Next Steps for U.S. Natural Gas Exports
December 17, 2012
On December 5, the long-awaited study on the domestic economic effects of U.S. natural gas exports was released. The study, commissioned by the U.S. Department of Energy (DOE), is the latest development in the ongoing deliberation on what the nation should do with abundant natural gas resources. DOE currently has 15 export permit approvals pending. For much of 2012, the permit review process was suspended while this study was completed. Now that the report has been released, speculation is rife as to when the next export authorization may be issued, and how many of the projects may ultimately be approved.
Only a decade ago, a mention of exporting U.S. natural gas would have been met with a great deal of skepticism. In fact, early in the last decade, the United States was expected to become increasingly reliant on natural gas imports. The Energy Information Administration’s (EIA) 2003 forecast suggested nearly a 50 percent increase in domestic natural gas demand to 34.9 trillion cubic feet (tcf) in 2025, but a decline of domestic production to 22.5 tcf in the same year. Accordingly, EIA projected that U.S. gas imports would nearly double from 3.7 tcf in 2001 to 7.8 tcf in 2025.
The outlook could not be more different today. Recently, both the EIA and the International Energy Agency suggested that the United States could become a net gas exporter by 2020. This sea change in the U.S. natural gas outlook is a result of successful development of shale gas resources in the United States brought about by the combination of innovative technology applications, high gas prices, mineral rights ownership/development on private lands, the right mix of industry players, and availability of infrastructure.
According to EIA, shale gas production in the United States increased at an average annual rate of 17 percent between 2000 and 2006 and at 48 percent between 2006 and 2010. Shale gas, which accounted for a negligible share of total U.S. gas production less than a decade ago, now makes up roughly a third of domestic gas output; that share is expected to grow to about half of domestic production by 2035.
Against the background of rapid increase in domestic production, which has kept natural gas prices low, many producers have begun seeking new sources of demand for new volumes. Some producers see overseas markets as essential to sustaining incentives to continue producing what they see as an undervalued commodity in the United States today. The existing price differentials between the North American and Asia-Pacific gas markets—current gas prices are about $3 per million British thermal unit (mmBtu) in North America, and $13–$16/mmBtu in the Asia Pacific—make the prospect for exports to Asia attractive to some producers. Even after costs incurred for liquefaction and shipping raised the price of North American natural gas delivered to Asian markets, prospective producers and importers believe there would be sufficient price differentials to warrant such a trade. Furthermore, the expansion of the Panama Canal in the middle of this decade is expected to improve the economics of U.S. natural gas shipments out of the U.S. Gulf Coast.
DOE’s export approval is basically automatic for countries that have entered into a free trade agreement (FTA) with the United States. For all other countries, DOE must do a thorough review of the “public interest” of allowing exports. Thus far, the Republic of Korea is the only major Asian gas consumer with an FTA with the United States; all other key regional players, like Japan, China, and India, fall into the non-FTA category. DOE has thus far approved one terminal, Sabine Pass in Louisiana, to export domestically produced liquefied natural gas (LNG) to both FTA and non-FTA countries. Fifteen export applications await DOE authorization, and while almost all of them have received DOE’s approval to export LNG to FTA countries, they await approval to export to non-FTA ones. If all 16 projects proceed, including the Sabine Pass project that is already approved and scheduled to begin shipping LNG by 2016, the maximum total volume of exports to non-FTA countries would amount to 23.71 Bcf per day—a highly unlikely prospect given the uncertainties of siting and financing.
Aside from obtaining export authorization, project sponsors must also obtain authorization to build a new LNG terminal (“green field”) or expand a terminal (“brown field”) from the Federal Energy Regulatory Commission
(FERC). Most of the LNG terminals in existence today were initially designed to receive natural gas imports, so they lack the essential feature for exporting LNG—namely the liquefaction facility. Condensing gas into liquid by cooling it to approximately -260 °F, the liquefaction process reduces the volume of natural gas to 1/600th and makes it significantly easier to store or transport. In April 2012, Sabine Pass became the first terminal to receive FERC’s approval.
