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LNG Tankers
March 2024 Exclusive Story

LNG Exports Have Negligible Effect on Consumers’ Prices

WASHINGTON—Although the United States is the world’s largest liquefied natural gas exporter, U.S. consumers enjoy some of the lowest residential natural gas prices in the world, according to a report from the American Petroleum Institute.

“Impact Analysis of U.S. Natural Gas Exports on Domestic Natural Gas Pricing,” which was prepared by Energy Ventures Analysis, says the last decade has seen the lowest natural gas prices in U.S. history. “Excluding the pricing anomaly of 2022, U.S. natural gas prices at Henry Hub averaged $4.10/MMBtu over the last decade, a decline of over 54% from the first decade of this century, when natural gas prices averaged almost $9/MMBtu,” the report details.

“Despite U.S. natural gas exports growing rapidly since 2016, natural gas prices have continued to decline,” Energy Ventures writes. “During the six years leading up to the rise in U.S. natural gas exports (2010-2016), natural gas prices at Henry Hub averaged $4.58/MMBtu. During the following six years (2017-2022), natural gas prices averaged less than $4.00/MMBtu. During the first half of 2023, when U.S. natural gas exports averaged a record 20.4 billion cubic feet of gas a day, natural gas prices at Henry Hub averaged $2.43/MMBtu, the lowest six-month average in this century outside of the height of the Covid-19 pandemic (April to October 2020).”

To explain LNG export terminals’ minuscule effect on short-term domestic prices, the report points out that constructing the projects takes years. “The lengthy project development process gives U.S. natural gas producers sufficient time to increase output to feed the new LNG export projects. As a result, the U.S. natural gas market already has accounted for the increased demand from a new LNG export terminal by the time the project is completed and loads its first vessel,” the report assures.

It helps that export terminals sell most of their output through long-term contracts, the analysis suggests. This means flows into the terminals “are highly predictable and, therefore, priced into the U.S. natural gas market, resulting in little to no increase in domestic natural gas prices.”

The Freeport LNG outage in summer 2022 illustrates how much predictability limits price impacts, Energy Ventures argues. Initially, the outage caused prices to drop. “Since natural gas is delivered on a continuous basis via pipelines, the unexpected loss of demand due to the Freeport LNG outage resulted in a substantial natural gas supply-demand market imbalance until the U.S. electric power sector absorbed the excess supply, returning domestic natural gas prices to pre-Freeport LNG outage levels,” Energy Ventures relates.

“However, when Freeport returned to operation in February 2023, domestic natural gas prices were virtually unaffected despite the 2.1 Bcf/d increase in demand due to its predictable nature,” the report contrasts. “This phenomenon is not unique to the LNG sector and can occur regardless of the source of demand.”

The 2022 Anomaly

Critics of LNG exports frequently cite the high natural gas prices in 2022 as proof that exports raise consumer costs, Energy Ventures notes. The firm takes issue with this argument. “It was not natural gas exports but rather a confluence of unusual coal market factors—limited domestic inventories, reduced fuel-switching capacity and heightened demand for U.S. coal exports to Europe—that served as the primary factor behind increased domestic natural gas prices in 2022,” it says.

The limited domestic inventories and reduced fuel switching capacity originated partly from the pandemic, Energy Ventures relates. “As pandemic restrictions waned in 2021 and economic activity slowly returned to normal, demand for virtually all goods and services rose once again. However, corporate debt and a nationwide labor shortage caused by the pandemic limited the responsiveness of supply across the entire energy sector,” it observes.

“Additionally, Winter Storm Uri in February 2021 resulted in a massive short-term natural gas supply disruption while demand soared to meet the increased demand in the ResComm and electric power sectors,” the report continues. “As a result, the natural gas sector quickly consumed the massive storage surplus of almost 500 Bcf versus the five-year average accumulated during the first few months of the pandemic and fell to a storage shortfall of over 230 Bcf in September.”

