If the United States were to let loose on the global market some of its bellyful of natural gas reserves, the effect on markets here and abroad as well as on the environment would be modest pretty much across the board, a year-long study of potential liquefied natural gas (LNG) exports by the Brookings Institution has concluded.
“…[S]ome amount of U.S. LNG exports is likely to be competitive in global markets,” the researchers said. “…U.S. LNG exports are likely to have a modest upward impact on domestic prices, and a limited impact on the competitiveness of U.S. industry and job creation.”
Further, U.S. LNG is likely to make a positive, but relatively small, contribution to the U.S. gross domestic product, trade balance. The potential for LNG exports to make a positive impact on global greenhouse gas emissions is minimal, the study found. There is potential for positive foreign policy impacts from U.S. entry in the global gas market through increased supply diversity for gas-importing allies, and as a force to weaken oil-linked contract pricing that works to the advantage of rent-seeking energy suppliers.
Brookings researchers referenced a study published early this year by the Energy Information Administration (EIA) that looked at the potential impact on domestic natural gas prices of LNG exports (see Daily GPI, Jan. 20). “Larger export levels lead to larger domestic price increases, while rapid increases in export levels lead to large initial price increases that moderate somewhat in a few years,” EIA said in its report. The most extreme modeling by EIA found that exports could increase domestic gas prices by 32.5% in a case of low recoveries of gas from shale plays and high levels of exports.
The researchers at Brookings found that EIA’s analysis represents an “extreme scenario for LNG exports.” Additionally, Brookings said the expectation of future demand caused by LNG exports would likely prompt producers to invest in additional production before incremental demand occurs. “As a result, the increase in prices [projected by EIA] would likely begin earlier and peak at a lower level than suggested by the [EIA] model,” Brookings said.
The think tank also looked at a study released last year by the Deloitte Center for Energy Solutions (see Daily GPI, Dec. 19, 2011). Brookings pointed out that the Deloitte analysis highlighted the anticipated producer response to exports in its model and also said price increased due to export would vary by region, i.e., higher near the Gulf Coast, the origin of exports, and lower in the Northeast.
“This is particularly important in the Northeast, which historically experiences some of the highest natural gas prices in the country, but will benefit from the development and consumption of natural gas from the nearby Marcellus Shale play,” Brookings said in its report.
The researchers also cited three different studies of late conducted by Navigant Consulting (two) and ICF International. Brookings said all the studies are worth weighing by policymakers for their respective strengths. “…[P]olicymakers would benefit from having a better understanding of the results that are generated from each report,” Brookings said.
The U.S. Department of Energy’s Office of Fossil Energy (DOE/FE) has granted approval to a number of projects to export LNG to countries with which the United States has a free trade agreement (FTA). However, key to moving the projects forward is authorization to export to non-FTA countries, and DOE/FE is sitting on that until it receives a report from a consultant it hired to look at domestic gas market implications of exports (see Daily GPI, March 27).
The Brookings study said lawmakers and regulators should stand back from either promoting or discouraging LNG exports and instead let the market work it out.
“The nature of the LNG sector, both the costs associated with producing, processing and shipping the gas, and the global market in which it will compete, will place upper bounds on the amount of LNG that will be economic to export,” the researchers said. “Incremental increases in the price of domestic gas (as a result of domestic demand or export) negatively impact the economics of each additional proposed export project, which even with government approval will still require private financing and interested buyers.
“Efforts to intervene in the market by policymakers are likely to result in subsidies to consumers at the expense of producers, and to lead to unintended consequences. They are also likely to weaken the position of the United States as a supporter of a global trading system characterized by the free flow of goods and capital.”
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