Report: LNG Exports to Have Net Economic Benefits, Impact Domestic Power Sector

Allowing unlimited U.S. exports of liquefied natural gas (LNG) would increase marginal costs of supply and raise domestic natural gas prices, but it would have "net economic benefits" across a range of scenarios ranging 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 around the world, a report prepared for the Department of Energy and released on Wednesday suggests.

The report from NERA Economic Consulting titled "Macroeconomic Impacts of LNG Exports from the United States" finds that benefits that would come from an LNG export expansion "more than outweigh" losses incurred from reduced capital and wage income to U.S. consumers—which will be likely as U.S. natural gas prices would increase when the U.S. exports LNG. However, net economic benefits would increase as the level of LNG exports increased, and scenarios with unlimited exports had higher net economic benefits than corresponding cases with limited exports, the report finds.

"Producing incremental natural gas volumes will increase the marginal cost of supply and therefore raise domestic natural gas prices and increase the value of natural gas in general," the report says. "Domestic industries for which natural gas is a significant component of their cost structure will experience increases in their cost of production, which will adversely impact their competitive position in the global market and harm U.S. consumers who purchase their goods."

U.S. natural gas price increases at the time LNG exports could begin range from zero to $0.33 (in 2010 dollars/thousand cubic feet [Mcf]). The largest price increases that would be observed after five more years of potentially growing exports could range from $0.22 to $1.11 (2010$/Mcf), the report shows.

The U.S. electricity sector could be "disproportionately" vulnerable to these price increases. The report notes that natural gas provides about 20% of the fuel inputs to power generation, and in many regions and times, natural gas–fired generation sets the prices of electricity. Maximum losses in electricity sector output could be between 0.2% and 1%, when compared across all scenarios, while the decline in output of energy-intensive sectors could be between 0.2% and 0.8%. Price increases will also propagate through the economy and affect both household energy bills and costs for businesses. "The overall effect on the economy depends on the degree to which the economy adjusts by fuel switching, introducing new technologies, or mitigating costs by compensating parties that are disproportionately impacted," the report concludes.

Among its other key findings, the 230-page report says that net benefits to the U.S. would be highest if the nation were able to extract large amounts of natural gas from shale at low costs. Other factors that would impel an LNG export boom were if world demand for natural gas increases rapidly and if LNG supplies from other regions were limited. "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," it finds.

It notes, however, that several uncertainties will need to be overcome before unlimited LNG exports become feasible. Advances in drilling technology that created the current shale gas boom are still sufficiently recent that there remains significant uncertainty as to the long-term natural gas supply outlook for the U.S., for example. "In addition to the uncertain geological resource, there are also other uncertainties such as how much it will cost to extract the natural gas, and many regulatory uncertainties including concerns about seismic activity, and impacts on water supplies that may lead to limits on shale gas development." Then there are infrastructure concerns: Only one project, Cheniere Energy’s 2.2 billion cubic feet per day facility at Sabine Pass, La., has so far received approval to export LNG to countries without trade agreements.

Meanwhile, on the demand side, the power sector has seen a considerable shift to natural gas in recent years, pegged to low gas prices. In the future, more coal plant retirements, combined with an accelerated shift toward natural gas by pending and possible future air, water, and waste regulations and climate change "could significantly increase in natural gas demand across the U.S. economy."

The Energy Information Administration (EIA) in a separate report on Wednesday again predicted that the U.S. could become a net exporter of LNG by 2016 and a net exporter of total natural gas (including via pipelines) by 2020. It doubled projections of how much gas the U.S. will potentially export, however. LNG exports could rise to about 1.6 trillion cubic feet by 2027, a tremendous increase from the 0.8 trillion cubic feet estimated last year.

Sources: POWERnews, NERA Consulting, DOE
—Sonal Patel, Senior Writer (@POWERmagazine)