March 2014 Exclusive Story

LNG Exports

Exporting Natural Gas Benefits Industry And America

By Vincent A. Caruso Jr.

HOUSTON–The Colorado School of Mines 2012 estimate of the United States having 2.384 quadrillion cubic feet of recoverable natural gas makes it crystal clear the nation has abundant gas supplies.

According to the U.S. Energy Information Administration’s Short-Term Energy Outlook, total U.S. marketed natural gas production for first quarter 2014 was 71.87 billion cubic feet a day. That was an increase of 4.2 percent from first quarter 2013 and was up a whopping 18.4 percent from the same period five years ago.

Unless there is some unforeseen reduction in long-term production activity, these rates will most certainly continue to increase in the coming decades. ExxonMobil stated in a March 2013 energy outlook report that “after decades of relatively flat production, output of oil and other liquid fuels in North America is projected to rise by about 40 percent from 2010 to 2040.”

Energy consumption in the United States is “expected to gradually plateau and then decline by about 5 percent from 2010 to 2040,” the company added. With production continuing to rise and domestic consumption expected to fall, some experts are predicting the United States could achieve energy independence by the end of this decade.

The overabundance of natural gas has created some unintended consequences for entities that logically should be benefitting from it the most. Instead of reaping the rewards of their considerable efforts, many of the oil and gas firms that drill for shale gas are suffering from the boom.

After rising to more than $12 an MMBtu in 2008, U.S. natural gas prices remained range bound between $2 and $6 an MMBtu until early this year, and didn’t exceed $4.50 an MMBtu for nearly three years.

One key issue is that there is no single, globally integrated natural gas market. The price of natural gas around the world varies widely and can range from $0.75 an MMBtu in Saudi Arabia to $4.00 an MMBtu in the United States and $12.00 an MMBtu in the European Union, and up to $16.00 an MMBtu in Asian markets that rely on liquefied natural gas imports. It would seem logical to begin exporting more of the natural gas produced in the United States, with a goal of eventually unifying not only the global market for natural gas, but the price as well.

There is a narrow window in which domestic natural gas can be sold at a profit in foreign markets. Gas-rich nations with adverse geopolitical interests such as Russia and Iran, as well as allied nations such as Canada and Australia, have taken note of the potential for profit in a globalized natural gas market, and will endeavor to produce and sell as much of their own natural gas as possible.

It should be understood that the global market for natural gas is dynamic. As the supply of gas available on a unified global market increases, the global price no doubt will equalize at a price point markedly lower than some of today’s higher regional prices. The profit available in such a market today or even five years from now will not remain constant.

In short, if U.S. companies wish to profit from high gas prices in Europe and parts of Asia, it would be best to capitalize on the opportunity in the near term. In order to make this a reality, several things must occur, not least of which is the need to streamline and shorten the approval process that LNG export facilities are subjected to.

The chance to produce and export a greater quantity of LNG must be seen as a source of profit, not only for the companies involved in the exploration, production and sale of natural gas, but for the nation as a whole. In time, such a reality most likely will evolve, but prior to that happening, progress toward a single global market for natural gas will face several challenges.

Federal Regulatory Hurdles

The Natural Gas Act of 1938 was the first real federal foray into regulating natural gas. Under its provisions and subsequent judicial interpretation, the Federal Power Commission had jurisdiction over regulating interstate gas sales. This persisted until 1978, when Congress, reacting to the problems inherent in the continual interplay between supply shortages and demand surges, passed the Natural Gas Policy Act.

The NGPA had three main goals:

  • Creating a single national gas market;
  • Equalizing supply with demand; and
  • Allowing market forces to establish the wellhead price of natural gas.

To effect these goals, the NGPA created the Federal Energy Regulatory Commission. FERC had jurisdiction over many of the same activities as the FPC, with the major exception being natural gas exports. Regulating natural gas exports was reserved to the Department of Energy when Congress enacted the Department of Energy Organization Act of 1977.

Thus, before natural gas can be exported to foreign nations, and before the export terminals and supporting infrastructure can be built, a potential exporter is subject to an onerous regulatory process governed by regulations enacted at a time when the United States was a net energy importer and was dependent on imported fossil fuels. Today’s market bears little resemblance to those conditions.

Under DOE regulations, exports to countries with which the United States has free trade agreements are deemed to be in the public interest, and thus receive near automatic approval. The approval process for exports to non-FTA nations is more involved and far more costly in both time and money.

