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Producers, Market Can Pass Higher LNG Stress Test, EIA Says

Exporting liquefied natural gas (LNG) will raise prices for domestic natural gas, but U.S. producers can keep up with the additional demand and keep the gas market balanced, according to an updated analysis released by the U.S. Energy Information Administration (EIA) Wednesday. In short, LNG exports are a win for the U.S. economy, EIA said again.

The U.S. Department of Fossil Energy (DOE/FE) asked EIA to assess how different scenarios it specified of increased exports of LNG from the Lower 48 could affect domestic energy markets. The scenarios posit total LNG exports sourced from the Lower 48 of 12 Bcf/d, 16 Bcf/d and 20 Bcf/d, with these exports phased in at a rate of 2 Bcf/d each year beginning in 2015.

DOE/FE requested that EIA consider the specified Lower 48 states LNG export scenarios in the context of baseline cases from EIA's 2014 Annual Energy Outlook (AEO2014) that reflect varying perspectives on the domestic natural gas supply situation, the growth rate of the U.S. economy, and natural gas use for electricity generation. The latest from EIA is an update of its 2012 LNG Export Study, which only looked at export cases of 6 and 12 Bcf/d (see Daily GPIMay 29, 2014Dec. 7, 2012).

Starting from the AEO2014 Reference case baseline, projected average natural gas prices in the Lower 48 received by producers in the export scenarios are 4% (12 Bcf/d scenario) to 11% (20 Bcf/d scenario) more than their base projection over the 2015-2040 period, EIA said.

"Percentage changes in delivered natural gas prices, which include charges for gas transportation and distribution, are lower than percentage changes in producer prices, particularly for residential and commercial customers," the agency found. "Starting from the AEO2014 Reference case baseline, projected average Lower 48 states residential natural gas prices in the export scenarios are 2% (12 Bcf/d scenario) to 5% (20 Bcf/d scenario) above their base projection over the 2015-2040 period."

Domestic natural gas markets will balance themselves in response to exports, largely as a result of the efforts of gas producers, EIA said. "Across the different export scenarios and baselines, higher natural gas production satisfies about 61% to 84% of the increase in natural gas demand from LNG exports, with a minor additional contribution from increased imports from Canada," EIA said. "Across most cases, about three-quarters of this increased production is from shale sources."

The findings were in step with the thinking of pro-export trade association America's Natural Gas Alliance (ANGA). "While today's study does not represent EIA's projection of the most likely export scenarios, it does show that U.S. natural gas production can increase substantially to meet new demand and that the economy will benefit from this growth," said ANGA's Erica Bowman, vice president for research and policy development.

"Even under the most aggressive export scenarios, the overwhelming majority of natural gas used to fill LNG export demand originates from additional production, not from existing domestic applications. In fact, domestic manufacturing consumption is projected to grow from current levels under all LNG export scenarios.

"EIA's reference case projection shows LNG exports of less than 10 Bcf/d by 2040, while this study evaluates much larger export scenarios. Under any but the most implausible scenarios, prices remain stable at levels below $6.00 a million British thermal units through 2030."

While producers would step up to the export challenge, some end-users would stand down from additional consumption in the face of higher prices, EIA said."As a result of higher natural gas prices, the electric generation mix shifts towards other generation sources, including coal and renewables, with some decrease in total generation as electricity prices rise," EIA said.

According to the agency, the reduction in the average annual level of gas-fired generation over the 2015-2040 period ranges from 30 to 146 billion kilowatt hours (kWh), starting from levels that range from 1,200 to 1,782 billion kWh across the five baselines used in the study. There is also a small reduction in natural gas use in all sectors from efficiency improvements and conservation, according to EIA.

But consumer spending for natural gas and electricity would increase only "modestly" with additional LNG exports, EIA said. "On average, from 2015 to 2040, natural gas bills paid by end-use consumers in the residential, commercial and industrial sectors combined increase 1% to 8% over a comparable baseline case, depending on the export scenario and case, while increases in electricity bills paid by end-use customers range from 0% to 3%," EIA said. "These estimates reflect the combined impact of higher prices and small reductions in natural gas and electricity use."

But higher energy prices would be offset by the stimulus to gross domestic product that exports would provide, EIA said. "Increased energy production spurs investment, which more than offsets the adverse impact of somewhat higher energy prices when the export scenarios are applied," the agency said. "Economic gains, measured as changes in the level of GDP relative to baseline, range from 0.05% to 0.17% and generally increase with the amount of added LNG exports required to fulfill an export scenario for the applicable baseline."

EIA said the projections for exports made in AEO2014 best reflects the agency's view on exports and U.S. gas markets more generally and that consideration of scenarios specified by DOE/FE should not be construed as reflecting a change in EIA's own projections.

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