Coal inventories also began depleting. “As natural gas prices began to rise in 2021 and more natural gas-fired power plants were being displaced by coal-fired plants, coal inventories began to decline rapidly, from over 55 days of full-load burn to 30 days by September 2021,” Energy Ventures details. “According to EIA, in September 2021, coal inventories fell to their lowest levels in over 40 years, limiting utilities’ capacity to fuel switch in response to rising natural gas prices.

“Due to the low coal inventories entering 2022, many regulated utilities limited coal consumption at their coal plants to their scheduled coal deliveries since coal production and transportation increases were still severely limited,” the report continues. “Therefore, despite rising natural gas prices due to the rapidly increasing natural gas inventory shortfall, natural gas consumption in the power sector continued to rise.”

Russia’s invasion of Ukraine exacerbated the supply crunch for both coal and natural gas, Energy Ventures says. Before the war, the report indicates, Russia supplied 70% of the thermal coal (which is primarily used in power generation) and 40% of the natural gas used in Europe.

“After Russia’s February 2022 invasion of Ukraine upended the energy supply-demand balance in Europe, global coal and (albeit much later) natural gas prices rose to incentivize non-Russian imports into Europe,” Energy Ventures recounts. “Due to the limited supply growth in the U.S. coal market, domestic coal prices rose rapidly, changing the relative economics of coal- and gas-fired power generators and causing increased amounts of natural gas to be consumed in the domestic power sector.”

That demand increase occurred even as gas prices hit a post-shale record in summer. “Increased electricity demand driven by above-average summer heat, over 14 GW of coal plant retirements in 2022 alone, the rest of the coal fleet limited by record-low inventories, and significantly delayed completion of new renewable energy projects due to supply chain issues post-pandemic, left natural gas as the only resource with the flexibility to increase electric generation output,” Energy Ventures explains.

Long-Term Record

Outside such unusual circumstances, the report says the U.S. natural gas industry has an excellent track record of meeting domestic needs. “Over the last 15 years, any substantial increase in natural gas demand from the industrial, electric power or export sectors has been accompanied by a corresponding increase in U.S. natural gas production,” it illustrates. “For example, while LNG exports rose by roughly 14 Bcf/d between 2016 and 2023, dry gas production jumped by 31 Bcf/d.

“Despite total U.S. natural gas consumption almost doubling from 2010 to 2023, the 2023 average natural gas price of $2.54 per MMBtu was the second-lowest level in over 35 years, only exceeding 2020 COVID-19 pandemic lows by a few cents,” Energy Ventures adds.

LNG exports’ influence on consumer prices also must be weighed against their other benefits, the firm advises. For example, the increase in natural gas production that is at least partially attributable to exports has “brought substantial economic growth to regions previously affected by low job availability and high unemployment rates. States like North Dakota, Texas, Louisiana, Arkansas, Ohio and Pennsylvania have experienced massive growth in employment in the oil and natural gas sector.”

Such oil field activity supports jobs in other industries, including manufacturing, retail and hospitality. “Furthermore, increased oil and natural gas production activity has also brought a noticeable increase in local and state tax revenue through royalties, property taxes, sales tax and income tax payments. These increased tax revenues often support vital local public services such as schools, libraries and first responders,” the report observes.

“Thanks to America’s enormous resources and constant industry innovation, U.S. producers have shown time and again that we can meet domestic demand while still being a leading supplier to rapidly expanding global markets. The administration’s misguided LNG freeze threatens American jobs and jeopardizes global energy security,” says Dustin Meyer, API’s senior vice president of policy, economics and regulatory affairs. “If policymakers are truly committed to energy affordability, they should focus on smart policies that remove hurdles to increasing natural gas production and developing critical infrastructure.”

The full report offers more depth on the history of U.S. LNG exports, the factors that influence natural gas prices, the events that led to the 2022 anomaly, and the disconnect between European and domestic gas prices. To download it, see Impact Analysis of U.S. Natural Gas Exports on Domestic Natural Gas Pricing.

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