One day after lawmakers in both houses of Congress debated the merits of liquefied natural gas exports (LNG), the House Committee on Foreign Affairs took up the issue on Wednesday, reasoning that exports are an intricate part of the discussion over the geopolitical potential of the energy boom in the United States. However, testimony from a panel of experts indicated the impact of U.S. LNG exports may be overstated and their effect on domestic natural gas prices unknown.
In his opening remarks, committee chairman Rep. Ed Royce (R-CA) derided the Department of Energy (DOE) as "government at a glacial pace" for approving only seven applications to export LNG.
"While the United States recently became the world’s largest producer of natural gas, Russia is still the biggest exporter," Royce said. "That is because while [Russian President Vladimir] Putin is freely selling oil and gas freely around the world, we impose major impediments to exporting our energy. That is a lost opportunity."
Royce said President Obama could direct the DOE to speed up approval of the pending applications to export LNG, or Congress could do the job by passing HR 6, a bill before the House that would grant immediate approval to all pending applications that had a notice published in the Federal Register (see Daily GPI, March 18).
"We should end our self-imposed sanctions on energy exports," Royce said. "America leads the world with its dynamic and innovative energy sector. Let's allow it to benefit the U.S. economy and our security interests worldwide."
According to the DOE, as on Monday there were 24 pending applications to export LNG from the United States.
Calls for Lifting Ban on Oil Exports, Too
Harold Hamm, CEO of Continental Resources Inc., called making the United States a world leader in LNG exports "a worthy goal," but since it will take several years for export terminals to come online he instead called for lifting the current ban on oil exports, in place since the 1970s. Continental is one of the Bakken Shale’s biggest oil producers. Oil export restrictions were imposed during the 1973 oil embargo and became law in 1975, but some exports to Canada from Alaska and California have since been permitted (see Shale Daily, Jan. 23).
"If we want to have an overnight impact on today's global events, we can immediately begin exporting crude oil, which does not have the same infrastructure constraints," Hamm said in his written testimony. He later added that "while Russian gas displacement with U.S. LNG may not yet be achievable, crude oil exports are possible immediately and may be used as a diplomatic tool to weaken the influence of our geopolitical adversaries."
Dennis Blair, a retired U.S. Navy admiral and co-chair of the Commission of Energy and Geopolitics, concurred that allowing unfettered oil exports would drive down global oil prices, but said the effect should not be overstated.
"The ability of OPEC [Organization of the Petroleum Exporting Countries], and particularly Saudi Arabia, to lower production in order to mitigate downward pressure on global oil prices -- and thereby offset the effect of increases in production from the United States and other countries -- is likely to endure," Blair testified. He later added "the reality is that, despite surging U.S. production, the oil market today remains tight, and will continue to be tight in the future."
Elizabeth Rosenberg, director of the Energy, Environment and Security Program for the Center for a New American Security, conceded that LNG exports would cause domestic gas prices to increase slightly, but the benefits from exports outweighed the costs.
"The effect LNG exports will have on domestic revenue and in strengthening U.S. strategic and economic ties with key allies and partners make them well worthwhile," Rosenberg testified. "Refraining from selling LNG abroad in order to support domestic gas-intensive manufacturing industries or halt gas production would undermine foreign relations and the scope of U.S. leadership abroad. It would also cause the United States to lose out economically to Canada and other countries that proceed to sell LNG overseas."
Rosenberg called on the DOE to speed up its consideration of the LNG permit applications in its queue, and give special "national interest" consideration to LNG export projects that could supply Europe. "The LNG export market will probably only support the construction of a few of the proposed U.S. LNG projects," she said. "But with all options on the table, market participants would maximize U.S. gas production and the potential benefits to global gas consumers, including those in Europe."
Weapon Against Russia?
Michael Levi, program director for energy security and climate change at the Council on Foreign Relations, said supporters of U.S. LNG exports were overstating their effectiveness as a "large weapon against Russia," but conceded that exports could still hurt Russia by forcing them to lower their prices. Nevertheless, economic costs also needed to be considered, especially the burden on manufacturers and lower-income consumers.
"The U.S. oil and gas boom provides the United States an important opportunity to strengthen its economy and its national security," Levi testified. "This opportunity will be undermined, though, if policymakers overestimate what the boom can do…A 'most of the above' strategy that seizes opportunities on multiple fronts while being realistic about what can be accomplished is the best route to taking advantage of the new U.S. energy opportunity."
Rosenberg kicked off the question and answer session, stating that "to the point of the role of U.S. LNG helping to diversify European gas supplies, and its ability to help Europe get out from under some of the influence of Russia, LNG has a role to play but the impact won't be immediate and it won't be the 'silver bullet.'"
