TCS Daily


Fixing California's Perpetual Energy Crisis

By Doug Bandow - August 9, 2004 12:00 AM

It's deja vu all over again, famously said Yogi Berra. So it is in California, which risks tumbling into yet another energy crisis. The only answer is increased supplies, which require new investment and construction. Which should include facilities for Liquefied Natural Gas (LNG).

In late July California energy demand broke the record set five years ago. In fact, the state set successive records on three days in a row.

There were no blackouts -- California has opened new power plants since the severe shortages of four years ago. But the peak demand occurred in moderate temperatures.

Officials worry that the crunch might grow more severe later this summer. "There is a slight possibility we'd have to get back into forced interruptions," warns Jim Detmers, acting head of the Independent System Operator, which runs the state electricity grid.

Even if California survives this summer unscathed, additional energy supplies will be a must as the state's population continues to grow and its economy continues to rebound. Gubernatorial spokeswoman Ashley Snee notes the "need to increase capacity here in California."

There is no excuse for California imposing black-outs. But additional power requires genuine electricity deregulation, more efficient environmental controls, and construction of new energy
facilities.

Natural gas fires one-fifth of power generation nationwide. It is a particularly important source of fuel for California power generation.

While the U.S. accounts for a quarter of the world's natural gas consumption, it possesses only five percent of natural gas reserves. As American production wanes, imports are expected to grow dramatically over the coming decade.

An obvious solution is liquefied natural gas (LNG). Impurities are removed from natural gas -- a combination of ethane, methane, propane, and other compounds. The gas is cooled to liquefy it. LNG is neither corrosive nor toxic, and need not be shipped under pressure.

Americans have consumed LNG for more than 40 years. The fuel also is widely used around the globe; in fact, it is the principal energy source for Japan, which lacks domestic resources. Yet capacity and regulatory barriers constrain U.S. consumption. Observes Federal Reserve Chairman Alan Greenspan: "Our limited capacity to import liquefied natural gas effectively restricts our access to the world's abundant supplies of gas."

Like any complex energy process, LNG requires production and transportation infrastructure. America has 113 LNG facilities, the most of any country, but only four of them handle imports.

Unfortunately, LNG plants generate the usual political opposition facing any new energy source. Proposed sites in Alabama, California, Maine, and Massachusetts have been defeated in recent months.

Some activists would prefer that people revert to a pastoral lifestyle and rely on low-yield energy sources such as biomass, geothermal, and wind power. Other critics fear that LNG, by lowering prices, would reduce the incentive to conserve. The Sierra Club and 26 other environmental organizations oppose any LNG facilities in California.

Equally significant is the classic NIMBY problem: we might need more energy operations, but "not in my backyard." Local protests already have derailed proposals for LNG operations in Eureka and Vallejo, California. Malibu's city council is opposing the two sites near their oceanfront community. The Oxnard City Council recently approved a resolution opposing the operation off the nearby coast.

About 40 LNG projects are being advanced around the country, but only a few seem to have much chance of running the regulatory gamut and ever providing energy. The barriers to construction in California are particularly high: state environmental authorities, California Coastal Commission, Public Utility Commission, and Federal Energy Regulatory Commission.

Joseph Desmond, deputy secretary of the California Resources Agency, believes that California needs two LNG terminals. With construction of most projects expected to take two or more years -- the earliest any of the projects expect to be online is 2007 -- expeditious approval is essential.

One of the main California contenders is Sempra Energy. Sempra's subsidiaries are SDGE, a leading utility, and SoCal Gas. Sempra would impose the cost on its ratepayers rather than its
shareholders.

Yet the project would be built in Mexico, not California. Thus, the Mexican government would control access to and distribution of the imported gas. Mexico always has jealously guarded its energy assets and that isn't likely to change with LNG. Californians might ultimately benefit from increased Mexican supplies, but they would shoulder the cost without any guarantees.

Moreover, the proposal faces a variety of challenges. Opposition mayoral candidates in Ensenada want to relocate the project further south. Critics have challenged permits granted by the central government; a judge has granted a preliminary injunction, threatening to freeze the project.

