As American natural gas production continues to increase, the U.S. Department of Energy (DOE) is considering a greater number of applications from companies interested in exporting liquefied natural gas (LNG). At the same time, the Federal Energy Regulatory Commission (FERC) is seeing more applications from companies seeking to build new LNG export terminals and liquefaction facilities. Currently, the U.S. only exports LNG internationally by exporting natural gas imported from other countries, a practice that increased in 2011.
Potential Export-Oriented Natural Gas Liquefaction Facilities, as of 3/30/2012
So far, nearly all applications to export U.S. LNG to Free Trade Agreement (FTA) countries – eighteen countries including Australia, Canada, Chile, Israel, Jordan, Korea, Mexico, and Oman – have been approved by DOE, while several applications to export to non-FTA countries remain under review. According to EIA, most FTA countries do not have significant LNG import markets. To date, only one facility – headed by Sabine Pass Liquefaction, LLC – has been approved by both DOE and FERC, and to export to both FTA and non-FTA countries.
Natural gas prices are low in the U.S., and have been trending lower, and U.S. producers are keen to sell into international markets, where prices are considerably higher. However, some U.S. power utilities and manufacturers are concerned about efforts to export LNG, as it has the potential to add 3–9% to natural gas prices per year, according to EIA.
Are you concerned or enthusiastic about U.S. LNG exports? How might the U.S. optimize the balance of interests between energy developers looking to sell internationally and domestic consumers who rely on low natural gas prices?
There is no shortage of commentary on the shift in discussion. The 2003 NPC Natural Gas Study missed the shale potential completely, and experts at the time made high estimates of necessary LNG imports by 2020.
It is not hard to understand those opposing exports:
Potential for energy independence as fuel switching to natural gas , efficiency, and domestic production lessen our dependence on oil imports from unstable regions. We are now in the 45 to 50 % range, trending down from above 60.
Potential for economic growth in the petro -chemical sector as production returns to the US, attracted by current feedstock pricing.
The Sierra club and other NGO’s are concerned exports will drive more aggressive shale development.
Industrial gas consumers and some gas utilities who prefer today’s price.
Balance that with legitimate questions from the free trade lobby:
Is the current price sustainable for producers?
What is the likely path of export growth? How probable is the EIA “worst case” scenario?
Are export restrictions the best way to continue the amazing period of innovation we have observed in the upstream oil and gas industry?
One would hope we take full advantage of this resource. Canadians are investing in natural gas transportation fuel infrastructure just north of our border; combined heat and power distributed generation enjoys improving economics; and the gas industry and regulators must assure gas generation facilitates rather than discourages development of renewable power.
The EIA’s estimate of a “3-9%” increase in natural gas prices as the result of LNG exports is, in a word, bogus. What is missing from their analysis is an understanding of commodity markets, not just for energy, but all commodities. The price difference between a commodity that is 5% oversupplied (the approximate level of oversupply of NG in North America today) and one that is 5% under supplied is literally unimaginable. Recall that as recently as mid-year 2008, at the onset of the most severe portion of the recession, natural gas sold for $13+ per million BTUs. Some of the fall to today’s approximately $2/MMBTU was due to lost demand, but much of that has been recovered. For example, there was exactly zero fertilizer industry in the U.S. at those NG prices. Most of those plants are now back on line. The real driver was/is on the supply side.
Natural gas is a North American commodity. As such, it is priced by commodity-on-commodity competition. LNG is a global market. It is priced proportional to crude oil, the price of which is dictated primarily by the national oil companies and traders. There is absolutely no reason to believe that prices will not retrace the 85% price drop seen in the last four years if enough LNG export is allowed. Going the other way, that translates to a 550% increase in price. Say goodbye to the fertilizer industry. And to the displacement of coal-fired power generation.
The current, ultra-low prices will not obtain for even the medium term. While there is an enormous shale gas resource which can be drilled with very high technical probability of success, only the liquids-rich areas like the Marcellus Shale are currently under development in North America. As the price rises, which it inevitably will, those other, lower liquids content shale gas opportunities will become economic. That will provide a governor on the domestic price of natural gas for literally decades.
