Dominion's LNG export bid sparks legal dispute

Aerial view of the offshore dock for ships at the Dominion Cove Point LNG  facility on the Chesapeake Bay.

For four decades, the owners of the liquefied natural gas terminal at Cove Point in Calvert County have given a pair of environmental groups a say over expansion of the sprawling complex, originally built to import fuel from abroad via the Chesapeake Bay. By all accounts, it's been a cordial, cooperative relationship.

Now, though, that almost unheard-of pact between industry and its traditional adversaries is being tested, as the terminal's owner, Dominion Cove Point LNG, seeks federal approval to export liquefied natural gas through the terminal to lucrative foreign markets in Asia and elsewhere.

The company, a subsidiary of Dominion Resources Inc., based in Richmond, Va., is scheduled to square off early next month in Calvert County Circuit Court with the Maryland chapter of the Sierra Club over whether the company's export plan violates the terms of its long-standing deal with the club and the other environmental group, the Maryland Conservation Council.

Converting the terminal would be a huge boon to the local and state economy, said company executives, who plan to spend more than $2 billion building a natural gas liquefaction plant and making other changes to handle exports. The construction would employ nearly 3,000 workers, and 70 full-time jobs would be created to operate the facility, said Mark Reaser, director of LNG operations at the terminal. The upgraded facility also would yield up to $40 million a year in tax revenues for Calvert County alone, he added, while helping ease the nation's trade imbalance.

"It truly is a win-win proposition across many areas," said Donald Raikes, Dominion's vice president for marketing and customer service.

But Sierra Club representatives say they won't go along with the plan because they're worried about the impacts of liquefying gas and loading tankers on surrounding residents and the ecologically significant marsh on the terminal property. They also object because the converted terminal would be used to export natural gas from Pennsylvania and West Virginia that would be extracted using hydraulic fracturing, or "fracking," as it's commonly known.

"We are concerned about any project that would incentivize a practice that right now is an item of big concern," said Josh Tulkin, Sierra's state chapter director.

Environmentalists say there's evidence that fracking — in which large amounts of water, sand and chemicals are pumped underground to extract natural gas — is contaminating residential wells, and polluting streams and the air. The gas industry says such complaints are unfounded and that any problems related to "fracking" are isolated cases.

In court filings, the company argues that it doesn't need the environmental groups' OK to build a gas liquefaction plant and make other changes at the terminal because it doesn't plan to expand its facilities beyond the current fence line.

In interviews, Dominion executives say their company shouldn't be dragged into the fracking debate because it's merely transporting the gas, not extracting it.

The Department of Energy already has approved exports of up to 2.2 billion cubic feet a day through a Gulf Coast terminal in Texas, and it is weighing bids from eight other terminals on the Gulf and Pacific coasts. Cove Point is the only East Coast site. Assuming it can get federal and state approvals in the next two years, the company hopes to start exporting by 2017.

"Somebody's going to do it, whether it's Cove Point or not," said Dominion spokesman Daniel Donovan. "So why should the state of Maryland suffer? Southern Maryland, Calvert County can benefit."

Dominion already has authority to export LNG through Cove Point to all nations with which the United States has free-trade agreements. The company is seeking federal approval to ship up to 1 billion cubic feet daily to virtually any corner of the world, except for those few countries under trade restrictions, such as Cuba and Iran. Dominion officials say they've negotiated long-term contracts with two customers to supply them 750,000 cubic feet a day — one of the customers would supply Tokyo Gas.

Fracking wasn't an issue when the original deal to build Cove Point was struck in 1972. The terminal's original owner, Columbia Gas System, reached out then to environmental groups opposed to building the facility.

Columbia pledged to preserve most of the 1,017-acre tract untouched, setting aside the bay beach and one of the state's largest freshwater marshes, which harbors several rare and even endangered plants. More importantly, the company agreed to limit its ability to expand operations beyond its 134-acre fenced-in processing complex without the groups' approval.

Sierra's Tulkin said Dominion has been a good steward of the property outside its fenced complex. The company has donated $125,000 a year to a local land trust for environmental education and preservation efforts, and doubled that to $250,000 in recent years. It also spent millions — it won't say exactly how many — on a project to restore the freshwater marsh after it was damaged by a storm several years ago.