Sempra also is under attack in the U.S. San Diego, San Francisco, and Santa Clara counties have sued the company for allegedly manipulating prices during California's last energy crisis. Sempra denies the charges and the state's energy problems were largely self-inflicted by officials who bungled electricity deregulation. But true or not, such claims hinder Sempra's LNG bid.

ChevronTexaco has proposed two offshore terminals, one near Tijuana, Mexico, and another at a site to be determined in southern California. Both are well behind in the permitting process.

The Tijuana initiative faces all the difficulties and uncertainties of any Mexican operation. The California proposal cannot be fully evaluated until a specific site is chosen. One possible location is near Camp Pendleton, a prime training ground for the Marine Corps. That spot also is close to the San Onofre nuclear power plant. Neither the Marine Corps nor city officials in nearby San Clemente would welcome the project.

Mitsubishi, recently joined by ConocoPhillips, has proposed to construct a terminal in Long Beach, south of Los Angeles. This proposal has generated particular controversy: Mitsubishi's reputation is poor and the California PUC is fighting the FERC for a share of regulatory oversight.

Environmental and traffic concerns have sparked opposition, including in surrounding minority communities. Port officials worry that some operations would have to be suspended when LNG tankers unloaded their cargoes, as has been the case in Boston. While LNG's safety record is good, an accident or terrorist incident would be particularly disruptive since Long Beach is estimated to handle as much as a quarter of the nation's seaborne commerce.

Among the more innovative ideas comes from BHP Billiton, which would create a terminal at Cabrillo Port, 14 miles offshore. The onshore facilities would be small and the project could easily connect to SoCal Gas Company's existing pipeline.

The regulatory hurdles are a bit higher, since more government agencies want to have a say. But the benefits seem bigger.

With little work necessary on land, there would be no added pollution and traffic in populous areas. The facilities wouldn't even be visible from the coast. BHPB would bring in new supplies from Australia. Given its distance from shore, the safety risks to Californians would be minimal.

A similar initiative comes from Crystal Energy, which has suggested using an existing offshore oil platform near BHPB's proposed site. However, the Platform Grace, which ceased production in 1995, is old and would require significant reconstruction. More important, the company has run into financing difficulties. It recently missed the annual platform lease payment, though it eventually paid up.

Other proposed projects seem well behind on grounds of feasibility, financing, or regulation. None is likely to win the necessary private financing and government approval to become serious contenders.

Opponents, sometimes verging on hysterical, attack the safety of expanded LNG use. They point to explosions at an LNG plant in Algeria last January and at a facility in Cleveland in 1944.

Yet problems have been few compared to the widespread use of LNG. Safety technologies and processes have evolved greatly over the decades: the Cleveland accident was due to poor war-time construction as a result of stainless steel alloy shortages. Moreover, the U.S. obviously does a better job of preserving health and safety than do poor, strife-torn states, such as Algeria. That LNG critics have to go back decades to find even one American fatality in an LNG accident is telling evidence of the system's good safety record.

In fact, advanced LNG facilities deploy several levels of safety precautions. Proper design to prevent leaks, containment procedures to restrict any spills that occur, safeguards to detect and limit problems, and safety zones to moderate damage in an accident.

Although onshore facilities routinely operate efficiently and safely, an offshore site, like that being advanced by BHPB, offers even greater safeguards. Any problem would be most easily limited and any damage mitigated.

The Congressional Research Service reports that LNG released over water would create a "flameless explosion." Moreover, Steve Meehan, BHPB's project manager, figures that the "largest area of potential hazard is three to four miles." That means the BHPB facility would have a buffer of ten miles, something that would be much more difficult to achieve on land, especially in a densely populated section of southern California.

The state needs more energy. Natural gas can help, but prices have tripled since 2000. LNG probably is the best means to increase gas supplies. Additional imports would lower prices as well as reduce the chances of electricity black-outs: by one estimate, just a two-year delay in building LNG terminals could cost American consumers $200 billion and Californians $30 billion in higher prices. Everyone would benefit from more energy competition through increased LNG supplies.

The most populous state in the world's richest nation should not again be teetering on the brink of an energy crisis. Energy resources are abundant around the world; we possess the technology necessary to produce and import all the energy that we need. Government needs to allow companies to get to work expanding supply.

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