Unless we export LNG. The current North American oversupply of natural gas is due to excessive enthusiasm on the parts of its developers. Now they wish We the People to socialize their shortfall via exports, bringing them up to world prices. Why would we want to do that? Why should we do that?
David and Joel raise important points. However, much of the current discussion over expanded LNG exports overlooks serious security concerns raised by LNG infrastructure — and therefore likely social opposition independent of any other concerns about prices, GHG, and such.
Here is an example which, while dramatic, is also representative just for that reason:
http://timrileylaw.com/LNG.htm
There is not a global gas market as asserted above, there are three distinct regional gas markets, each of which sets natural gas prices differently. The US has gas-on-gas competition, Europe sets prices indexed to certain oil products although nascent gas hubs are starting to change this pricing structure, and Asia indexes its natural gas prices to crude oil, enforce in very long term contracts; this means that Asian prices are around $16 per mmbtu, making LNG exports from the US a very attractive option. There is limited trade between these three regional markets.
MIT modeled the price impacts in 2030 of a continuation of these regional markets compared to a global market in gas where there is substantial trade between regions, like today’s oil markets. The price impacts in the US were substantial, around a 30% drop in prices for US consumers (I am remembering the numbers, not looking at them, they can be seen in the MIT Future of Natural Gas study). Surprisingly, US production didn’t drop in this scenario, it remained steady. This was due to the fact that overall demand for natural gas increased in the US because prices were low. US entry into LNG exports would certainly hasten the development of this global market.
Although I have very high regard for Lew’s work and observations, I do not find the story line of a sensational movie to be a compelling reason to oppose either LNG exports or imports. I believe that Sandia National Laboratory did a lot of LNG safety research after 9/11. I will try and find some links to this work but I don’t think the conclusions remotely tracked the apparent thrust of this film. I am generally leery of Hollywood efforts to present “facts” on energy and point to the China Syndrome as exhibit A, Gasland as exhibit B. One is entertainment, one is advocacy, and both distort or conflate the real and sometimes serious impacts of the ways we produce energy (none of which is benign, including renewables). These films should not guide our responses to these impacts; analysis, observation and data should.
Brookings just released a study on gas exports from the US (disclaimer: I was a member of the study’s advisory group) and concluded that the USG should do nothing to either encourage or discourage exports. I tend to agree although I expressed reservations about the political reaction to exports; this is borne out by the listing above of Sierra Club, industry, etc. opposition to exporting gas, all of which is generated by advocacy positions, which should be considered as such.
At the rollout of the Brookings study, I highlighted the investment uncertainty associated with converting current LNG import sites in the US to liquefaction and export facilities (not a small capital investment by any means). I noted that, as an investor, I might be concerned about the development of global shale resources and its overall impacts on LNG demand. China for example has 1275 Tcf of technically recoverable shale resources and only consumes around 3Tcf of gas per year.
The US import market is a prime example of how shale gas can affect LNG import opportunities. In the Bush Administration, the US increased LNG import capacity by an order of magnitude (including Mexico and Canada volumes, destined for US markets), from around 2 bcfd to 22 bcfd. In 2010, we imported just over 1 bcfd, leaving significant stranded assets out there around the country. This is a cautionary tale for potential investment in exports, and to me, suggests that any export volumes of LNG from the US would likely be relatively small and self-limiting.
Finally, the US has a horrible track record on natural gas policy. Example 1 is the LNG import debacle noted above. I also remind people, as example 2, that the Congress outlawed the use of natural gas in power generation in 1978 (based on a completely flawed understanding of what was really going on in US gas markets at the time). This coupled with Three Mile Island (accompanied by the hysteria generated by the movie, The China Syndrome), gave us the ancient, creaky, CO2 emitting coal fleet we have in the US today; this underscores the fact that the energy infrastructure choices we make today will likely be with us for the next 40-50 years.
