NATURAL GAS:

DOE nominee Moniz foresees global gas trade curbing carbon emissions

If Ernest Moniz, tapped yesterday by President Obama to lead the Energy Department, wins Senate confirmation, one of the first and most important issues awaiting his attention will be how to handle more than a dozen proposals to expand U.S. natural gas exports.

The Energy Department is currently maintaining a queue of 15 applications to export liquefied natural gas more freely around the world. The issue has been contentious, with supporters saying exporting U.S. natural gas would boost domestic energy production and employment while detractors highlight environmental problems associated with fracking and drilling or argue that national interests would be better served by keeping the fuel at home.

The best clue to Moniz's thinking on the issue is a 170-page report that he co-chaired at the Massachusetts Institute of Technology on "The Future of Natural Gas." It's one of a series of energy policy studies published by the MIT Energy Initiative, which Moniz directs.

The study reflects a comprehensive view of the potential benefits and challenges that the U.S. shale gas resource presents and illustrates the extent to which Moniz -- who served in the Clinton administration as an undersecretary of Energy and as associate director for science in the White House Office of Science and Technology Policy -- would hit the ground running at DOE.

Framed against a backdrop of a world with a binding carbon price, the partially industry-funded report portrays natural gas -- increasingly from shale resources -- as a cost-effective "bridge" toward a low-carbon future over the next few decades, particularly as a power plant fuel. In that light, it calls for an international expansion of natural gas trade, much of it traveling by ship as LNG.

"The U.S. should pursue policies that encourage the development of an efficient and integrated global gas market with transparency and diversity of supply," the report says. "A global 'liquid' natural gas market is beneficial to U.S. and global economic interests and, at the same time, advances security interests through diversity of supply and resilience to disruption."

But Moniz did not side with energy industry executives who see the United States as a major exporter of shale gas over the long term. In testimony on the report to a Senate committee in 2011, he said, "Interestingly, in spite of the substantial domestic gas supply in the U.S., by 2030 we see an increase in gas imports to the U.S." The reason, he said, is the abundance of low-cost natural gas around the world, which can compete in energy markets even when LNG transportation charges are factored in.

Final decision a 'collaboration'

Moniz's comments on the issue highlight a trait that those who know him point out as a strength: Perhaps not surprisingly, the physicist is seen as an independent and careful thinker.

"I don't think he will bring in a preconceived, precast answer. He'll respect a process" for seeking answers to the export question, said Peter Fox-Penner, principal and chairman emeritus of the Brattle Group consulting firm, who worked with Moniz at the White House.

"I think it would be extremely premature and inappropriate to take from this appointment some detailed understanding of the administration's position on fracking or LNG or anything else," Fox-Penner said. "I anticipate these policies evolving," he said, adding that's what Moniz would want.

Richard Newell, currently with Duke University's Energy Initiative and a former head of the Energy Information Administration (EIA), noted considerations that the DOE secretary must take into account that do not necessarily weigh on an academic study.

"When one is acting ... as a Cabinet secretary at the head of a department ... you need to take into account a wide range of views," Newell said. Legal views and precedents, as well as departmental analysis, will be important, he noted.

Also significant, of course, will be input from the White House.

Salo Zelermyer, a principal with law firm Bracewell & Giuliani and former DOE senior counsel at DOE under George W. Bush, described the pending decision on how to handle exports as a "collaboration" between DOE and the White House.

"The White House will certainly both be involved and make their views known to DOE on the topic," Zelermyer said. "Given the structure of the president's Cabinet, obviously" the president's opinion on the issue will be taken into account, he added.

Several agencies have some jurisdiction over the approval of exports and construction of natural gas liquefaction terminals, Zelermyer noted, with the Federal Energy Regulatory Commission, DOE and the Coast Guard among those with roles to play. Within the White House, the Office of Management and Budget, the Council on Environmental Quality, the National Economic Council and other offices will weigh in, he said.

"Ultimately, the statute gives the DOE secretary the authority to make the final decision" on whether to grant expanded export approval to a particular project, Zelermyer said. "If it's an important enough call that the White House feels very strongly about it, typically that's the decision that ends up getting made." In this case, that's likely to be the path, he said.

The White House has so far refrained from weighing in clearly in public. President Obama, in his February State of the Union speech, reiterated his support for the natural gas industry generally. And White House energy adviser Heather Zichal said last July that the administration was not opposed to exports but was committed to "protecting American consumers and making sure we're sending the right signal to industry and the manufacturing sector" (EnergyWire, July 17, 2012).

Last month, White House officials indicated that any announcements on LNG exports would stem from DOE's analysis of the issue (EnergyWire, Feb. 22).

But the LNG export case is somewhat unusual.

The governing statute, the Natural Gas Act, creates a presumption that exports of natural gas to U.S. free-trade partners are in the public interest and requires DOE to approve such applications "without modification or delay." But for applications to export to countries with which the United States lacks a free trade agreement, the statute says DOE must start from a presumption that exports are in the public interest but entertain arguments to the contrary.

