Proposed LNG Terminal as a Coase Problem

1
Proposed LNG Terminal as a Coase Problem

• By
• Semoon Chang
• Note that this paper has been published in the
  June 2004 issue of the Oil, Gas Energy Quarterly

2
Introduction

• ExxonMobil proposed to purchase the 200-acre
  Mobiles Middle Bay Port at 38 million to build
  an LNG terminal.
• Three domes with each having 4 BCF capacity
  shipped every 4 days.
• Alabama State Port Authority had difficulty in
  finding tenant since 1994.

3
(No Transcript)
4
Hypothesis

• Social gains can be maximized when solutions are
  explored through direct negotiation of interested
  parties based on the Coase theorem.
• Ronald Coase won Nobel Prize in 1991.

5
Needs for LNG terminals

• Four terminals exist in 48 states Boston
  (Everett), Savannah (Elba Island), Lake Charles
  (Lake Charles), Maryland (Cove Point)
• 30-plus new ones proposed by the end of 2003

6
Economic impact of the proposed facility

• Total construction 586.6m
• Local construction 165.95 million
• 660 construction jobs for three years
• 26m wages per year

7
Permanent employment

• Total 258
• Direct operation 71 (announced as 50 by
  ExxonMobil) rallying point
• Subcontracting maintenance 98
• Port services 66
• Vessel purchase of consumables 23

8
Opposition

• Hollingers Island residents
• Bay Watch (environmental group)
• The Mobile Register
• Better Growth Mobile (newly formed)

9

• If the contents of one of the five tanks onboard
  a ship were ignited a wall of fire half-mile
  wide would erupt. People two miles away from
  the tanker could suffer from second-degree
  burns.
• This quotation from Mobile Register, October 26,
  2003, p. 1A.

10
(No Transcript)
11
(No Transcript)
12
On October 28, 2003

• ASPA approved the deal 4 to 2
• City of Mobile passed resolution calling for an
  independent safety study and delivered it to
  ASPA during ASPAs meeting.
• The site is located outside the city limits.

13
Coase theorem deals with externalities in such
way that

• Any solution should be to maximize social gains
• A decision favoring one or the other may fail to
  serve the larger social welfare
• When transaction costs are kept low, two sides
  will find an optimal solution through negotiation.

14
The first step is to realize that

• An external cost is not simply a cost produced by
  one and born by the other
• In almost all cases, the cost is a result of
  decisions made by both parties.

15
The Model

• Profit TR TC
• Max profit P MC
• MC MC1 MC2
• MC2 0 according to ExxonMobil but infinitely
  large according to opponents.

16
Sensible solution

• Negotiated settlement among the residents,
  ExxonMobil, the Port Authority, and local
  governments that benefit from increased tax
  revenues!
• Parties too emotional to consider negotiated
  settlement!

17
During January 2004

• Mobile Registers new years resolution 3 Move
  LNG Offshore (Off-shore facility uses 100
  million-plus gallons of sea water per day killing
  everything in it.)
• Gov. Riley sated he intends to block the sale.
• On 19th, LNG facility in Algeria exploded with 27
  fatalities.

18
September 21, 2004 Mobile Register

• ExxonMobil filed applications with FERC to build
  LNG facilities at two sites in Texas and one in
  Louisiana
• Too late to build one in Mobile by 2009 when
  ExxonMobil begins importing 2 BCF/day from Qatar
• ExxonMobil pays about 1.7m a year to ASPA to
  keep the site out of competition for 3 years.

19
Downtown Mobile
20
(No Transcript)