Finally, I encourage everyone to consider Example 3, namely theoverbuild of NGCC merchant plants when wholesale electricity markets were de-regulated in the mid-90s. We have a fleet of highly efficient gas generation units that are operating at 41% capacity factors, when they are designed to operate at 85-87%. Volatility in gas prices has ensured that old, inefficient coal generation tends to get dispatched first over more efficient, much lower CO2 and other criteria pollutants + non-mercury emitting NGCC plants. Shale gas production has greatly diminished this price volatility, making the NGCC overbuild a good luck/bad luck story — slowly but surely our old coal plants are being retired and we don’t require new builds to replace them because we have so much surplus NGCC capacity. It has however, taken 15 years or so to start correcting this market miscue, and perhaps the capital that was stranded over that time period might have been put to better use.
In short, policies need to be carefully considered for their long term impacts and unintended consequences and we should rely on sound analysis and data to make policy on things like LNG exports.
The MIT group’s finding that N. American natural gas prices would enjoy a 30% drop given the establishment of a global LNG trading market is very interesting. However, given the already-85% drop in wholesale prices, perhaps some of its assumptions deserve revisiting. Moreover, the excess LNG import capacity provides the U.S. an option on the benefits of such a market. Should MIT’s indicated results obtain, imports would once again be competitive. Should the the situation suggest that export of LNG would be an act beneficial to the national economy, such a policy could be pursued at that time. Import/export control has historically been an element of the policy initiatives of most nations. In this case, simply declining to enable LNG exports would be a relatively passive policy imposition.
Secondly, you should be a bit cautious in applying the term “stranded assets” to either the unused LNG import facilities or the oversupply of NG-fired combined cycle plants. The term has previously been applied to electric utility assets that existed because of actions within the framework of a regulatory compact. They became an issue in the context of deregulation of that industry under the assumption that rate-of-return based retail rates were going to be abandoned in the onslaught of deregulation (they weren’t). By contrast, both of the over investment situations you cite above result from private decisions regarding the deployment of capital. As such, the possibility of having employed that capital differently is a subject utterly NOT a governmental policy question in a capitalist system. I repeat, there is every reason to avoid socializing those failed investment decisions on the part(s) of private enterprise(s) and every reason – except the desire to benefit a select group of investors – to keep cheap NG prices at home. Salient among them, retiring that “ancient, creaky, CO2 emitting coal fleet we have in the US today”. Don’t export LNG at this time.
In fact, there were policies that encouraged the imports of LNG as well as the overbuilding of NGCC capacity. You may recall, in 2003 (?) the Fed Chairman went to the Hill, told Congress we were running out of natural gas and that we needed to import LNG. There was a corresponding fast track created at FERC for LNG import permits, a huge amount of capacity was built and it is now sitting empty. I don’t lose a lot of sleep worrying about private capital that is wasted but I don’t like misfires on policy — it diminishes the public’s confidence — and we have serious energy challenges and shouldn’t be enacting policies or encouraging investments that mis-fire in these fairly spectacular ways. And is is surprising that you express a hands off policy for investment of private capital and in the next couple of sentences say we shouldn’t allow the export of natural gas, a completely hands on policy approach. The federal government has to make a public interest determination in granting export purposes and it has done so for several. Unless it decides to take them back, that cow has already left the barn.
“..this underscores the fact that the energy infrastructure choices we make today will likely be with us for the next 40-50 years. …. In short, policies need to be carefully considered for their long term impacts and unintended consequences and we should rely on sound analysis and data to make policy on things like LNG exports.”
Agreed. Very careful planning is in order, and all facets need to be considered.
- Which is nice to see here in these comments.
“These films should not guide our responses to these impacts; analysis, observation and data should.” – also agreed.
Wouldn’t we be better served to embrace the notion of global natural gas market, engage in the design and function of that market, and build a cogent set of supporting policies (e.g., investments to hedge against market volatility), which could be supported initially by some of the early benefits of exporting into the crazy imbalance of the current regional markets?
No, not unless you a) don’t like having options and b) desire a return to punitive natural gas prices in North America. Allowing the export of LNG is a gain for NG producers at the expense of just about everyone, with the possible exception of Big Coal. That would be both pro-cyclic with the recent domestic and worldwide financial weaknesses and inflationary as well. It is difficult to understand the wisdom of abandoning an economic benefit both stimulative and anti-inflationary, given the broader economic context. Not to mention the desirability of faster retirement of coal-fired power generation. Those are very real, demonstrable benefits. Theoretical achievements don’t compare well.
