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LNG Report Starts Next Round of Debate

Last Wednesday the U.S. Department of Energy's (DOE) hired economists said exporting liquefied domestic natural gas would be a boon to the nation's economy. But in the months ahead, the macroeconomic analysis will stir plenty of debate, long before any cargoes leave port.

NERA Economic Consulting found that exporting domestically sourced liquefied natural gas (LNG) would generate a net benefit to the economy, with greater exports bringing greater gains (see related story). It also found that the global LNG market would act as a governor of export volumes and that the Energy Information Administration's (EIA) "high case" scenarios for export volumes (12 Bcf/d) were unrealistic. The impact on domestic gas prices would be relatively modest.

Now under way is a 45-day comment period, to be followed by a 30-day period when replies to comments will be accepted at DOE. Aligned in favor of exports are LNG project backers, gas producers, vendors to the industry, free trade fans and others. Opposed are consumer-minded interest groups and lawmakers, and environmentalists, who fear exports would stimulate increased domestic gas production, causing more hydraulic fracturing (fracking).

Analysts at ClearView Energy Partners LLC previously wrote that the study's release would mark the beginning rather than the end of decision-making on exports. After reviewing the study, they wrote Thursday that they were right and said they are reminded "that there's 'no such thing as a one-handed economist.'" The report "eloquently reinforces" economic theory regarding the benefits of trade. "On the other hand, U.S. energy policy decisions are made in a fragmented, multifaceted process that can give disproportionate weight to the individual political, economic and regional biases of key decision-makers."

Anti-fracking interests were disappointed by the study's findings. Sierra Club Executive Director Michael Brune combined the environmental and economic arguments against LNG exports.

"The law requires the Department of Energy to determine if more natural gas exports are in the public interest -- so it is baffling that this report omits the serious threats increased fracking and gas production pose to our water, our air and the health of our families," Brune said. "Even if we consider what's actually included in this analysis, increased gas exports are expected to result in higher gas prices and lower wages for American families, meaning we pay the price here while the companies shipping gas overseas rake in the profits."

U.S. Sen. Ron Wyden (D-OR), an opponent of large-scale LNG exports, is slated to become chair of the Senate Environment and Natural Resources Committee. After the study's release his office said Wyden "will continue to call on the Energy Department to ensure that unfettered natural gas exports don't harm U.S. consumers and manufacturers. Forecasts and scenarios are worthwhile, but the department has an obligation to consider the impacts of each of the actual applications before it. It is critical that exports do not squeeze out or price out the billions of dollars of new, natural gas-related investments that have been proposed in the U.S. chemical, industrial, and electric generation sectors."

ClearView said the study might support Wyden's argument against exports as the economists found that some segments of the economy and some citizens would experience harm from exports. "Ultimately, the NERA study may play into Sen. Wyden's concerns regarding winners and losers and provoke further cautions against unintended, adverse impacts for certain segments of the economy and population ('net benefits' notwithstanding)," ClearView said.

However, U.S. Sen. Lisa Murkowski (R-AK), a ranking member on the Senate Energy and Natural Resources Committee, is in the pro-export camp. "The administration should be commended for commissioning such a comprehensive and transparent review of the potential impacts of exporting natural gas," Murkowski said. "It's clear from the study that exporting LNG would be beneficial to the U.S. economy, and the greater the level of exports, the greater the benefit."

The trade group Industrial Energy Consumers of America quickly responded to the report and said at first glance it found four "weaknesses" in the study in that it doesn't compare the economic benefits of exporting natural gas versus using it as a domestic jobs creator; "unfortunately" uses EIA Annual Energy Outlook 2011 demand forecast assumptions, which say electricity demand for gas will decrease by 2020 with only a small increase in industrial demand; doesn't "adequately address," the EPA and Bureau of Land Management regulations on gas drilling that could negatively impact production, nor does it address forthcoming EPA regulations that will drive demand; nor does it address the implications of removing the intangible drilling costs tax provision that allows the industry to deduct drilling expenses and generate cash flow to invest.

