Dominion and Sierra Club Battle Over Proposed LNG Export Facility

On Friday, Dominion filed suit, asking a state court in Calvert County, Maryland to confirm the company's right to construct and operate a liquefied natural gas ("LNG") export facility at the company's existing LNG terminal at Cove Point in Lusby, Maryland.  Dominion obtained preliminary authorization from the Department of Energy last year to export LNG, which Dominion plans to do from its terminal at Cove Point.  But the Maryland Chapter of the Sierra Club issued a statement in April claiming that it has the right to veto the proposed export facility under a 2005 agreement with Dominion.

Background of the Cove Point Terminal

Dominion's Cove Point LNG terminal was originally owned by Columbia Gas, which constructed the terminal as an LNG import terminal in the 1970s.  Columbia only operated the facility as an import terminal for a couple of years, but in the 1990s it added liquefaction capability at the facility for use in providing "peaking service."  This involves liquefying natural gas and storing it during periods of low demand, then regasifying and selling it during periods of peak use. 

Dominion acquired the facility in 2002 and applied to the Federal Energy Regulatory Commission for authority to expand the facility and use it again for LNG imports.  In 2005, Dominion entered an agreement with the Sierra Club and Maryland Conservation Council, in which those environmental organizations agreed not to oppose Dominion's expansion of the terminal in return for Dominion's agreement regarding the protection of certain other nearby areas.  Since then, Dominion has used the facility for LNG imports.

What led to the current dispute?

Up until the last few years, there were projections that the United States would remain dependent on natural gas imports, including LNG imports, into the foreseeable future.  But domestic production of natural has increased dramatically in the last few years, in large part because of the use of horizontal drilling and hydraulic fracturing to produce natural gas from shale formations.  That has led to decreased imports, and to such a plentiful domestic supply of natural gas that companies are planning to export natural gas.  Dominion applied to the Department of Energy for permission to export natural gas and received preliminary approval to do so last October.

But on April 26, 2012, the Sierra Club sent a letter to Dominion, demanding that it cease plans to export natural gas from Cove Point.  The same day, the Sierra Club issued a press release declaring its opposition to Dominion's export plans.  The Sierra Club contends that the 2005 agreement prevents Dominion from expanding the terminal or from using it as an export facility.  Thus, contends the Sierra Club, Dominion cannot export LNG from Cove Point without the Sierra Club's consent.  Further, the Sierra Club states that it will not give that consent.  In part, the Sierra Club says it objects to expanding the footprint of the terminal, which Dominion plans to do by building additional liquefaction capacity, which would be needed in order to operate the terminal as an export facility.  But the Sierra Club stated that Dominion's operation of the terminal as an export facility would be "unacceptable ... even if Dominion confined its new construction to the existing plant site."  Why?  Because the export of natural gas would encourage more natural gas drilling and the use of hydraulic fracturing, which the Sierra Club opposes.

Dominion's Contentions and its Lawsuit

Dominion Cove Point LNG, L.P. filed suit in the Circuit Court for Calvert County against the Sierra Club, the Maryland Chapter of the Sierra Club, and the Maryland Conservation Council.  Dominion disputes the Sierra Club's contention that the 2005 agreement limits Dominion to using the Cove Point terminal for LNG imports.  Further, contends Dominion, the Sierra Club's opposition to Dominion's export of LNG from Cove Point has very little to do with concern about LNG exports, construction activity at Cove Point, or an enlarged footprint for the terminal.  Instead, the Sierra Club's primary reason for opposing the export of LNG is that the Sierra Club opposes drilling for natural gas and the use of hydraulic fracturing, and the increased availability of LNG export facilities will encourage natural gas drilling.  To support its point, Dominion points to the Sierra Club's "Beyond Natural Gas Initiative."  Further, both the Sierra Club's April 26 press release and its April 26 letter to Dominion give prominent attention to the Sierra Club's opposition to hydraulic fracturing and natural gas drilling, even though neither of those are directly at issue in Dominion's proposal.  Dominion's lawsuit seeks a declaratory judgment that the 2005 agreement does not prevent it from building and operating LNG export facilities at its Cove Point terminal. 

In addition to arguing that the 2005 agreement does not prevent such use, Dominion points out that the proposed project would result in an additional $40 million per year in property tax revenue for Calvert County, 70 to 100 permanent jobs in Calvert County, and 2500 to 3100 construction jobs.

Dominion would like to begin construction in 2014, with a schedule that would call for putting the proposed export facility into service in 2017, pending necessary regulatory approvals and the negotiation of terminal service agreements.

Why is this Important Beyond Calvert County, Maryland?

The resolution of Dominion's lawsuit will turn on the court's interpretation of the language in the 2005 agreement, and the court's interpretation of that language is not likely to have a direct effect on any other disputes.  The importance of this dispute is that it shows the Sierra Club's determination to oppose projects that will encourage ─ even indirectly ─ greater drilling for natural gas and use of hydraulic fracturing.  Natural gas is the cleanest burning of all fossil fuels, and there have been projections that the plentiful supply of natural gas will contribute to an increased use of gas and a decreased use of coal for generating electricity.  Will the Sierra Club oppose increased drilling for natural gas even if less drilling mean more coal use in the U.S.?  Will the Sierra Club continue to oppose natural gas exports if less exports would mean more coal use abroad?

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