What you suggest makes a lot of sense.
Creating LNG trains was an approach that El Paso took with a large investment in Algeria back in the 60s that didn’t succeed because no one cared. The rationale behind the more recent construction of LNG regasification plants in the U.S. was based on the belief that we would always be a net importer of energy and we had storage capacity and therefore the default destination when demand elsewhere waned. I’m pretty sure that’s there’s currently only one operating liquifaction plant in Alaska that services a long term contract with Japan. I think we built something like 12 regasification plants with more in the planning stage not too long ago. All of this occurred prior to the emergence of shale gas and unconventional recovery, leaning on what was most likely confidence based on studies in how the business plan would develop.
Companies are now scrambling to convert regasification sites to liquifaction sites and signing deals with end users and foreign investors. I believe that the max transportation cost from U.S, ports to the fartherest destinations is somewhere around $2/MMBTU. With the notional future value of natural gas FOB at one of our ports somewhere south of $6/MMBTU (in the belief that the market will steady up sometime in the future after the creation of installed capacity and infrastructure is sufficient for end users to commit to a permanent switch to this feedstock), and a world market in the $10+ range, there’s a business to be had. Toss in the “cargoes afloat” feature where a higher bid will redirect destinations and make LNG a surrogate crude oil commodity, increased volatility will come into play. Is this a bad thing? Shouldn’t we ask ourselves what is the size of the potential future market share of LNG compared to total future natural gas production on a common time line? Are the numbers compelling one way or the other?
I understand that the ramp up of liquifaction facilities won’t be substantially in play for 3+ years. Production of natural gas is growing and will continue to grow, intuitively because the folks who are making a very large investment of capital in production and supporting infrastructure anticipate a reasonable return. Will the cumulative increase of demand offset the increase of supply to the point that marginal changes on either side result in the excesses of volatility seen in the years leading up to the speculative bubble burst of 2008? My guess is no but it’s a good question that deserves discussion, particularly in light of crude prices over the last decade.
I’m not a LNG expert by any means (please correct any of my statements if materially erroneous). I do make decisions based on natural gas prices and have witnessed over the years enough bad calls (see first paragraph) to want to give the unfolding potential for natural gas a chance (including exporting LNG).
Upon reflection, the burden of advocacy here appears to be on the parts of those suggesting that LNG export be allowed. Currently, there is no mechanism for doing so. This requires at least enabling permission. The salient question is why is that act in the interest of the country?
The (over)developers of natural gas in North America are likely free market sorts, who would prefer no Federal intervention. However, they find themselves in the awkward position of not liking one market, which is performing poorly from the standpoint of their interests. So they are asking the government to give them another market, one that is much higher in price, one that will raise the price of natural gas in the U.S. substantially. (Otherwise, why are they asking?)
Note that this is not a Republican/Democrat, right/left, rich/poor or business/anti-business issue. Exporting LNG will raise domestic natural gas prices. That will be of benefit to a very few and to the detriment of very, very many. Those seeing negative impact include a host other industries as well as 300 million end users. The belief that somehow we will shape an established global trade with the 3-4 BCF/day excess deliverability in North America beggars credulity. Someone please give us a GOOD reason why our government should do this?
Let’s try to keep as many cows in the barn as we can. Other than enriching a very few at the expense of very many, there is just no reason to grant further export permits based on any measure of public – or even broad private – interests.
Understand conceptually what you are saying. The problem is that kind of looks like a quasi-nationalization of natural gas. I just don’t see a practical way that an action that looks anti-free market (even if it’s a good idea) is going to actually become policy in today’s political environment. I appreciate that we could get there on what would effectively be inaction by not issuing permits, but I don’t think that improvement to optics is enough to get over the practical hurdle of treating gas so differently than other energy resources (we export coal, refined petroleum products, and electricity).
The other practical hurdle is that shutting in natural gas capacity doesn’t just prevent a few from enrichment at the benefit of society, it kills job creation right now. And politically there is nothing worse (excepting support for clean energy of course) than killing jobs right now.
