American exports – natural gas

exporting natural gas

Energy independence is heralded by some as the chief goal regarding U.S shale gas discoveries. However, the gas industry and the Obama administration are also in the midst of a debate about an additional – if not greater – use for the natural gas: export. Even prominent figures from the oil & gas industry are split on the matter.

The prerequisites of exporting gas

Hydraulic fracturing has made the U.S the world’s largest producer of gas. In other words, the U.S has the most proven reserves in the world, tapped and untapped. Nonetheless, producing and exporting are two wildly different things. To supply natural gas energy to global markets, a country needs the appropriate infrastructure – or LNG “terminals” along the coast – to chill the gas in liquid form and ship it overseas. Australia has 10 LNG export terminals; the United States only recently approved the construction of two, one in Louisiana and one in Texas. Export terminals are fairly pricey; the U.S Department of Energy approved a $10 billion plan that will convert the Quintana terminal in the Gulf Coast and make it conducive for shipping LNG to China, South Korea, Japan, India, and Europe. 19 other permits for building LNG export facilities in the U.S are currently under review by the Department of Energy. The DOE has suspended any approval of new contracts pending economic impact assessments.

Perks of natural gas export

Exporting natural gas, at first glance, seems obvious. If U.S gas exports expanded to 6 billion cubic feet (Bcf) every day – assuming current prices – revenue is estimated at $10 billion/year. The U.S would be poised to tackle its trade and budget deficits. Furthermore, the competitiveness of American liquefied natural gas (LNG) on European and Asian markets would also bolster the government’s leverage in trade diplomacy, urging international partners into free trade agreements. In fact, the sheer speculation that US natural gas supply may exceed what can be consumed domestically has brought the price for it down to $4 per million BTU in the States. Having no reserves of its own, Japan must pay $17 per million BTU to import gas. Classic trade theory – or basic math – reveals a comparative advantage for the U.S to cheaply and efficiently ship natural gas to other markets, where the returns are much higher than at home.

The caveats of natural gas export

Expanding exports does not come without risks. The EIA’s (Energy Information Administration) 2012 impact study highlighted these potential challenges:

  • Diverting natural gas production towards export may limit the supply available domestically, which would subsequently push up the prices of natural gas for U.S consumers. Price hikes would disproportionately affect low-income households.
  • If domestic prices for natural gas rise, local manufacturing companies will be less likely to switch to natural gas and will continue to use high emissions coal-fired energy generation. The chemical and electricity sectors are currently prospering from lower prices, which help companies comply with environmental regulations.
  • Signing binding supply contracts and trade agreements with other countries locks the U.S into increasing its natural gas production. 3/4 of this energy production will come from hydraulic fracturing, which is currently subject to regulations, moratoriums, and contention over its feasibility as an extraction technique. Without public consensus on the issue, conflict may ensue regarding potential health and environmental effects related to the use of fracking.
  • Because of the United States’ relatively isolated geographical position, shipping costs will be higher.
  • If the United States diverts its natural gas production for export, the country will still have to continue to import natural gas from Canada to meet U.S consumer needs.

The vice president of the National Gas Alliance, Erica Bowman, has spoken out against a natural gas export strategy. She asserts that if the U.S can use the energy at home without having to keep up with competing countries already endowed with export infrastructure, we would better bolster our manufacturing and chemical industries. Other critics of an export strategy are urging policymakers to keep the natural gas at home: we could use it to replace coal-fired plants and to use as a primary fuel for U.S vehicles down the road.

Competing reports on LNG export

Other reports are more optimistic than the EIA’s. Michael Levi from the Council of Foreign Relations and NERA Economic Consulting published two strategy papers, and both argue that the benefits of exporting LNG outweigh the costs. The difficulty of making accurate projections is worth mentioning. The reports use an analysis approach that determines findings on the economic impacts of exporting. Simply put, they test and compare the outcomes of different possible scenarios and case studies and make predictions for future impact and price forecasts. For some goods and services in the global economy, these projections can be very accurate where supply, demand, prices, and speculation do not change greatly. But because there is no integrated global market for natural gas, prices vary between Asia, Europe, and the United States, making gas markets notoriously insecure. Other suppliers may react to increased U.S natural gas exports by altering how much they produce to keep prices the same or push them down. Lastly, even if domestic price hikes were avoided, these reports assume that fracking operations will be approved and will increase. In other words, the findings use potential drilling operations of uncovered deposits, not existing ones.

LNG export debates continue

The effects of increasing natural gas exports for the U.S economy are unknown and difficult to predict. According to the EIA’s report, it takes about 4 years to approve and build LNG export facilities. Will the global market for LNG be competitive in 4 years? Alternatively, gains in trade could be as high as $4-10 billion annually, which would do wonders for improving the U.S trade deficit. The stakes are such that the Senate and the House of Representatives are also joining the debate ranks: the Energy and Natural Resources Committee met on Tuesday, June 4th to host natural gas forums. Energy secretary Ernest Moniz is firmly delaying the approval of any new export applications until more impact studies are reviewed and Dow Chemical has been explicit in its stance against exporting and its detrimental effects on the manufacturing industry. The question for the Obama administration will not be whether or not the U.S should export LNG, but how much, striking a balance between satisfying domestic needs and competing with other suppliers.

“The gas export debate is a microcosm of our energy policy.”  -Michael Schmidt, from Energy Group Lead GolimHaris.

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