But Royce noted that Lithuania currently relies entirely on Russia for natural gas. The country plans to bring online in December a floating LNG import terminal, Independence, which would be based in Klaipeda.
"Clearly this is one of the reasons you see the Lithuanians toying with the idea of an LNG facility," Royce said. "Maybe [Russia's] monopoly doesn't drive price, but in Lithuania's case it pays the highest price for gas in all of Europe. It sounds like perhaps there is a more direct connection to that monopoly than we'd like to assume. The Lithuanians certainly believe it."
Levi said LNG imports would depend on the particular European country, noting that some are better integrated into the continent's energy grid than others.
"Ukraine is different," Levi said. "In the case of Ukraine, Russia is not threatening to raise prices from typical levels to much higher ones -- they're threatening to raise prices from severely depressed levels, subsidized levels, to the kind of price that a country like the United States might offer. We are going to be hard pressed to combat that.
"If we want to help make Ukraine more resilient, we need to provide assistance that helps them transition from their heavy industry, which is completely unprofitable unless they get subsidized Russian gas, to a more sustainable foundation."
Royce said he accepted Levi's point, but added "the reality is that if you're in manufacturing and you find out that in the winters your supplier, Russia, is going to turn off the valve, that doesn't leave for a lot of rationale for investment for rebooting your economy."
Constituents: Will Domestic Gas Prices Go Up?
Rep. Eliot Engel (D-NY), ranking member on the committee, said it was intriguing that the United States could counter Russia by exporting natural gas and oil. "We would have to be crazy not to consider it," he said. "It needs to be looked at and considered from a geopolitical point of view. I'm not saying we should rush to it, but we should do it.
"But people back home want to know the bottom line: Will prices of natural gas go up? What will the impact be on gasoline prices? We have to weigh the overriding geopolitical concerns, but we also have to care about what our constituents feel."
In response, Hamm said tight oil that has been brought onto the market, particularly from the Bakken Shale, has helped reduce diesel prices by about 20%. He said gasoline prices were also lower, and that the market for natural gas had been broadened.
"I used to talk about natural gas in terms of 55 Bcf/d," Hamm said. "Now we're approaching 75 Bcf/d, yet we're able to take care of that market and do it very well because of the increased supply we have, approaching 200 years' supply that many of us think is there. Overall, I think the price is going to be much more stable, and we can take care of these LNG exports."
Levi cautioned that infrastructure constraints in Europe also complicate the idea of the continent importing LNG from the United States.
"The reality is that in the European market Russian gas is less expensive than delivered U.S. gas," Levi said. "Certainly, the domestic gas price here is much lower, but once you liquefy, transport and regasify it you end up with a fairly high price. There are some consumers that will pay for diversity and will pay to 'spread their bets' a bit, and that's why I would not say that U.S. gas will displace no Russian gas. But for the most part these companies want to be competitive on a day-to-day basis in the global economy and are going to go to the lowest price.
"The other thing to keep in mind is crisis dynamics. We all saw over the last several months during this record cold snap in the United States how infrastructure constraints in this country made it difficult to bring our abundant natural gas to parts of the country where it was in extraordinarily high demand, driving natural gas and electricity prices up [see related story]. Infrastructure constraints are real, and companies don't overbuild massively just to respond to unusual events. It's no different in Europe, and that would undermine Europe's ability to absorb very large amounts of gas from a different source during a crisis."
Europe a ‘Vulnerable, Rickety’ System
But Blair said coupling low day-to-day prices with a "vulnerable, rickety" system in Europe could be disastrous, costing the United States hundreds of billions to fix, perhaps with military force.
"I've seen it in the Middle East," Blair said. "The price of oil was not what we were paying at the pump. It was the price of what we were paying -- plus lives and the treasury of this country sent over to that part of the world to keep stability and restore order there. The idea that we just have to keep the lowest possible price on a day-to-day basis and not think about some consequences…is really short-sighted. We have to take prudent action to be more resilient and more independent."
Levi countered that the European Union’s members needed to take action. "The main investments in resilience, in the current context, need to be made by our friends and allies in Europe," he said. "[They need] to build extra capacity so that they can be more resilient in the face of a crisis. Their underinvestment leads to our having to come in and bail them out."
In separate hearings on Tuesday, the Senate Committee on Energy and Natural Resources and the House Energy and Commerce Committee’s Subcommittee on Energy and Power discussed U.S. LNG exports and the crisis in Ukraine (see Daily GPI, March 25).