The DOE considers economic, geopolitical and environmental considerations relevant to the public interest, as well as current levels of domestic supply and demand for natural gas. This process is announced publically in the Federal Register, and anyone may comment on or protest the proposed application. Thus far, opponents of proposed LNG export facilities have not been able to successfully prevent their being granted DOE approval.

Aside from receiving DOE approval, a proposed export facility also must receive FERC approval for siting and constructing the actual terminal. Once constructed, FERC will continue to regulate the facility for the remainder of its existence.

Part of FERC’s approval process is completing an environmental impact statement, as mandated by the National Environmental Policy Act anytime there is a “substantial question” about a proposed project’s potential harm to the environment. An EIS must take into account any possible claims made under the Endangered Species and Clean Water acts. The EIS is a thorough study of the potential impact the proposed export terminal will have on the environment, and as such is a lengthy, costly and very public process.

Economic Impact Of Exports

With an awareness of the potential impact that allowing greater exports of natural gas could have on both the economy and the environment, the DOE and FERC had temporarily suspended granting any approvals until impact studies being generated by the EIA and NERA Economic Consulting, a private contractor for the DOE, could be completed. These studies on the potential economic impact have been completed and assert that increased exports of LNG will be “a net positive for the U.S. economy.”

The report authored by NERA goes so far as to claim that for every one of the market scenarios it examined, net economic benefits increased as the level of LNG exports increased. Nevertheless, the Obama administration is thwarting calls for a comprehensive EIS “on the grounds that new gas drilling induced by the exports is not reasonably foreseeable.”

To date, the only LNG project that has received both DOE and FERC approvals is Cheniere Energy’s Sabine Pass terminal being built in Cameron Parish, La. This is not for lack of ambition on the part of other entities wishing to export natural gas, but instead is the result of the lengthy and onerous approval process and the many judicial and administrative challenges that result.

Five other projects have received DOE approval and are waiting on FERC approval. Approximately 20 proposed projects spread across the nation have yet to receive approval from either the DOE or FERC.

The economic risks encountered by a company when deciding whether to construct or expand an LNG export terminal are severe enough, without adding the uncertainty that a long application and approval process brings. One of the most recent LNG export terminals to be approved by DOE, the Freeport LNG project in Texas, will cost an estimated $10 billion to build.

A company considering whether to allocate the significant amounts of capital needed to construct or expand an export facility must consider that it will take years for the facility to pay off these initial costs–if and only if market conditions at that later time remain near their current levels of profitability. A lengthy, arduous, and costly permitting process provides a disincentive to generate the added capability that a new or expanded facility will bring. This disincentive can ultimately prove costly for the company in particular, the energy industry as a whole, and for a nation seeking energy independence.

Opposition From Industry Groups

Perhaps the largest beneficiary of an abundant supply of cheap natural gas is the U.S. chemical industry. In part, chemical companies use natural gas to make plastics and polymers for export, and continual access to cheap natural gas provides these companies a distinct pricing advantage over their international competitors.

According to Hassan Ahmed, a chemical analyst and co-founder of Alembic Global Advisors, for every dollar the price of natural gas increases, U.S. chemical companies lose 7-8 cents of their pricing advantage.

Andrew Liveris, chief executive officer at Dow Chemical, has stated, “If we allow the world gas price to come to this country by exporting gas, it will destroy the benefits of plentiful cheap gas.”

It is estimated that cheap natural gas is powering a $100 billion investment boom in the U.S. chemical industry. Dow Chemical, ExxonMobil, Chevron Corp., Sasol, and Saudi Basic Industries Corp., to name but a few, have announced plans to build or expand chemical plants in the United States. The United States logged an $800 million trade surplus in chemical exports in 2012, and Kevin Swift, chief economist at the American Chemistry Council, says he expects that surplus to swell to $46 billion by 2020.

This investment has led to 11,800 new industry jobs since June 2012, and it is estimated the chemical industry will create an additional 46,000 jobs before the end of the decade.

In addition, lower domestic energy costs have led to a renaissance of manufacturing in the United States, and many economists “posit a return to industrialization for the world’s biggest economy after more than a decade of consumption-led growth.” The National Association of Manufacturers has projected the shale boom has the potential to add 1 million manufacturing jobs by 2025.

