CQ WEEKLY – IN FOCUS
Oct. 6, 2012 – 12:53 p.m.
Natural Gas Export Race Raises Flags for Lawmakers
By Pam Radtke Russell, CQ Staff
Less than a decade after Congress was debating the merits of new offshore terminals for importing liquefied natural gas, a sudden glut of domestic gas has set off a race to start building export facilities instead.
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Already, more than 15 companies have applied for permission to begin shipping natural gas to lucrative international markets. If all the applications were approved, exports would account for about 40 percent of the nation’s current production — a prospect that has triggered calls by lawmakers to restrict or even prohibit natural gas exports.
Economists and policy experts say the marketplace will resolve concerns about rising natural gas prices if the lawmakers and regulators can just keep their hands off. “We ought to let it play out,” says Charles Ebinger of the Brookings Institution, lead author of a recent study on liquefied natural gas (LNG) exports.
“U.S. policymakers,” his study concludes, “should refrain from introducing legislation or regulations that would either promote or limit additional exports of LNG from the United States.”
But with some studies projecting that natural gas exports could increase domestic prices by as much as 11 percent on average, lawmakers are facing political pressures to intervene. As the consulting firm ClearView Energy Partners observed in a recent report, LNG exporting is an issue with two wrong sides for politicians seeking re-election. A politician endorsing exports could be accused of raising costs on manufacturers and households if prices spike, while an opponent of exports could be portrayed as hostile to developing domestic oil and gas resources.
At the same time, lawmakers supportive of environmental causes face pressure to oppose LNG exports. Many environmental groups are wary of the drilling technique known as hydraulic fracturing, or “fracking,” which is responsible for the surge in domestic production.
A recent study by the James Baker Institute for Public Policy at Rice University suggests that the concerns about LNG exports may be overstated. Kenneth B. Medlock III, the study’s author, says the United States will ultimately export just 1.2 billion cubic feet of natural gas a day — less than the 2.2 billion cubic feet already allowed under the first, and so far only, permit granted, at Sabine Pass Terminal near Port Arthur, Texas.
“A lot of political capital gets spent on something that won’t mean a lot in the end,” Medlock says.
‘De Facto Moratorium’
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The issue of LNG exports is so contentious that in September the Obama administration delayed a crucial macroeconomic study until after the election. Though the Energy Department says the delay is simply intended to give an outside contractor time to complete the study, Bill Cooper of the Center for Liquefied Natural Gas calls the delay a “de facto moratorium” on LNG export terminals.
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Natural Gas Export Race Raises Flags for Lawmakers
“I just want to think this through,” Wyden says. A spokesman says the senator wants to see the Energy Department economic study — and how the administration uses it — before he is comfortable with large-scale exports.
Paul N. Cicio, president of the Industrial Energy Consumers of America, says his members, which include chemical, steel, glass and other manufacturers, are planning $80 billion in investments that will come online by 2016 and require an additional 6 billion cubic feet in natural gas per day. He is concerned that exporting 6 billion cubic feet per day on top of the new industrial demand will stretch the capacity of producers and drive up prices.
Other lawmakers are concerned about the environmental impact of fracking, which involves injecting water, sand and chemicals deep underground to free gas trapped in shale formations. Some environmental groups say the practice, which the industry insists is safe, can contaminate drinking water supplies and pollute the air.
The Energy Information Administration reports that 63 percent of exported natural gas will come from new production, most from wells drilled using fracking. Even an additional 6 billion cubic feet a day will lead to a 5 percent increase in hydraulic fracturing, says Craig Segall of the Sierra Club.
Colorado’s
“I think it’s critical that it addresses environmental costs — we need to make sure that the damage that is done is not greater than the revenue we receive,” Polis said.
On the flip side of the issue, a bipartisan group of 60 lawmakers from western and natural-gas-producing states have asked the Energy Department to act more quickly in approving terminals to help shore up natural gas development that retreated from record high activity last year because of falling prices. Producers say they need a bigger market for their product.
“Creating more opportunities to sell natural gas into global markets and access overseas customers could help the goals of increasing natural gas use and smooth out historical boom-bust cycles,” wrote some members of that group, led by Reps.
Rice University’s Medlock and other analysts, however, say that the impact of U.S. natural gas exports has been oversimplified and overstated. The Energy Information Administration study, for instance, doesn’t take into account competition from other countries that are adding LNG export capacity, or the likelihood that natural gas prices will rise.
“To separate truth from fiction, one must apply the appropriate analytical framework grounded in international trade,” says the Rice study.
The Brookings study says a change in U.S. fracking regulations could lead to higher costs that render domestic LNG uncompetitive on the world market. Additionally, if the Eastern Mediterranean increases conventional gas production, if China develops unconventional gas through hydraulic fracturing, or if Japan revises its plans to shut down nuclear power plants, it could erode the U.S. price advantage for natural gas.
To get financing for LNG export terminals that cost $2 billion to $8 billion each, U.S. exporters will need a price advantage, or spread, of $3.40 per million metric British thermal units for 10 to 12 years, Brookings says.
“These spreads are unsustainable,” Medlock says.
Natural Gas Export Race Raises Flags for Lawmakers
While the delay in the study and the “de facto” moratorium on LNG terminals is being decried by LNG advocates, Medlock says it might actually be a good thing.
“It will give the market pause,” he says, adding that investors aren’t seeing the big picture right now. “In six months to a year, there will be additional LNG supplies from Australia. It’s going to give the market some softness” and allow investors to re-evaluate pouring billions into LNG terminals that might not be profitable.
Rush for Approvals
Speculation is rampant, however, that the Energy Department will limit LNG exports. That, in turn, would lead to a rush to win Federal Energy Regulatory Commission approval and begin construction.
That, Medlock says, would distort the marketplace because the limited export licenses awarded would effectively be subsidies. Additionally, it would mean that the United States favors the interests of manufacturers over those of the producers of natural gas.
“If DOE ultimately says we don’t want to do this because it would be bad for Dow Chemical, it’s saying Dow’s interest is above and beyond the producers,” says Andrew Ware, director of corporate communications for Cheniere Energy, which owns the Sabine Pass terminal and is seeking a license for a second LNG terminal.
A better solution, many of the experts say, would be to approve all the applications and let the marketplace sort out which facilities can best meet market demand. Such an approach was taken in permitting LNG import terminals between 2005 and 2008, when it appeared that the United States was going to need massive amounts of imported natural gas to meet the country’s demand. Dozens of companies applied, most of which received approval, but in the end fewer than 10 terminals were built.
Ware says FERC’s lengthy and expensive licensing process already provides the “time out” that Wyden is calling for. While any company can apply for an export license, it costs million of dollars to go through the licensing process. Ware says Cheniere spent $100 million on licensing for Sabine Pass. And even after FERC approval, a terminal still requires local and state permits before construction.
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“Our proper course won't be sweeping legislation or layers of new regulation,” she said. “Instead, it will be to ensure a degree of comfort that our newfound energy security can be maintained under current export rules.”
FOR FURTHER READING: Wyden transition, CQ Weekly, p. 1970; natural gas exports, 2011 CQ Weekly, p. 2037; 2005 energy law (PL 109-58), 2005 Almanac, p. 8-3; LNG background, 2005 CQ Weekly, p. 2714.