That’s why I think we acknowledge and even embrace the notion of a global market and use that as a catalyst for sensible policy to protect against future hydrocarbon price shocks.
And I also understand your point of view. There does seem to be some inroad on commercial rights being suggested. However, it’s quite a leap to get from simply not issuing further export permits to “a quasi-nationalization of natural gas”. Perhaps you’d care to reconsider that bit of hyperbole?
As for job creation I’d argue that the current low price of natural gas is extraordinarily stimulative, possibly on a par with the Fed’s continuing low interest rate policy, although far less threatening of future inflation. It’s the export of LNG and the concomitant price rise for natural gas to the $16/MMBTU+/- mentioned above that will kill jobs – far more than might be lost due to reduced drilling – and hamper economic recovery. Further, the current excess of domestic LNG import capacity gives the U.S. an option on participation in any future global market. From a trader’s perspective, there is no reason to participate at this point.
Finally, your last statement closing ” … embrace the notion of a global market and use that as a catalyst for sensible policy to protect against future hydrocarbon price shocks” clearly has no basis in energy history. There is and has been a global market in crude oil for decades. It can hardly be said to have prevented price shocks. Indeed, that has been its salient characteristic.
In reverse order.
Not suggesting the globalization of the natural gas markets protects. I don’t think there’s any question that you are correct that exports create a significant upward price trend once export capacity starts to build, at least initially. Rather, I was suggesting that while this process is occurring the economic boon could be used as cover to build sensible policies that lay the groundwork for a the diverse portfolio that can protect against future price volatility.
Basically, my point was export is going to happen, and there’s nothing that can reasonably be done about that, so let’s try to make the most out of it.
Second point is that it’s a question of near term jobs vs long term economic stability. These decisions will be made in Washington. Short term wins every time inside the Beltway (and yes I appreciate that is no small part of the reason this forum exists).
I didn’t say it was a quasi-nationalization. I said looks like. You’re telling the resource owner she can’t get full value for her gas because there’s a long term economic benefit to society to limit the available market. Despite export limits being a reasonable discussion about how we manage natural gas to meet our long-term energy policy goals the bottom line is that the optics are not good.
Energy policy discussions and hyperbole go hand. Someone will call it nationalization, socialism and for good measure, probably communism too (and it wouldn’t be all that hard to make a list who is likely to say that…).
While I’d call my approach realistic in light of the current energy policy dialogue (such that it is) in Washington, I can freely admit that my cynicism could be obfuscating a potentially good, albeit radical, idea.
Before considering long-term committments to LNG exports, we should understand three things clearly: 1) How much gas we actually have, 2) How much we are planning to use in the future as domestic demand increases, and 3) How much we are committing to export. Unfortunately, I don’t think we understand any of those things yet.
I have attempted to answer all of these questions in recent articles. Here is a summary.
1) Regarding our reserves and resources, I have examined the PCG’s estimates closely and remain very skeptical about their “100-year-supply” claim. Currently, we only have an 11-year supply on the books. I discussed those numbers in Slate.
2) Regarding our new demand, the amount of coal-fired generation that will be replaced with gas over the next two decades or so is hard to know, and estimates are all over the place. I detailed those here.
The new demand generated by a resurgence of domestic plastics manufacturing is hard to estimate (I found no solid data on that), as is the new structural demand we may be committing to long-term in terms of LNG exports.
I offered a quick summary of our anticipated new demand here.
Using the numbers in that last article, consider this scenario:
3 tcf/yr of new demand from power generation
1.5 tcf/yr of new demand from trucking
0.5 tcf/yr of new demand from plastics manufacturing
4.6 tcf/yr of new demand from LNG exports
24 tcf/yr of current total demand
—-
=33.6 tcf/yr Total potential demand
Against supply of:
- 273 proved gas reserves; that’s an 8-year supply
- 273 proved plus 50% (generous) of the 482 tcf the EIA estimates as “unproved technically recoverable resource” shale gas, we’d have a total of 498 tcf of gas; a 15-year supply.
