Should the U.S. Export Natural Gas?

Controversy concerning natural gas exports flared the day the U.S. Energy Information Administration (EIA) released its estimate that U.S. natural gas exports could begin in 2021. The EIA’s analysis was revealed in the early release of its Annual Energy Outlook (AEO) 2012, made public in December 2011. The EIA’s analysis also found “increased natural gas exports lead to higher domestic natural gas prices.” As the saying goes, it’s the second-worst problem we could have.

Surprising many, the recent AEO2013 Early Release (Dec. 5, 2012) adjusted the EIA’s initial date of export estimate, pushing it up from 2021 to 2016. The magnitude of natural gas production and potential export remains staggering, and proven reserves continue to sharply rise each year. However, there is a wide gulf between proven natural gas reserves and actually building liquefied natural gas (LNG) export terminals.

Almighty Dollar

On one side are environmentalists, members of Congress, and even a newly formed industry group that have come together to oppose the construction of new export terminals, although for distinctly different reasons. The American Public Gas Association, along with Alcoa, Celanese Corp., Dow Chemical, Eastman Chemical, Huntsman Corp., and Nucor Steel recently formed the coalition America’s Energy Advantage. The lobbying organization’s purpose is obviously to appeal to government to limit natural gas free trade to protect member markets and balance sheets. Hypocritically, the members expect to continue unobstructed free trade of the chemical and metal commodities they produce. Jack Gerard, head of the American Petroleum Institute, called the coalition “seriously misguided.”

On the other side are developers wishing to build new export terminals—and more members of Congress. The Department of Energy (DOE), under Section 3 of the Natural Gas Act, must grant a permit for natural gas exports to countries that have entered into a free trade agreement (FTA) with the U.S., like Mexico and Canada. Those agreements are de jure in the public interest. Projects that involve non-FTA countries, such as Japan and EU nations, require the DOE to make a public interest determination. There are currently 17 applications for non-FTA LNG export terminals in the DOE review queue, with only a single project approved so far.

The problem facing the DOE is rationalizing the process for determining “public interest.” The DOE began by subcontracting the analysis to the EIA, its energy statistics organization. In January 2012, the EIA released its report, “Effect of Increased Natural Gas Exports on Domestic Energy Markets.” That report’s conclusions, limited by the lack of a global macroeconomic model for LNG exports, failed to answer the question.

Exports Are a Net Benefit

The DOE’s second effort was to subcontract the work to NERA Economic Consulting. NERA’s report, “Macroeconomic Impacts of LNG Exports from the United States,” released in early December 2012, focused on international natural gas market factors and macroeconomic impacts on the U.S. economy that result from LNG export expansion.

NERA’s study found that under each of the 63 scenarios studied, the U.S. would enjoy a net positive economic impact from LNG exports to non-FTA countries, and those benefits increase with increasing LNG exports. “LNG exports have net economic benefits in spite of higher domestic natural gas prices,” according to the report. “This is exactly the outcome that economic theory describes when barriers to trade are removed.”

The biggest winners are obviously natural gas producers that can sell their product at a higher price on the global market, particularly where competing natural gas supply prices are pinned to the market price of oil, such as in Europe. The report identified the industries that will experience “serious competitive impacts” as energy-intensive, particularly those that compete in global markets, like the members of America’s Energy Advantage. The DOE declined to endorse the NERA report results but said its conclusions will be included as part of its deliberations.

Several senators wasted no time in commenting on the NERA report conclusions. Sen. Lisa Murkowski (R-Alaska) noted, “It’s clear from the study that exporting LNG would be beneficial to the U.S. economy, and the greater the level of exports, the greater the benefit.” Sen. Ron Wyden (D-Ore.), incoming chair of the Senate Environment and Natural Resources Committee and LNG export skeptic, called the NERA report “seriously flawed” in a letter sent to Energy Secretary Steven Chu on Jan. 10. He also used Dow Chemical as an example of an impacted company.

The NERA report concluded that job losses will occur but that they will be minor and will be absorbed by a commensurate increase in like jobs in other parts of the economy (ironically, the same logic used by “green power” proponents when speaking of fossil power industry job losses). Those who depend on government transfer payments (Social Security and the like) will always be the most vulnerable to energy price increases, the report noted.

Bravo to energy companies willing to invest billions in building the next generation of LNG export terminals, and a Bronx cheer to those companies lobbying for trade barriers to prop up balance sheets. Exporting natural gas may kick up the country’s GDP and overall economic activity, but the impact of importing energy dollars for a change is priceless.

— Dr. Robert Peltier, PE is POWER’s editor-in-chief.