While there is uncertainty and risk, particularly for would-be exporters, the longer term ramifications for U.S. liquefied natural gas (LNG) exports could carry a number of positive aspects for the economy, both domestically and globally, according to Rice University energy economist Ken Medlock.
Medlock, an energy economics fellow in the Baker Institute for Public Policy at Rice, elaborated in an interview with NGI about his recent report, "U.S. LNG Exports: Truth and Consequence," in which he stressed the need to analyze the potential U.S. exports from an international gas market perspective (see Daily GPI, Aug. 17; Aug. 9).
He thinks the United States entrance into the gas export business could be "a positive force in a post-recessionary economic world," if it can, in fact, put downward pressure on global gas prices. "This will encourage its use and accomplish a positive in terms of facilitating industrial activity [good for economies], not to mention the environmental benefits it could bring if gas displaces coal in [worldwide] power generation," he said.
Natural gas continues to fall short of being a true global commodity because of constraints on the ability to arbitrage price differences. "As those constraints fall, then globalization will become a reality," he said. "In other words, the LNG fleet needs to expand. Transportation differentials will persist internationally just as they do in the U.S. domestic market."
Medlock's report on his detailed modeling of what U.S. LNG exports are likely to do in terms of domestic gas operations and prices concentrates of exports from the Gulf of Mexico (GOM) and projections that foreign LNG shippers will be eager to buy storage in the United States. Current gas storage that is somewhat overbuilt will play what he called an "intermediary role," but longer term the global appetite for U.S. storage should ramp up.
"This, in turn, could motivate some expansion of capacity down the road," Medlock said. "I think this will eventually happen here rather than in other places largely due to the regulatory certainty that North America offers relative to other regions."
Medlock said his analysis allowed for prospective export terminals on the both the West and East coasts, in addition to the GOM, however, realistically he thinks the concentration will be on the Gulf where the import terminals, infrastructure and local community support already exist.
"The Gulf Coast is chosen to show representative results largely because that is where the action is currently occurring in a tangible sense," but he doubts anything will happen on the West Coast [of the United States] because of local opposition. "The East Coast does present at least one viable opportunity."
In time, Medlock sees some of the risks swirling around the U.S. exports diminishing. One development he sees taking shape over time is the elimination of the requirement by developers to have oil-linked gas contracts with a specific off-take destination as part of securing financing at the upstream end. "As liquidity grows, the risk of off-take should decline, meaning the marketability of supply would be less of an issue."
Nevertheless, one risk he doesn't see subsiding over time is that of the U.S. developers again overbuilding terminal capacity for export as they did with import facilities during the past decade (2000-2010). "I think that is a very real issue that we could be discussing 10 years from now," Medlock said.
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