Again, there is a lot of squishyness in these numbers on both the supply and demand side. I have made the most informed guesses I can make about what the real numbers are, but truly, this is the kind of exercise that should be performed by a team of analysts with a real budget and better access to data, like the EIA. Why isn’t anyone else attempting to add up all these new commitments to domestic gas, and doing a detailed examination of the speculative resource claims of the Potential Gas Committee?
On a final note, it appears that, as I wrote in February, production of shale gas seems to be slowing down, and the top operators (see the recent news on Chesapeake) may be finally forced to reckon with the enormous debt overhangs they have built up during the shale gas land rush. Shale gas has been produced at a loss since 2010 (see The questionable economics of shale gas), and I think that prices have finally bottomed. I think we’ll see production declining and prices rising again before the end of the year, and I remain firmly opposed to LNG exports, at least until we have a much better idea of how much gas we really have, and what the new demand numbers are.
@Elias – you need never apologize for your cynicism. Life forces it down our throats like the French fattening a goose. I can not imagine how extreme that process is within the Beltway.
@Chris – one has to be very careful about throwing around reserves numbers for any commodity, particularly hydrocarbons. To begin with, they are price sensitive in fact, but tend to be stable in report regardless of the extraordinary price swings routinely seen in their markets. Further, they are highly sensitive to the internal politics of the corporations reporting them: an upstream energy company is what it books to reserves. Even worse, you have to lay it all out in the SEC’s supplemental reporting requirements for those companies. There have been several sizable restates of reserves figures in the past 5 years, particularly RoyalDutch/Shell. And, of course, they are forecasts. In fact, they are forecasts based on a data set that is actually quite limited given the areal extent of any individual pool.
Historically, the U.S. in particular and the world in general has ALWAYS been some 20 – 40 years away from running out of hydrocarbons of all sorts. That condition has persisted for at least a century and has lost some credibility. The fact has as much to do with the nature of long term forecasting (“How do I know what’s going to happen 25 years from today? I don’t really know what’s going to happen tomorrow.”) as with any other influence.
Due to specific geological truths, the amount of gas we ultimately recover from shale deposits is likely to be some multiple of the total recovery from conventional sources (produced-to-date plus current conventional reserves plus to-be-discovered conventional gas). The most attractive economic feature of the activity is that these deposits have been known for decades; drilling them has a probability of success near 1.0. Given the range of associated liquids and the very wide – on BTU and volume bases – price spread between petroleum and natural gas, only a limited portion with higher liquids content are being drilled today. That’s both for reasons of individual well economics and the characteristic over extension and over spending of participants in the early stages of a commodity boom.
RD/S is now calling for the price of natural gas to double by 2015 ( http://www.4-traders.com/ROYAL-DUTCH-SHELLA-6273/news/ROYAL-DUTCH-SHELLA-Shell-Warns-On-US-Natural-Gas-Price-Bounce-FT-14333168/ ). The $4-$6/MMBTU price range will spur an increase in NG development. From a policy viewpoint, that’s actually a more desirable medium to long term price level than the current ~$2.50/MMBTU: shale gas pools with lower liquids yields become economic as the price rises. Regardless of future demand growth, North America is going to have an ample supply of moderately priced NG for decades.
Unless we export LNG.
@Joel: Yes, it’s certainly true that technology and economics shift potential resources to proved reserves over time. It’s also true that predicting the future is difficult. But it’s not difficult, nor do I think it should be in any way controversial, to suggest that it makes more sense to prove the reserves before making long-term commitments, particularly if we’re talking about long-term LNG export contracts. Don’t count your chickens, etc. Assuming that vast amounts of unproved shale gas resources will be recoverable at an acceptable price and committing to export contracts before they are actually proved is akin to deficit spending. It’s a huge gamble, and one that we do not have to take.
We only have a 9-year production history for the oldest of the shale plays, and a 5-year history or less for the newer plays. That isn’t enough data to be able to say conclusively what the real hyperbolic decline curves of production are for these wells, or determine their EURs. The costs of production are also a fluid, and poorly-understood subject, particularly for the more recent plays, and now we are seeing key producers like Chesapeake running out of rope on their debt-fueled land rush. Economically, the future of shale gas is decidedly murky.