This projection is predicated in part on only moderate increases in the price of natural gas. In his 2013 State of the Union Address, President Obama asserted, “Our first priority is making America a magnet for new jobs and manufacturing.”

This assertion is, of course, predicated on conditions being in place to foster industrial and manufacturing job growth.

While there can be little debate over the general contention that there is a significant benefit to the United States in increasing the number of manufacturing and industrial jobs, creating and maintaining those jobs do not rely solely on the price of natural gas.

Energy related costs are but one metric to be judged by a foreign or domestic company that is considering whether to develop or expand operations in the United States. Employee wage and benefit costs, the prevalence and strength of unions, and federal and state environmental regulations and the attendant increase in litigation costs these regulations will bring, all are factors to be considered by entities contemplating an increased presence in the United States.

Charging that the these industries can thrive in the United States only in the presence of cheap and abundant natural gas is an expedient, but not necessarily a solely determinative, argument.

Further, it must be assumed that the potential price increase of natural gas in a single global market will lead to increased production in the United States. This increased production will lead naturally to additional jobs in the exploration, drilling and transportation sectors of the energy industry, to say nothing of additional jobs and growth in the various service industries that support the energy industry.

This trend has been evidenced already by the considerable job growth within the industry since 2007. During the “great recession,” employment in oil and gas extraction increased by 28,000 jobs, with an additional 45,000 jobs created in mining support activities.

While it is, of course, probable that by facilitating the manufacturing and chemical industries, the potential exists for increased job growth in the future, the oil and gas industry has been creating jobs throughout the nation during one of the most severe economic downturns in recent history. It would, therefore, seem prudent to foster the continued growth and success of this industry.

International Trade Agreements

Natural gas exports will have an impact on global energy markets and will be subject to international trade agreements. By some interpretations, the mere capability of the United States to produce and export quantities of natural gas may subject the nation to these treaties. While there is no international trade agreement specifically regulating the export or import of energy products, several agreements could potentially impact this nation’s ability to limit or restrict natural gas exports.

The World Trade Organization, as established by the Marrakesh Agreement of 1995, regulates trade among member nations by providing a framework for negotiating and formalizing trade agreements, and by administering a dispute resolution process aimed at enforcing a member state’s adherence to WTO agreements.

The General Agreement on Tariffs and Trade (GATT), as modified in 1994, is still in effect, albeit now under the framework of the WTO. Article I of GATT mandates that “any advantage, favor, privilege or immunity granted by any member to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other members.”

In short, if the United States provides for a certain natural gas export regime to one nation, then natural gas exports to all other WTO nations must be accorded the same protections and privileges.

While the GATT does allow a nation to afford more favorable treatment to another nation with which it has negotiated a free trade agreement, under GATT Article XI, duties, taxes and other charges are the only GATT-consistent methods of restricting exports. It is, therefore, possible to interpret the licensing scheme enforced by the DOE and FERC as being inconsistent with Article XI obligations.

There is also the question of potential hypocrisy. The United States has filed a complaint with the WTO to challenge Chinese restrictions on exports of rare earth minerals. These minerals are a crucial component in many sophisticated products, ranging from smartphones and tablets to wind turbines and missiles. If the United States limits natural gas exports while simultaneously demanding fair access to another nation’s natural resources, it will be difficult to maintain a posture of fairness and legitimacy on the world stage.

Global Market Influence

Many nations rely on natural gas as both a feedstock for their industries and as a source of energy. Nations not fortunate enough to have secure access to a plentiful domestic supply are forced to import LNG to meet their needs. Nations such as Russia and Iran are growing wealthy supplying these needs, but not without consequences for the purchasing nations.

Russia has on several occasions between 2006 and 2009 interrupted or cut off supplies to Europe when its economic or political demands were not met. Poland is so desperate to wean itself from Russian gas that it has plans to purchase LNG from Qatar at a price 40-50 percent higher than its Russian gas imports.

The United States has an opportunity to capture the market with this nation’s abundant supply of natural gas. A study by Deloitte finds that “exporting LNG would boost the American LNG global market share at the expense of countries such as Russia, decrease the price of natural gas for allies such as those in Europe, and still maintain comparatively low domestic natural gas prices.”

U.S. Senator John Barrasso, R-Wy., and Representative Mike Turner, R-Oh., introduced the Expedited LNG for American Allies Act of 2013 in their respective houses of Congress in an effort to capitalize on the opportunities abroad, but these bills have failed to attract enough support to come to a vote in either house.

