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DOE Likely Won't Cap LNG Exports, Say Experts

Assuming the U.S. Department of Energy (DOE) decides to allow export of U.S. liquefied natural gas (LNG), the agency will likely leave it up to markets to determine how much LNG is sent abroad, two industry veterans told NGI.

"I would say that so far DOE has been fairly light-handed in their regulation," consulting firm Deloitte's Bill Hederman said. "They have generally taken the approach that this is stuff that markets can determine subject to certain public interest constraints, and I think they've been handling that well. I would be surprised if they set any kind of specific quantity limit, but we'll have to see."

Michelle Foss, chief energy economist in the Bureau of Economic Geology at the University of Texas, is of a similar mind when it comes to markets being free to govern LNG export levels. "DOE people are certainly cognizant of potential market impacts of an export wave, if that really materialized," Foss told NGI. "However, they also know that the market itself is a governing mechanism. If prices rise enough so that Henry Hub is no longer cost competitive for liquefaction and export, the LNG export developers themselves are in trouble."

Foss further observed that the competitiveness of domestically produced LNG is dependent upon the conditions in the markets that would receive the cargoes. Oil prices will play a large role as contracts for LNG are oil-indexed in Asian markets. "Most people feel that Asian buyers will continue to negotiate and accept LNG sales indexed to oil," Foss said. "Many feel that this is what provides the best assurance that some U.S. export projects could succeed (but western Canada is a better bet, assuming gas production can get to the West Coast)."

However, oil-indexation of natural gas prices is coming under pressure in Europe as Europeans push back on oil-indexed pricing for pipeline gas imports from Russia, Foss said. Prices at Henry Hub could also rise, and this is something that Foss is betting on, she said, adding that the U.S. shale gas bounty has been overstated by many.

"Higher [natural gas] prices going forward are, by the way, a really good possibility, and it is my own bet," she said. There has been "way too much arm waving out there on cheap U.S. supply and low price forever [and] way too little understanding of all the potential supply constraints, pressure on costs, the impact of pent-up demand and organic growth in demand (recession effects plus the difficulty of discerning what expansion plans will really happen and by when), and on and on. "But lots of cheap gas forever makes a good story..."

The question of whether some of that gas will be consumed abroad remains to be answered. When DOE said release of the report it had commissioned on the market impact of exports had been delayed until year-end (see NGI, Sept. 24), many industry observers weren't too surprised. Expectations among some for a while had been that the report would not be released until after the upcoming presidential election.

Or maybe there has been a glitch?

"My understanding is there have been some problems with their modeling contractor or contractors. I'm not sure what aspect of the analytics model has been a problem, but it seems like there have been some problems there," said Hederman, a former policymaker and founding director of the Office of Oversight at the Federal Energy Regulatory Commission.

"This is not a simple, technical report as it might have been in the past, but it's going to be highly politicized whatever it finds in terms of results, and so I would expect that the modeling is getting far more scrutiny than it has in the past. It would not surprise me if it came up lacking in some ways and so they're probably trying to deal with some of those issues now...That's one explanation for how we're still stuck without a report. The other would be that it is simply being held until after the election because the results are viewed as potentially highly political, which they probably will be one way or the other."

In April DOE approved the first application Cheniere units Sabine Pass LNG and Sabine Pass Liquefaction to export LNG to non-free trade agreement (FTA) countries (see NGI, April 23). Since then it has put the permitting process for non-FTA applications on hold pending the completion of the second half of the two-part study. Exports to FTA countries are presumed to be in the public interest and are routinely approved. As of Sept. 11 there were 12 non-FTA applications awaiting action by the DOE. These plus Cheniere's Sabine Pass authorization add up to export capacity of 18.66 Bcf/d of domestically produced LNG from the Lower 48 states, according to the DOE's Office of Fossil Energy.

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