marine consultant and former Gulf Coast Manager for Marine & Pipeline Operations, for one, says that they are. He goes on to say that the approval process through the U.S. Coast Guard and FERC was both flawed and pushed through with unusual speed, without the necessary due diligence for any number of issues which might have killed other nascent projects elsewhere.

CITGO also says that the solutions to potential security and safety issues related to the terminal will create an onerous financial burden for their company and many other users of the ship channel. At the heart of their arguments is the unique, some say one-of-a-kind berthing arrangement at the soon to be constructed facility. The berths are being dredged at an approximate 45 degree angle to the shipping channel, fully open to passing traffic. In truth, there are few in the Lake Charles area who oppose the facility itself; it is the berthing arrangement that has become the lightning rod for those who want to stop the facility.

In May of 2005, CITGO personnel say that they met with Sempra to discuss concerns over the design of the proposed terminal’s berthing arrangement. According to Ron Foster, CITGO was asked to sign a "secrecy agreement" as a precondition to viewing Sempra’s safety simulation data. On the advice of counsel, CITGO refused. Their fears - later confirmed, he says - were that the data would show dangerous situations which they would never be able to make public. From this point forward, CITGO attended meetings with Sempra which revealed, among other things, that Sempra had conducted additional simulations of ship allision and passing traffic. Eventually, Sempra allowed others to view the new simulation data without signing a confidentiality agreement. According to Foster, “Sempra’s allision studies have shown that without mitigation, a rudder failure on a large crude tanker or LNG ship would result in an allision with a docked Sempra LNG ship - hitting their vessel at 4.1 knots.”

The simulations, of course, also showed mitigation steps which could be taken. CITGO’s technical experts say that these measures included putting the ship’s engines in full reverse, dropping both anchors and using tethered, 70 ton tractor tugs. In every case, CITGO technical personnel raised concerns as to the effectiveness of these actions, citing (a.) engine failure often accompanies rudder failure, especially in the case of a generator failure, (b.) potential puncturing of the passing ship’s hull by its own anchors dropped in a 40 foot channel, and (c.) failure of the Sempra studies to adequately examine the bollard stresses which would occur in the event of an emergency. The banking effects from a passing vessel in normal conditions were also studied.

CITGO disagreed with Sempra’s conclusions in almost all cases and the results of Sempra’s own studies were enough to harden CITGO’s resolve; not against the terminal itself, but the way in which its docks will interface with the existing ship channel. LNG has been a fact of life for many years in Lake Charles. By most accounts, the local pilots are experienced in handling these vessels and the risks of bringing them up and down the Calcasieu Ship Channel have been well managed during that time. The Trunkline LNG facility, for example, is located upriver from the slowly developing form of the Sempra Terminal. Unlike the Sempra Terminal, Trunkline is well secluded in its own dredged cut to the east of the main channel. Ron Foster contends that this terminal is properly positioned, both in terms of security and the safety of the ship mooring configuration. A second, planned terminal to the south of the Sempra location plans for a similar isolation plan. This facility, the Cheniere LNG Marine Terminal, also has FERC approval, but awaits the nod from some local port players in order to begin construction.

Not withstanding the disagreements between CITGO and proponents of the Sempra Terminal (as configured), there are plausible answers to the safety concerns raised by CITGO Petroleum. The obvious ones involve huge amounts of money. The two most likely safety fixes - if in fact they are deemed needed by the local Coast Guard and other ship channel players - for ensuring the safety of the vessels moored at Sempra’s facility and that of passing deep draft traffic, would be (a.) the slowing of traffic to a speed whereby the bank effect of passing vessels could be minimized, and (b.) the introduction of tug escorts, probably new-generation tractor tugs, for all deep draft traffic passing the terminal in either direction.

The first safety measure, as described above, will potentially increase the transit time of vessels in the channel from the usual 7-1/2 hours, to well over 8 hours. Perhaps not coincidentally, the latest pilot tariff proposals for the Calcasieu River now include the proposal to add on a 50% surcharge for every movement that spans in excess of 8 hours. Since (according to CITGO representatives) the lion’s share of ship transits on the channel already take more than 7 hours to complete, the potential, additional downstream costs to shippers like CITGO and / or Conoco are significant. A recent roundtrip invoice from the Lake Charles Pilots to CITGO (described by CITGO as typical) for pilotage services on a deep draft crude carrier totaled $18,444.52. The port already endures some of the highest pilot fees in the nation, but the additional surcharge could increase the cost of a particular vessel’s pilotage by $4,000, or more.