To that end, the department has commissioned two studies, one by EIA and one by the private consulting group NERA Economic Consulting, looking at the economic impacts of LNG exports to non-FTA countries. The second of those studies was published in draft form in December, followed by two public comment periods. Those wrapped up at the end of February, leaving DOE at the point where it has said it would begin to issue decisions on individual export applications "on a case-by-case basis" (EnergyWire, Feb. 26).

Bracewell & Giuliani's Zelermyer said the wording of the statute leaves DOE plenty of wiggle room to decide either way on the pending applications. With more than 150,000 comments (most of them form letters) filed on the issue, DOE has cover to take the decision in either direction.

Whatever it decides will be closely scrutinized not only by the opposing export camps but also by the attorneys for any projects whose applications are rejected. That puts a particular spotlight not just on the overall approach to exports but on the arguments used to approve or reject individual applications.

Senate gantlet

Another important constituency in the decisionmaking process is Congress. In order to take the helm at DOE, Moniz will have to win support from the Senate. A hearing date has not yet been announced by the Energy and Natural Resources Committee, but Moniz will undoubtedly meet with both Chairman Ron Wyden (D-Ore.), an export skeptic who has suggested he might support shipments with a limit on the total volume to be sent abroad, and ranking member Lisa Murkowski (R-Alaska), a strong backer of exports.

"Dr. Moniz might well choose to acknowledge Chairman Ron Wyden's ... notion of a 'sweet spot' (limited LNG export volumes) even if he does not endorse it outright," wrote ClearView Energy Partners, an investment advisory firm, in a note yesterday. "This might look like it plays against LNG export prospects, but we would suggest it actually changes very little: the White House appears to be continuing to look for a 'sweet spot' anyway."

Robert Dillon, a spokesman for Murkowski, said the senator is hopeful that Moniz would look favorably on LNG exports. "At first blush, he seems to be someone that we may be able to work with," Dillon said.

"He's talked about the importance of exports, he hasn't spoken in specific about LNG," he added. But Dillon said Moniz also had a history of discussing a carbon tax -- like the one presupposed in the MIT Energy Initiative report -- that is "a potential red flag."

That issue could be behind the reticence of major oil and gas producers to chime in yesterday on the nomination announcement. Prodded for comment, the American Petroleum Institute said only, "We look forward to learning how Ernest Moniz's energy background and experience will shape his approach to the game-changing domestic shale revolution that is creating jobs, generating billions of dollars for the government and putting America in a position as a global leader in energy."

Time-limited support

One aspect of the MIT report that undoubtedly makes fossil fuel backers nervous is its focus on natural gas as a "bridge" to non-carbon energy sources.

The MIT authors predicted that coal-fired power plants would be completely displaced by around 2035, mostly by natural gas generation.

"In the U.S., a combination of demand reduction and displacement of coal-fired power by gas-fired generation is the lowest cost way to reduce CO2 emissions by up to 50 percent," the study says. "For more stringent CO2 emissions reductions, further de-carbonization of the energy sector will be required; but natural gas provides a cost-effective bridge to such a low-carbon future."

Moniz himself has also cautioned against overly optimistic views of the size of the shale gas resources, given the scant history of the development.

"Significant uncertainty exists regarding the size of the shale resource," he told the Senate Energy and Natural Resources Committee in 2011. MIT's estimate of the amount of the gas resources ranged from 418 trillion cubic feet (tcf) to 871 tcf, a very large amount compared with current annual U.S. consumption of natural gas from all sources of around 25 tcf.

"Shale gas is not 'cheap gas'; rather, it is a large resource of 'moderate cost gas,'" Moniz said at the time. "This reflects the maturity of the U.S. resource base, which has seen much of its 'easy' gas produced over the past decades. Of the gas available at between $4 and $8 per thousand cubic feet, over 60 percent is shale gas, making that a foundation of moderate-priced natural gas supplies," he said.

His support for natural gas as a lower-carbon option than coal or oil is limited in time.

"Natural gas can indeed play an important role over the next couple of decades, together with demand management, in economically advancing a clean energy system," he told the Senate committee. "However, with increasingly stringent carbon dioxide emissions reductions, natural gas would eventually become too carbon intensive, which highlights the importance of a robust innovation program for zero-carbon options," he said.

The MIT report concludes that those risks are "challenging but manageable." "In all instances, the risks can be mitigated to acceptable levels through appropriate regulation and oversight," Moniz testified.

He also parts with some shale gas industry promoters when he calls for more comprehensive regulation and recognizes local interests affected by shale gas development.

"The MIT study recommends that in order to minimize environmental impacts, current best practice regulation and oversight should be applied uniformly to all shales," he said.

Moniz said local communities "clearly have a strong role" in assessing the trade-offs of development, and the report calls for "concerted, coordinated effort by industry and government, both state and federal" to minimize development impacts through both research and regulation.

"Transparency is key, both for fracturing operations and for water management," it says.