I see no reason to rush into export commitments until we have a better production data set. What would be the harm in waiting another two or three years before committing to LNG exports, until we have a better idea of how much gas we really have, how many wells we’ll need to drill to maintain production targets, and what the real costs and externalities are?
I utterly agree, Chris. The missing piece in the reserves picture is the average well EUR in a play that involves different kinds of matrix substance, e.g. coal and shale, and has varying physical chemistry from one deposit to another. With LNG import capacity oversupplied the country has a call option on the international natural gas trade. As we currently enjoy the lowest free market natural gas prices in the world, we should get on with displacing coal for power generation and liquid hydrocarbons for transportation uses. A decision to allow greater LNG export can always be made in the future.
What will be interesting to watch on a global scale is whether and, if so, how much, the introduction of North American exports affects LNG pricing worldwide. As much as we wonder and ponder how much U.S. exports might affect the domestic price for natural gas, the numbers are equally speculative when you look at the global LNG market of more than 32 billion cubic feet a day last year (average daily consumption). Currently, there are three distinct pricing mechanisms for natural gas worldwide: North America, Europe and Asia. We pay the lowest in North America, with gas priced on gas. Asia pays the highest, with gas (LNG) generally priced against oil as the alternative fuel. European LNG prices are between the two, with some gas-on-gas competition and a strong reliance on imported LNG. Will the introduction of low-cost U.S. gas (priced against the U.S. Henry Hub benchmark) break the oil-linked pricing hold on Asia? Will the world move toward a single pricing mechanism? Or is security of supply so important in Asia that they will continue to pay the highest prices? No doubt pricing will affect the profit potential for gas producers, which will enter into the U.S. export debate.
An interesting update on this issue: Analysts are predicting that industrial lobbying could lead to a cap on U.S. natural gas exports.
Jayesh Parmar of Baringa told Reuters, “There is a lot of lobbying in the U.S. to limit LNG exports and to instead use the gas to allow the domestic industry to benefit from low energy prices.”
Political risk consultancy Eurasia Group recently wrote “Resource nationalism is the biggest political risk to U.S. LNG (exports), with many opponents to exports concerned about the impact on domestic natural gas prices.”
Since FERC granted export approval to Cheniere Energy’s LNG plant at Sabine Pass, Louisiana, the “U.S. government has suspended decisions on expanding U.S. gas exports until a study on the price impact on domestic consumers is completed this summer.” [Reuters]
What is your take on this development? Is a cap an acceptable way to balance the risks and rewards of LNG exports?
Caps are simple in concept, difficult in application. The most reasonable export cap would result from a consideration of the current surplus (3 – 5 BCF/day) and the price elasticity of the commodity. Unfortunately, it’s likely that only industry participants possess the necessary expertise and experience to divine that number. The conflicts of interest abound.
The societal impact is actually quite extraordinary. The low price of natural gas is obviously stimulative. Industries that employ NG as both an energy source and a feedstock (some petrochemicals, fertilizer manufacture) were out of business with it priced in double digits per decatherm (the jobs argument is a loser for would-be exporters). Unlike most stimulative measures, it’s counter-inflationary. When one adds to that the ability to economically displace coal fired power generation and even transportation hydrocarbon liquids, cheap natural gas is pro-environmental as well. That particular trifecta just might be unique. I can’t name another like it.
It’s not surprising that significant industrial lobbying has arisen in opposition to LNG exports. As mentioned earlier, this is not a pro-business/anti-business, free market/controlled market nor Republican/Democrat issue. Secretary Chu should follow Nancy Reagan’s advice and “Just say no.”
I’d be interested in seeing what you all think of the IEA’s report:
“Golden Rules for a Golden Age of Gas”
http://www.iea.org/newsroomandevents/pressreleases/2012/may/name,27266,en.html
Having only scanned the press release, I basically like it. One of my continuously beaten drums is the need for regulation both trustworthy and industry-enabling . A set of best practices is certainly a step in the right direction. If my opinion changes on reading the full document, I’ll say so, but on first glance it’s a good doc with a good list of references (even better!).