LNG: Why Can’t America Make the Export Decision?

by Lauren Bardin

Most have heard there is an energy revolution going on in the United States known as the ‘shale gas revolution,’ but what does that really mean? What is shale gas? Should the US export it? What are the arguments for and against and who is making them? The answers to those questions are important less because of where the shale gas originated but more because of its final destination. American gas producers would like to export this new surplus in the form of liquefied natural gas (LNG) to other areas of the global market.

Companies have applied for a total of 16 LNG export facility projects.

The bedrock of the American shale gas revolution can be found in the roughly 20 shale formations discovered below the level of where conventional oil and gas are located. Until about seven years ago, it was uneconomical to drill and produce this gas. Recent innovations in horizontal drilling and hydraulic fracturing technology have lowered costs, contributing to the successful US drilling boom. The Energy Information Administration projects that US natural gas production will see a 44% increase from 23 trillion cubic feet in 2011 to 33.1 trillion cubic feet in 2040 and almost all of this increase will be due to the increase in shale production, which will grow from 7.8 tcf in 2011 to 16.7 tcf in 2040 and make up 50% of production. The United States is leading the shale gas revolution because of these technological achievements and its liberalized gas market, augmenting the country’s role in the future global gas market.

Figure 1- Source BP Statistical Review 2012.

This is why the federal government is so involved. When gas production soars, prices drop and a surplus of supply is created. Gas producing companies would like to export it in the form of LNG (gas liquefied to minus 162°C and shipped overseas via tankers) and take advantage of their low production costs and the high importing prices of other continents. The US Henry Hub price is approximately $4 per million British thermal units compared to about $11/Mbtu in Europe and $15/Mbtu in Asia, as displayed in Figure 1. However, US trade policy does not currently allow gas companies to export natural gas to non-FTA countries. In response, companies have applied for a total of 16 LNG export facility projects, to be reviewed and decided on by the Department of Energy and the Federal Energy Regulatory Commission. Government involvement is either seen as too much or too little in the case of LNG export. American business sectors and individuals have reached opposing conclusions on the issue.

Aversion to export is led by energy intensive manufacturers such as the chemical industry, best represented by a conglomerate of businesses and organizations called America’s Energy Advantage. With lower gas prices, manufacturers have been able to produce at much lower costs, giving them a competitive advantage in the global sphere and they argue that export will reverse this. Domestic prices will rise, increasing their costs and as a result, will throw away American manufacturing competitiveness. Dow Chemical Company CEO Andrew Liveris said shale is “a unique opportunity to export advanced products, not just ‘BTUs’.” Additionally, America’s Energy Advantage is afraid of the potential decrease in manufacturing competitiveness; they say a significant number of US jobs, mostly in the steel and cement industries, could be at risk. Also opposed are environmentalists, who realize that increased export would mean increased drilling of shale gas. Environmentalists are extremely wary of horizontal drilling and fracking because of the possible dangers they can cause, such as contaminated drinking water, earthquakes, and an overall agitation to the natural environment.

Those who support LNG export are, of course, led by natural gas companies that are faced with oversupply in the domestic market and need more customers to pay higher prices. They see overseas customers such as the Japanese as not only a solution to their bottleneck problems but also an aid to America’s overall economic woes. Export of LNG would necessitate large investments in infrastructure, spurring private spending and leading to thousands of jobs, both short term for construction and long term for production and export. The Hamilton Project predicts that at six bcf of daily export, the US could see the creation of 25,000 jobs in natural gas and 40,000 jobs along the supply chain in areas like steel, ship building, and rig manufacturing. The same level of export could also lead to export revenues of about $20 billion, depending on the price of gas. This $20 billion is equal to about 5% of the 2010 and 2011 trade deficits.

Both contingents also claim that their path is the most patriotic and would lead to better American energy security. Indeed, both exporting and not exporting can be seen as benefiting American energy security. Exporting LNG would allow US gas producers to sell at a price about three times as much as they receive in the states and would lead to more American jobs and an additional $4.4 billion to $47 billion per year to GDP by 2020. Conserving the gas and not allowing export would keep domestic prices low for citizens and large consumers like chemical companies, thereby bolstering manufacturing within the US and giving American companies a competitive advantage. For the most part, these arguments are not being made by businesses for the sake of defining and defending American energy security; they are being made based on dollars and whose pocket those dollars fall into.

