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U.S. LNG Exports Study Sees Net Benefits

Exporting liquefied domestic natural gas to world markets would generate a net benefit to the U.S. economy, and the more liquefied natural gas (LNG) that's exported, the greater the benefit, according to a macroeconomic analysis of the impact of LNG exports commissioned by the U.S. Department of Energy (DOE) and released for public comment Wednesday.

"Across all these scenarios [considered by the study], the U.S. was projected to gain net economic benefits from allowing LNG exports. Moreover, for every one of the market scenarios examined, net economic benefits increased as the level of LNG exports increased. In particular, scenarios with unlimited exports always had higher net economic benefits than corresponding cases with limited exports," NERA Economic Consulting said in the summary of its 216-page report. Reaction was mixed (see related story).

The long-awaited independent study is the second part of DOE's two-part analysis of the impact of LNG exports on domestic natural gas prices and the U.S. economy. The first part was conducted by DOE's Energy Information Administration and released in January (see NGI, Jan. 23). DOE would not disclose the name of the firm conducting the macroeconomic analysis; however, NERA's name was recently linked to a news service (see NGI, Nov. 26). Release of the NERA study had been delayed, and in the months leading up to the U.S. presidential election it became apparent to many that it would not be released until after election day.

The NERA study looked at "a wide range of different assumptions about levels of exports, global market conditions, and the cost of producing natural gas in the U.S.," the firm said. "...[M]arket scenarios ranged from relatively normal conditions to stress cases with high costs of producing natural gas in the U.S. and exceptionally large demand for U.S. LNG exports in world markets...Export limits were set at levels that ranged from zero to unlimited in each of the scenarios.

"In all of these cases, benefits that come from export expansion more than outweigh the losses from reduced capital and wage income to U.S. consumers, and hence LNG exports have net economic benefits in spite of higher domestic natural gas prices. This is exactly the outcome that economic theory describes when barriers to trade are removed."

Not all of the scenarios examined yielded conditions that would generate exports of LNG from the United States. Under the study's U.S. reference and international reference cases (status quo conditions at home and abroad), "there is no feasible level of exports possible from the U.S.," NERA said.

Under a low natural gas price case, which includes "high" estimated ultimate recoveries (EUR) from shale plays, exports are feasible. "However, under a low shale gas outlook (low shale EUR), international demand has to increase along with a tightening of international supply for the U.S. to be an LNG exporter." NERA said.

The United States would benefit most from exports if it were able to produce "large quantities" of shale gas at low cost, if global demand for LNG increases rapidly and if LNG supplies from other regions are limited, NERA said. "If the promise of shale gas is not fulfilled and costs of producing gas in the U.S. rise substantially, or if there are ample supplies of LNG from other regions to satisfy world demand, the U.S. would not export LNG," the study said. "Under these conditions, allowing exports of LNG would cause no change in natural gas prices and do no harm to the overall economy."

Indeed, domestic gas prices would rise with LNG exports, the study found. "But the global market limits how high U.S. natural gas prices can rise under pressure of LNG exports because importers will not purchase U.S. exports if U.S. wellhead price rises above the cost of competing supplies. In particular, the U.S. natural gas price does not become linked to oil prices in any of the cases examined."

The research found that at the time when LNG exports could begin (2015), the increase generated in natural gas prices would range from zero to 33 cents/Mcf in 2010 dollars.

"The largest price increases that would be observed after five more years of potentially growing exports could range from 22 cents to $1.11/Mcf," the study found. "The higher end of the range is reached only under conditions of ample U.S. supplies and low domestic natural gas prices, with smaller price increases when U.S. supplies are more costly and domestic prices higher."

Domestic gas prices would not rise to levels in countries that pay oil parity-based prices for LNG imports, the study found. "U.S. exports will drive prices down in regions where U.S. supplies are competitive so that even export prices will come down at the same time that U.S. prices will rise."

While exports would be a net benefit to the U.S. economy, not all participants in the nation's economy would benefit equally, and some would be harmed, the study found. In general, the winners would be the shareholders of natural gas companies.

"Like other trade measures, LNG exports will cause shifts in industrial output and employment and in sources of income," the study found. "Overall, both total labor compensation and income from investment are projected to decline, and income to owners of natural gas resources will increase.

"...[T]hrough retirement savings an increasingly large number of workers share in the benefits of higher income to natural resource companies whose shares they own. Nevertheless, impacts will not be positive for all groups in the economy. Households with income solely from wages or government transfers, in particular, might not participate in these benefits."

Commercial interests that would be impacted by LNG exports are confined to narrow segments of industry, according to the study. "About 10% of U.S. manufacturing, measured by value of shipments, has both energy expenditures greater than 5% of the value of its output and serious exposure to foreign competition. Employment in industries with these characteristics is about one-half of one percent of total U.S. employment."

The overall level of employment in the country would likely not be affected; however, some workers would likely be pulled to industries associated with gas production and export from other industries. "In no scenario [in the study] is the shift in employment out of any industry projected to be larger than normal rates of turnover of employees in those industries."

As of Nov. 21, about 20 parties had applied for authorization to export domestically sourced LNG, some to nations that are parties to free trade agreements (FTA) with the United States, some to non-FTA countries and some to both, according to DOE's latest applications summary. Exports to FTA countries are presumed to be in the public interest. However, DOE so far has only granted Cheniere Energy's Sabine Pass LNG project authorization to export to non-FTA countries. The newly released NERA analysis bolsters the case of those seeking non-FTA export authorizations.

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