Natural Gas Exports: Realistic Market Response and Political Uncertainly
Jack O. Nutter
Nutter & Harris, Washington D.C.
With natural gas trading in the U.S. for about $2 per million British thermal unit, there is considerable interest by producers, gas transporters and investors to dramatically increase exports of natural gas to countries where the price is up to eight times that amount. Exporting gas may prove to be a profitable venture in-and-of-itself but also could soak up excess supply, which would bolster the domestic price.
Current State of LNG:
One way to alleviate the problem of natural gas oversupply in North America is to increase its export. The most economical way to export natural gas is to liquefy it into LNG, which is transported in specially designed transport ships. There are currently over 100 production, export and storage facilities in the U.S and several companies have submitted applications with the U.S. Department of Energy to begin LNG export.
The nation's largest exporter of LNG is Cheniere Energy and last year, its Sabine Pass terminal in Louisiana was the first export terminal project in more than 40 years to get authorization from the U.S. Department of Energy to export natural gas to major importing countries.
Market and Use:
The process of developing an LNG supply chain takes significant investment and a long time to establish. If natural gas prices continue to stay at current levels the demand for LNG exports from the U.S. will continue to increase.
With the onset of natural gas exports, the U.S. must first set out to reverse the current use of its liquefied natural gas facilities. Just a few short years ago natural gas was selling for more than four times what it is now. It made sense to import cheaper LNG as demand was outpacing supply. However, with the wide spread use of “hydraulic fracking” and other advancements in horizontal drilling, the U.S. supply of natural gas has boomed. Currently, supply is outpacing demand (and storage is filling up) and the price of natural gas has dramatically fallen due to the increased production, warmer weather and demand reductions due to the economic downturn.
Natural gas must be cooled to minus 160 degrees Celsius for transportation. When super-cooled, natural gas shrinks its volume 600 times thus making it an ideal energy source that can be transported by specialized ships. In March 2010 it was reported there were 337 ships engaged in deep-sea movement of LNG up from a reported 197 in 2005. Many more ships are being built in even larger sizes in China and South Korea. Shipping rates on LNG transport have increased from about $40,000 a day to more than $140,000 a day in the past couple of years.
Foreign natural gas producers no longer see the U.S. market as a destination for LNG. The companies owning the facilities designed to warm imported LNG back to its gaseous state are now examining making the facilities reverse the process and cool domestic natural gas to its liquid form for export.
Legal and Regulatory Authority
The Federal Energy Regulatory Commission under the Natural Gas Act has exclusive authority to authorize the location of facilities for imports or exports of LNG. Authorization is conditioned, however, on the satisfaction of other statutory requirements for various aspects of a project with substantial authority vested in states to block aspects of approval and thereby effectively "veto" development of an LNG facility using the Clean Water Act, the Coastal Zone Management Act, and the Clean Air Act.
A summary of the legal requirements and potential impediments include:
Coastal Zone Management Act Section 307(c) - An LNG project must certify that the proposed activity in a designated coastal zone complies with the enforceable policies of the affected state's coastal zone management program. If the state does not concur with the certification, no FERC approval may be granted..
Clean Water Act Section 401 - A certification of compliance with the state's water quality standards is required from the responsible state agency for any activity (including construction and operation of LNG import facilities) that may result in a discharge into navigable waters. If the Section 401 certification is denied, the LNG facility cannot be constructed. In addition under Section 404, a permit is required from the U.S. Army Corps of Engineers for discharge of dredged and fill material. The Corps permit requires applicants obtain a Section 401 certification.
Clean Air Act Section 502 - A permit is required for any person to operate a source of air pollution, as defined in the Act. If the responsible state agency does not issue the permit, the project cannot proceed.
Beyond its authority based on these Federal statutes, a state also has the ability to be a cooperating agency with FERC during the review of a project under the National Environmental Policy Act (NEPA), and can contribute to the complete environmental review of a proposal.
Gas Supply and Price are the Keys to Exports:
The U.S. currently has a surplus of domestic natural gas. It is this surplus largely created by the increase of gas production from shale formation that will drive the export market. Given the importance of shale gas to the future of the U.S. gas sector, potential exports hinge on the prospect for its sustained availability and development. For exports to be feasible, gas from shale and other unconventional sources needs to both offset declines in conventional production and compete with new and increased domestic end uses.