Natural gas producers welcome the promise of increased U.S. exports, as it would arguably drive up the currently low price of natural gas in the United States and create jobs in their industry. Especially the prospect of exporting gas to Asia, which is forecast to account for nearly two-thirds of global LNG demand growth through 2030, is an attractive option. The prospect of U.S. gas export is also garnering great interest in Asian countries—traditional consumers of Japan and Korea, as well as emerging consumers of China and India alike—that see supply diversification benefits in welcoming the U.S. LNG export. Also, a handful of Asian companies are involved in U.S. LNG export projects, mainly through off-take agreements, but some through liquefaction-tolling contracts. Many in Asia look to the greater presence of North American gas in the Asian markets to serve as a potential leverage in moderating the power of traditional suppliers in price negotiations. Such a development, they hope, would also facilitate gradual de-linking of natural gas prices from global oil prices—a welcome departure from decades of LNG trade with a Japan Crude Cocktail–based price tag.
Meanwhile, some U.S. industries and environmental groups are concerned about potential adverse impacts of LNG exports. Many groups representing energy intensive industries like petrochemical companies and electric utilities that benefit from low prices of natural gas are concerned about the potential for natural gas prices to rise or be more volatile as a result of exporting and thus hurt their competitiveness. There also is some environmentally driven opposition. The main concern of most environmental opposition is that exports will facilitate increased production of unconventional gas—a process they believe to lack comprehensive government review and possible regulation of health and safety issues associated with hydraulic fracturing. These concerns, particularly the impact of rising electricity costs and loss of jobs in some sectors of the economy, will likely dominate a Senate hearing on the LNG export issue that is expected early in the New Year, although no congressional action is required for the export projects to proceed.
Acknowledging these economic concerns, DOE commissioned the National Economic Research Association with a study to analyze macroeconomic impacts of U.S. LNG exports. This study built on an earlier EIA study on the impacts of U.S. LNG exports on domestic gas prices that was released in January 2012. In sum, the economic impacts study reiterated the classical economic theory of net gains from trade, while pointing out there are groups of people that would not be economically rewarded by LNG exports. The study is now opened up for a public comment period of 45 days and a “reply comment” period of an additional 30 days. DOE will be conducting its own review of the economic impacts study findings and examining the pending export license applications on a case-by-case basis, although it remains unclear—at least to the general public—exactly what criteria DOE will use to determine if each project is in the public interest. Meanwhile, some proponents of LNG export warn that deciding against LNG export may be in violation of the trade rules of the World Trade Organization and could lead to legal challenges from member countries.
Export authorization is, however, not the only hurdle for proposed U.S. LNG export projects. They face a steep uphill battle in terms of economics—the high capital cost of a greenfield export facility, the questionable economics of traditionally volatile natural gas price differentials among gas markets, and the stiff competition in the global LNG market. In fact, even if the LNG export received a full green light, the future of robust U.S.-Asia LNG trade is not a foregone conclusion. By the early part of the 2020s, many LNG projects will likely come online, and the United States may face steep competition from existing and emerging suppliers. In addition to Qatar, which has the largest liquefaction capacity in the world, emerging suppliers are also eying the Asian markets. For example, Australia is expanding its export capacity to as much as 12 Bcf per day by 2020, and Canada has approved a 20-year export license to a project on the coast of British Columbia. Additionally, Russia, which is busy considering several projects in the Russian Far East and on Sakhalin Island, as well as planning significant production in its Arctic regions, has announced its eastward pivot for gas exports.
The global LNG picture is increasingly dynamic and will undoubtedly look different in a decade whatever the U.S. export decision may be. But, the export decision will surely affect both the pace and scope of LNG market evolution, including regional gas trade dynamics.
Jane Nakano is a fellow with the Energy and National Security Program at the Center for Strategic and International Studies in Washington, D.C.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
© 2012 by the Center for Strategic and International Studies. All rights reserved.