The United States is a signatory to–and in many cases the driving force behind–numerous international trade agreements. From the U.S. point of view, these agreements were negotiated not only to allow domestic producers access to potentially lucrative foreign markets, but also so that the United States could assert an increased influence over international trade and markets.

Nature abhors a vacuum and so does power. If the United States is unable or unwilling to provide leadership in the global energy market, another nation will. Looking at the nations able to export large amounts of natural gas, it would benefit both the United States and its allies to take a greater share of the energy trade.

An increased U.S. presence in the global natural gas market would serve the dual purpose of providing allies with a reliable source of energy and helping to strengthen economic and geopolitical relationships to the detriment of nations such as Russia and Iran.

Natural Gas For Generating Electricity

Using natural gas to generate electricity is seen by some as an alternative to the coal-fired power plants that are the single biggest source of carbon dioxide emissions in the United States. The Environmental Protection Agency states, “Compared with the average emissions from coal-fired generation, natural gas produces half as much CO2, less than a third as much nitrogen oxide, and 1 percent as much sulfur oxide.”

Coal and natural gas are the two main fuels used to generate power in the nation. Over the past decade, natural gas has steadily eroded coal’s dominance as the source for generating electricity in the United States, while the percentage of electricity generated by nuclear, hydro, and other renewables has held steady.

In April 2012, the percentage of electricity generated by coal and natural gas briefly reached parity. Since then, the combination of a slightly higher natural gas price and an increased demand for electricity (primarily during the summer months) has led to a greater reliance on coal, which now accounts for about 40 percent of electric generation, compared with 25 percent for natural gas.

Those in favor of replacing coal-fired power plants believe this can happen only if the supply of natural gas remains abundant and cheap. Allowing for an increase in natural gas exports and the likely commensurate rise in its price is seen as a threat to the goal of reducing the amount of domestic electricity produced by coal-fired plants.

This argument is far from determinative. Natural gas is likely to remain relatively inexpensive for the foreseeable future; that is the inevitable result of the United States having massive amounts of the resource locked in its shale formations and the ability to extract it at a reasonable cost. When compared with the risks inherent in nuclear power generation or with the air pollution inherent in coal-fired power generation, natural gas likely will remain a viable source of generating electricity, even if the per-unit cost rises slightly.

Domestic Energy Security

The natural gas locked within American shale is a natural resource, and as with any other natural resource, it has value. Both those who favor increasing natural gas exports and those who favor reserving it for domestic use probably agree on that point. That also is where any agreement most likely ends.

The goal of attaining energy independence is not only a financial goal, but is a question of domestic energy security as well. There are domestic needs for natural gas that will compete with gas intended for sale in foreign markets. The EIA estimates the United States consumes 70.1 billion cubic feet of natural gas a day. Juxtapose that figure with the nearly 30.0 Bcf/d in potential exports that the proposed LNG facilities awaiting approval represent, and there is some concern that domestic interests will be impaired in the rush to profit in foreign gas markets.

In March 2013, then-Representative Edward Markey, D-Ma., proposed a 10-year moratorium on natural gas exports, arguing, “American oil (and natural gas, presumably) should be kept here to benefit our consumers, not shipped to Europe or Asia to help boost oil company profits.”

The opposing view contends increased shale gas production and its subsequent export constitute a real and present benefit to landowners and local communities, as well as for energy, steel and construction workers, that outweighs the potential hazards. Senator Lisa Murkowski, R-Ak., argues, “The United States has an historic opportunity to generate enormous geopolitical and economic benefits by expanding its role in the global gas trade.”

Good governance requires a careful balancing act. There is no doubt that the United States should protect its domestic interests from the potential harm caused by exporting too much natural gas to foreign markets, but any such protectionism should be weighed against the probable benefits attendant to increased natural gas production and export.

Economic development in areas that have been ignored for decades, a substantial reduction in the U.S. trade deficit, and hundreds of thousands of potential jobs throughout the country should be sufficient incentive to promote increasing natural gas exports. Hoarding this nation’s gas reserves is certainly one manner by which to achieve domestic energy security, but the sacrifices inherent in such an approach seem to outweigh the potential gains.