The most prevailing conclusion supports a middle ground scenario that would see an increase in gas production, a positive overall GDP impact, an increase in employment, and a slight increase in price.

Unfortunately, these opposing sides cannot reach an agreement and the debate continues to be distorted by the media. Issues are portrayed in a political matter, appealing to either the left or to the right and drawing a clear line down the middle, making compromise look like failure or treachery. What many members of the audience are not told is that for US LNG export, there is a feasible compromise. Numerous analyses and reports, both by federal and private institutions, provide economic justification for a happy medium. The reports vary in realm and results because they are projections based off of hypothetical gas prices and export volumes. The most prevailing conclusion supports a middle ground scenario that would see an increase in gas production, a positive overall GDP impact, an increase in employment, and a slight increase in price. When markets are opened and demand grows, an increase in commodity price is obvious, but each study has found that the fluctuation in price could be restrained by volume and rapidity of export. In January 2012, the EIA conducted a study called the Effect of Increased Natural Gas Exports on Domestic Energy Markets requested by the Office of Fossil Energy. In this study, four scenarios were considered with export volumes ranging from 6 bcf/ d phased at a rate of 1 bcf per year (low/slow scenario) to 12 bcf/d phased at a rate of 3 bcf per year (high/rapid scenario). Projected Henry Hub prices varied from $5.81/MMBtu to $7.03/MMBtu from 2015 to 2035, depending on which scenario was used, so if the government were to allow export of the highest volumes at the most rapid pace, the largest increase could be $3.00 by 2035. The Brookings Energy Security Initiative concluded that LNG exports would impact prices at a range from 2% to 11% compared to a baseline scenario of zero exports.   Energy analyst Michael Levi from the Council on Foreign Relations wrote a discussion paper titled A Strategy for Natural Gas Exports where he determined that there could be a $0.2 rise in electricity costs if an upper scenario is used. Yet another analysis, conducted by NERA Economic Consulting, claimed that all scenarios saw a subtle increase in price, but higher net economic benefits were found in unlimited export scenarios.

Numerous other studies have been done by federal agencies, environmental organizations, and private consulting groups and they recognize that a compromise is wise for US LNG export to provide maximum benefits for all. Levi suggests that government does not necessarily encourage exports but simply allows them to occur. The Brookings Institute has a similar view in which, “U.S. policy makers should refrain from introducing legislation or regulations that would either promote or limit additional exports of LNG from the United States”.

The effects of the increase in American natural gas production are enormous whether the government decides to allow export of LNG or not. America can keep the gas domestic and manufacturers can enjoy low hub prices or it can export LNG and take advantage of a thirsty global market willing to pay higher prices. The final destination of this shale gas is the most imperative decision in American energy today but it should be made clear that the government does have the ability to mitigate some effects by reaching a compromise based more on economics and expert advice and less on political intuitions and platforms.

Lauren Bardin is an MA candidate in the ENERPO program at the European University at St. Petersburg.

References:

America’s Energy Resurgence: Sustaining Success, Confronting Challenges. Rep. N.p.: Bipartisan Policy Center’s Strategic Energy Policy Initiative, n.d. Print.

Levi, Michael. A Strategy for US Natural Gas Exports. Working paper. N.p.: Hamilton Project, 2012. Print.

Montgomery, W. David, and Sugandha Tuladhar. Macroeconomic Impacts of LNG Exports from the United States. Rep. N.p.: NERA Economic Consulting, n.d. Print.

Tullo, Alexander, and Jeff Johnson. “Chemical And Gas Suppliers Battle Over LNG Exports.” Chemical and Engineering News. CEN, 11 Mar. 2013. Web. 06. May 2013.

“U.S. Energy Information Administration – EIA – Independent Statistics and Analysis.” Natural Gas. EIA, 1 May 2013. Web. 06 May 2013.

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