Dow Chemical Co., a major user of natural gas and natural gas liquids for fuel and feedstock, has been sending its executives to energy industry conferences in recent months, cautioning against allowing wholesale export of LNG (see NGI, Oct. 1a). Dow CEO Andrew Liveris blasted the report. "The report issued by the DOE on liquefied natural gas (LNG) exports is flawed, misleading, and based on outdated, inaccurate and incomplete economic data," he said Thursday. "The report fails to give due consideration to the importance of manufacturing to the U.S. economy. The value of every unit of energy used by the manufacturing sector is multiplied by as many as 20 times from the production of thousands of high-value products though the value chain. Compare this to the one-time value created by exporting energy as liquefied natural gas.

"Industry has announced over 100 capital investments representing over $90 billion in spending and millions of new jobs predicated on abundant and affordable natural gas, none of which were captured in this report."

However, the pro-export Center for Liquefied Natural Gas (CLNG) said the NERA study supports the assertion that "LNG exports would increase American households' real income at a time when millions of families are struggling financially...[W]e can export LNG without adversely affecting the availability or affordability of our abundant natural gas supplies."

The Institute for Energy Research (IER) also praised the study's findings. "The report confirms what everyone knows: exporting American-made products creates American jobs and grows our economy. It does not matter if we are exporting wheat, airplanes or natural gas," said IER President Thomas Pyle. "We are at no risk of running out of natural gas, especially if the federal government ends its de facto moratorium on exploration and development of new areas."

Cheniere Energy's Sabine Pass LNG terminal is the only export project so far to secure DOE authorization to ship LNG to countries that are not party to a free trade agreement (FTA) with the United States, although numerous others are seeking the same. ClearView analysts said they would not expect to see another non-FTA approval before late in 3Q2013. DOE has said it will give case-by-case consideration to pending export license applications, starting with those whose projects are in pre-filing with the Federal Energy Regulatory Commission. ClearView said "the process doesn't look quick" and it remains to be seen exactly how DOE will proceed.

It is not expected by ClearView or others (see NGI, Oct. 1b) that DOE will try to cap the volume of LNG exports "...but considering each project on its own isn't the same as automatically approving each project considered," ClearView said. "DOE could still conclude that only 'some' exports are in the public interest..."

Would-be LNG exporters have a long regulatory road still ahead of them, and a good deal of domestic and global market uncertainty, too. But CME Group's Gary Morsches, managing director of global energy products and services, was willing to wax enthusiastic about globalization coming to the gas industry.

"...I do think that it [natural gas] will become a linked commodity in that there will be a global Btu market," Morsches told reporters during a briefing in Houston Thursday. "We'll see Btu parity around the world. Right now, you're talking about natty [natural gas] at Henry Hub, let's call it $3.50/MMBtu. That same Btu sitting in Japan is $14 bucks, and $11 sitting in Europe, for the exact same heat content value."

Natural gas/LNG prices are high in Japan because they are linked to crude oil. "I think they'll eventually have a separate market where you have a liquids market and you have a Btu market," Morsches said. Gas prices will be determined by the incremental cost of production of producers in the United States, the United Kingdom, Qatar and Russia's Gazprom, etc. and the cost of shipping the gas to market, he said. "I think free enterprise will win out...When the same exact thing that's three bucks in Louisiana is $14 in Japan, someone will figure out a way to get it there a lot cheaper, and they'll arb that [price] back down to the incremental cost. That's part of the globalization. That will happen."

But it will take billions of dollars of investment in infrastructure around the world and several years before there's a lot to talk about. "I do think if we're sitting here in the next three to five years, that will be a main topic of discussion," Morsches said. "It's not going to be there yet, but there's going to be massive investments, and you'll start seeing some of this huge separation [of markets] start chipping away. The early entrants will be able to capture some real value."

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