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DOE Study Finds Increased LNG Exports Would Drive Production, Prices Higher

The economic impacts of increased U.S. liquefied natural gas (LNG) exports would be “marginally positive,” according to a study released Monday by the U.S. Department of Energy (DOE).

The report, commissioned by DOE and authored by researchers from Oxford Economics and Rice University in Houston, modeled the macroeconomic impacts of global demand for U.S. LNG exports rising from 12 Bcf/d to 20 Bcf/d over various scenarios projected out to 2040. The researchers found that the increase in LNG exports corresponded to higher domestic natural gas prices and an increase in domestic production, with some tradeoffs related to higher energy prices for U.S. manufacturing.

Shale drilling “has lowered the domestic price of natural gas so that the United States now has among the lowest prices in the world,” thus leading to “gains in competitiveness for U.S. manufacturers,” but this has hurt upstream and midstream natural gas operators, the researchers wrote.

“While selling natural gas at higher prices on the world market would increase profits for U.S. gas producers, the narrowing of the price gap between the United States and the rest of the world would erode some of the benefits that have accrued to U.S. consumers and manufacturers,” according to the study. The net benefit of higher prices and more investment in U.S. gas production “typically exceeds the negative impacts of higher domestic natural gas prices associated with increased LNG exports.”

The report found that an increase in LNG exports from 12 Bcf/d to 20 Bcf/d would be supported largely through increased domestic production rather than a decrease in domestic demand.

“The scenario analysis reveals that domestic production continues to increase throughout the time horizon when LNG export volumes can expand to 20 Bcf/d. This contrasts to the case when exports do not exceed 12 Bcf/d and production plateaus and declines slightly in the 2030s. The majority of the increase in LNG exports is accommodated by expanded domestic production rather than reductions in domestic demand, a result that reflects the very elastic long-run supply curve in North America,” the report said.

A rise in LNG exports would narrow the spread between Henry Hub and other international benchmarks, the report found, with the spread still “large enough to support the flow of trade” even with exports above 20 Bcf/d.

According to the researchers’ models, “the majority of the price movement occurs abroad, not domestically, with the most significant impact occurring in Asia.”

Compared to a 12 Bcf/d LNG export scenario, export levels of 20 Bcf/d would increase U.S. GDP by 0.03%, or $7.7 billion in today’s prices, on average from 2026-2040, the report said. Over the same time frame, the increased LNG exports would drive a 4% increase in natural gas production and a 4.3% increase in the Henry Hub price on average compared to 12 Bcf/d export scenario.

Responding to the rise of domestic shale production, a number of U.S. LNG export facilities are currently moving toward operation, with Cheniere Energy’s Sabine Pass in Louisiana -- on track to be the first major U.S. export terminal -- expected to begin shipping cargo in January (see Daily GPI, Dec. 23).

Recently, analysts with Bernstein projected a global LNG overcapacity of 20-30 million tonne per annum until 2018, a result of significant new liquefaction capacity coming online in the United States and Australia (see Daily GPI, Dec. 4). But this oversupply is expected “to be followed by a famine,” the analysts said.

The DOE LNG study released Monday follows an LNG export study completed last fall by the Energy Information Administration (see Daily GPI, Oct. 29, 2014).

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