"We've tried to be friends with the environment," Donovan said.

The agreement between the environmental groups and the terminal owner has been revised and rewritten several times over the years, as ownership changed hands twice. The most recent rewrite occurred in 2005 to accommodate some terminal upgrades.

"When we did this deal with them back in 2005, no one was thinking export," said Craig Segall, a Sierra Club attorney. "We were doing a minor expansion for import, and we thought that was it."

But imports have lagged, as U.S. natural gas prices fell to historic lows, the result of the sluggish economy and a flurry of domestic drilling, notably in the gas-rich Marcellus shale formation underlying much of the Mid-Atlantic region. Only three tankers have called at Cove Point since March 2011, two of them bringing in LNG just to help maintain the super-cold temperatures in the storage tanks.

Dominion sees a potential bonanza in exports, as gas costs more in Asia and Europe than in the United States. Exporting LNG will help "stabilize" prices, albeit at a higher level, and revive drilling and production, Raikes said.

Others, though, point out that those higher prices will cost U.S. households and businesses. Natural gas is widely used for heating homes and increasingly for generating electricity and powering factories. Exports could increase U.S. electric bills by 1 percent to 3 percent, and gas bills by 3 percent to 9 percent, over the next two decades, according to a study by the federal Energy Information Agency.

Environmentalists also worry that exporting will spur a new wave of fracking.

"A big question for us," Segall said, "is if you export a lot of gas, you have to frack a lot of gas."

Most environmental groups support Gov. Martin O'Malley's decision to impose a de facto moratorium on drilling in Western Maryland until studies weighing its impact are completed. On Thursday, two groups vowed to go further, seeking state legislation next year imposing a permanent ban on fracking. The Sierra Club also has filed objections to other terminals seeking LNG export authority, Segall said.

Beyond that, the club just isn't comfortable with how the terminal's expanded activity to handle gas exports would affect Cove Point and surrounding residents.

"This is a space that was intended to be a protected wilderness, a state park," said Sierra's Tulkin. "We believe we should do everything we can to protect that space."

The other environmental group involved in the pact with Dominion, the Maryland Conservation Council, has parted company with the Sierra Club, at least on the legal issue of what their agreement says.

"The way we read the agreement," said Paulette Hammond, president of the Baltimore-based council, "Dominion Cove Point LNG has every right to do what they're doing, mainly because it is not outside the boundary that was set originally for them."

Dominion originally sought the two groups' approval for expanding beyond its fence line and suggested it might be willing to buy and preserve some environmentally important land elsewhere in return. The discussion never got down to specifics, though, because the Sierra Club made clear it wouldn't agree. Company officials now say they can build the gas liquefaction plant and any other needed facilities within the existing terminal area.

Hammond said the council, which has split with most other environmental groups to support building more nuclear reactors, is still studying fracking and has yet to take a position on it. While members have been debating the drilling technique's pros and cons, she said, she personally favors selling LNG abroad. And she questioned how drilling practices would be influenced by stopping the terminal project.

"How can you stop it?" she asked.

Nearby residents are split on the project. Alan Spahr, president of the Cove Point Beach Association, said that the bayfront community of 130 full-time households adjoining the terminal is equally divided.

While the export project likely would generate more traffic on the only road to and from the community, and bring more tankers into the bay with all the attendant risks, Spahr said he was swayed by the potential for more jobs.

"Personally, I don't have a problem,'' said Spahr, a software designer who said he's lived there for about three years. He called the terminal an "excellent neighbor."

June Sevilla, another Cove Point resident who's lived there 27 years, said she's not against business per se, but worries that the export activities there could increase air and water pollution from the complex, as well as risks of a leak or explosion.

Dominion spokesman Donovan said the company is working with state environmental regulators to reduce its discharge of copper into the marsh area, and intends to comply with all federal and state air-quality requirements for the plant. It paid a $175,000 state penalty three years ago for sediment pollution violations during construction of a new natural gas pipeline.

However the legal dispute over the terminal plan ends, both Dominion and Sierra representatives say they don't expect it to spoil their ability to continue to work together on protecting and enhancing the surrounding land.

"We've had good relations with the Sierra Club,'' Donovan said, "and we look forward to having one going forward."