The productivity of shale gas wells has been a subject of debate, with suggestions undeveloped wells may prove to be less productive than those developed to date and production performance of existing wells has been exaggerated. However, a prominent view among independent experts is sustainability of shale gas production is not a cause for serious concern, owing to the continued rapid improvement in technologies and production processes.
Creating a viable export trade is expected to boost prices of gas. The Energy Information Administration (EIA), the statistical arm of the U.S. Energy Department, recently said gas exports could push domestic prices up over the next decade between 14% and 36%, depending on the pace of export-facility construction.
According to an Energy Information Administration study entitled, “Effect of Increased Natural Gas Exports on Domestic Energy Markets”, exporting liquefied natural gas may increase U.S. consumer prices for the fuel from as low as 36 percent to as much as 54 percent in 2018. Natural gas exports would also increase electricity costs between 2 and 3 percent on the low end to as much as 9 percent.
However, there are contrary opinions and other studies pointing to a lower price impact and, in fact, set forth a longer-term bearish case for gas exports due to international competition and other factors.
Politics and Government:
A major beneficiary of more abundant U.S. natural gas is the industrial sector. The sector currently consumes roughly 32 percent of total natural gas demand, 85 percent of which is consumed in manufacturing. Demand for natural gas in the industrial sector is projected to continue to grow.
The industrial sector is highly price-sensitive with respect to energy inputs. Because natural gas is a primary feedstock for many industrial consumers, large users of natural gas as a raw material or fuel source have enjoyed a revival and competitive edge.
Proponents of gas exports maintain they will provide a valuable source of economic growth, gains from trade, and job creation for the United States. Opponents contend gas exports will raise domestic natural gas prices to the detriment of U.S. consumers and negatively affect U.S. energy security.
Efforts to export LNG are facing increased opposition from a variety of sources, including Congress, NGOs, and industrial and electricity users. In Congress, Representative Edward Markey (D-MA) has introduced a bill to prohibit FERC from approving applications for LNG export facilities until 2025 and a bill to prohibit the Department of the Interior from the export of natural gas produced on federal lands.
Senator Ron Wyden (D-OR) has indicated he will introduce similar legislation. Notably, Senator Wyden could become Chair of the Senate Energy and Natural Resources Committee next year with the retirement of the current Chair Jeff Bingaman (D-NM) assuming continued control of the legislative body under the Democrats.
Senator Wyden several weeks ago again signaled his opposition to gas exports stating the export of liquefied natural gas from the United States undermines economic recovery. There are two proposed LNG export terminals in his state. Both terminals were originally proposed as import sites, but a new pipeline has improved the supply of natural gas to the West Coast and thus paving the way for considering the terminals for export purposes. Wyden has proposed a "time out" on export discussions to establish a list of criteria the federal government could use to determine if exporting natural gas is in the country's best interests.
Industrial and electrical consumers have also expressed concern about the expansion of LNG exports. The American Public Gas Association is supporting Markey’s LNG bills. In addition, the Industrial Energy Consumers of America and the American Public Gas Association filed motions to intervene against several terminals’ applications to export LNG. These associations contend their members, who rely on natural gas, could be adversely affected if prices spike due to LNG exports.
The American Chemistry Council, a trade group of chemical makers, says a long-term supply of cheap natural gas would drive enormous investment and job creation in the petrochemical industry. It warns the government against "undermining the availability of domestic natural gas," but has not taken a position on gas exports.
NGOs are likely to become more active in challenging efforts to export LNG. The Sierra Club filed a motion to intervene in DOE’s consideration in granting a license to export LNG. Sierra Club’s petition says an export license for the facility is not in the national interest and that DOE is required to prepare an environmental impact statement, among other claims. Similar challenges in the future can be expected.
Natural gas prices have been helping U.S. manufacturers gain an edge over foreign competitors. However, the Federal government has to consider other factors when determining whether to approve proposals to export U.S. natural gas likely to raise the prices.
Even though there a several permit requests pending, the Department of Energy has stated it will examine how gas exports will affect U.S. consumers and industries, while also considering the impact on gross domestic product and trade imbalances. A position, which takes no position.
In the interim, the Energy Department has said it will not approve any more export plans until it completes its impact study later this year.
The surplus of natural gas has reduced prices and given a boost to industrial companies. The natural pushback by producers is to try to counteract the situation by turning to the export market to reduce supply and boost prices. These opposing interests are bound to collide. However, the future of gas exports will also be greatly influenced by government regulation, domestic supply, international markets, infrastructure and transportation.
This material is for infomation only.