Burdens On Domestic Gas Production

To be sure, the United States not only possesses vast reserves of natural gas, but a significant effort has been made over the past few decades to produce as much as is profitable. This led inevitably to the supply overhang that is affecting the domestic gas market. As primary and extended lease terms expire, the pressure on oil and gas producers to drill their leaseholds becomes severe. The fact that any natural gas produced will only add to the oversupply is seen as the lesser of two evils, when contrasted with surrendering lessees’ exclusive production rights.

Much emphasis has been placed on the number of drilling rigs exploring for oil and natural gas, but even if rig counts were to fall in the short term, production would continue to rise at an appreciable rate for the foreseeable future. This is because the relationship between rig count and the volume of production is not necessarily linear. In the Marcellus Shale alone, more than 1,000 wells drilled in 2012 had not yet been brought on line as of early 2013. Production from the Marcellus continues to rise, even as rigs are transferred out of that play and into more lucrative shale plays in Texas, Louisiana and Ohio.

To complicate matters, not all production costs the same. Each well requires a different benchmark sale price to recover costs and begin to generate a profit. Some wells can be profitable when the market is as low as $3.00 an MMBtu, while others may require a significantly higher price.

It is estimated the median price required to allow an unconventional well to turn a profit is $4.85 an MMBtu. The fact that the domestic natural gas market did not see this price for most of the past three years has led many producers to prove up their reserves and then sit, waiting for the price of natural gas to rise. There are compelling incentives to afford production from the various shale plays a return to widespread profitability because this unproduced gas represents a missed opportunity in today’s more lucrative global markets.

Concluding Thoughts

A window of opportunity exists during which the natural gas locked within America’s shale formations could be produced, compressed, shipped overseas and sold in lucrative foreign markets at prices it is not possible to realize in the domestic market. This opportunity is finite, so the United States must decide soon whether increasing LNG exports will become a national priority.

Detractors will point to the potential threat this could pose to the rebirth of American manufacturing and to increased reliance on coal for generating electricity, as well as argue that exporting natural gas will prevent it being used to provide domestic energy security for the foreseeable future.

It would be wrong to ignore these concerns. America is in need of good-paying jobs in the manufacturing and chemical industries. The United States needs more jobs that strengthen the middle class.

According to the EPA, coal is a leading cause of air pollution and reducing its use would benefit the environment and, arguably, the populace at large. And, being able to secure its domestic energy needs for the foreseeable future is in the best interest of this or any nation.

However, even when one takes into account the arguments against greater LNG exports, it should be realized that utilizing natural gas to satisfy America’s domestic needs and selling it for profit on a global market are not mutually exclusive.

No one industry should be placed in a position superior to all others, but subjugating the future of natural gas in the United States to nothing more than a cheap raw material or feedstock is not the proper course, either. The nation’s natural gas reserves should be treated as an asset.

LNG can be sold in Japan for $15.50 an MMBtu, it can be sold in Europe for just under $11.00 an MMBtu, and it can be sold in Brazil for $14.00 an MMBtu. These market conditions represent a real opportunity for the profitable sale of a resource whose December contract closed at $3.62 an MMBtu on the domestic exchange.

The profit gained from foreign sales of LNG would benefit more than the oil and gas company that produced and sold it. Increased LNG sales in foreign markets would reduce the U.S. trade deficit, which in turn would mean this country had to rely less on foreign creditors.

The increased sales price no doubt would lead to an increase in the rate at which companies explored for and produced natural gas, which in turn would lead to greater employment. More Americans working in exploration and production, as well as in the ancillary jobs such activity creates, means more tax revenue for federal, state and local governments, and greater economic development for parts of the United States that have long been ignored. The growth and development of local communities in western Pennsylvania and North Dakota are but two examples of the real and tangible benefits manifested by increased production.

As with most issues in the world, moderation is usually the best path forward. Should companies be permitted to produce and sell as much LNG on the foreign market as they can to the detriment of domestic needs? Of course not. But the short term opportunity for profit in a global market should not be prohibited, either.

Rather than enact a moratorium on the foreign sale of LNG, as some have suggested, would it not be wiser to first ensure sufficient natural gas is present for domestic needs while simultaneously allowing companies to sell any excess amounts on lucrative foreign markets? It would seem that the United States is possessed of sufficient reserves to meet both needs.

This story is a complement to the print edition of The American Oil & Gas Reporter. For other great articles about exploration, drilling, completions and production, subscribe.