The second solution, if applied to every one of the 2,000 ship movements in the Calcasieu River today, amounts to literally millions of dollars in additional tug charges for shippers. But, it’s hard to imagine deep draft traffic being allowed to pass the wide open mooring arrangement at Sempra’s planned facility without them. Combined with mandatory speed limits for passing traffic, the tug escorts would likely provide a good measure of safety for all concerned. But at what price, and to whose account?

While CITGO and others will not be thrilled at what looks to be a marked increase in their shipping costs in the not-too-distant future, the security aspect of the facility gives them a similar level of discomfort. Leaving aside the questions of marine safety, the wide open, angular arrangement of the terminal’s mooring facilities, immediately adjacent to the ship channel, might present an inviting target for a “COLE” style attack from the channel. Any number of small pleasure and fishing craft transit the channel every day. How those vessels can be controlled with any certainty is a troubling question, and one which to date may not have been properly addressed. One such solution to this very real menace might be to deploy the same type of highly visible waterborne security barriers that Port Everglades in Florida recently decided not to use on a regular basis to protect moored oil tankers. The barriers, which Port Everglades officials say are unique to their location in comparison to similar commercial ports nationwide, are designed to prevent the same type of terrorist attack that damaged the USS COLE in 2000.

The move by Port Everglades was partly based on operational issues involved with moving the barriers back and forth as tankers arrived and departed. The procedures, port officials said, were downgrading the useful life of the equipment. Port Everglades will save $900,000-per-year by ending a contract with the local marine outfit which was employed to move the barriers back and forth.

At Sempra’s Cameron Terminal, it isn’t clear whether the barriers would be practical to use or even if they could be properly deployed. Some depictions of the facility show the bow of the southernmost vessel sticking out almost to the edge of the channel in an angular fashion as determined by the mooring configuration. Stretching a floating barrier around both vessels might be difficult, if not impossible. Beyond this, the effect of a two or three knot current, at maximum flood or ebb tide, on the barriers is unknown.

To be fair, Ron Foster says that security issues at the terminal have been addressed on the ship channel by a channel Security Committee, but the waterway security analysis remains a closely held secret. And, earlier this year, four layers of local Coast Guard personnel abruptly departed their command positions in Lake Charles, Port Arthur, Houston and at the 8th District Headquarters in New Orleans. The reason for these almost simultaneous departures was unclear, but one Coast Guard veteran who asked to remain anonymous said that the moves were “highly unusual.” It is possible that a robust and effective security plan does exist, mitigating waterborne threats from the ship channel, but these arrangements are rarely made public.

Also unclear at this point is the effect that a catastrophic event at Sempra might have on the U.S. Government’s Strategic Petroleum Reserve (SPR), located about two miles away. The SPR itself is said to be heavily guarded against intruders, but the more inviting and presumably softer target of a marine terminal open to the ship channel in close proximity to this important national storage facility could arguably make those security arrangements a moot point.

Sempra Energy is a Fortune 500 energy services company with 2005 revenues of almost $12 billion. With every reason to be a responsible, good neighbor corporation, they have shown themselves to be adept at navigating the regulatory maze of the LNG terminal approval process. They’ve certainly made plenty of friends in Louisiana and Lake Charles along the way. And, the U.S. Coast Guard, the port of Lake Charles, the Lake Charles Pilots, Sempra itself and FERC all seem to be satisfied with the safety and security arrangements for the facility. This impressive quintet of organizations brings a lot of experience and talent to the table. They are worth listening to. For its part, CITGO Petroleum remains unconvinced that the facility can be operated in a safe and secure manner. Beyond this, CITGO maintains that a safe and secure Cameron LNG marine facility, if it can be managed, will come at a significant financial burden to other channel users.

Next time: Part II - the case for Sempra’s Cameron LNG terminal…

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