Energy Policy:

Lawmakers, analysts debate the economics and politics of exporting LNG

As low prices dominate the United States' growing natural gas market, what are the economic and political costs of exporting liquefied natural gas? In this E&ETV Special Report, lawmakers and analysts weigh in on the LNG exports debate and discuss how the issue could play into election-year politics. Interviewed experts include Joel Kirkland, deputy editor, EnergyWire; Rep. John Garamendi (D-Calif.); Rep. Pete Olson (R-Texas); Guy Caruso, former administrator, U.S. Energy Information Administration; Bill Cooper, president, Center for Liquefied Natural Gas; Lisa Epifani, former assistant secretary for congressional and intergovernmental affairs, Department of Energy; Kevin Book, managing director, ClearView Energy Partners; and Bruce McKay, managing director of federal affairs, Dominion Resources.

Transcript

Bruce McKay: Anyone on Capitol Hill who has worked in the energy industry, members of Congress, several years ago they were hearing about a scarce precious resource that we were running out of and there was an urgent need to get new areas opened up to production and to get LNG import terminals constructed so that we could bring LNG in. What a turnaround we are today.

Kevin Book: LNG exports touch on two major topics for many voters and Americans broadly. The first is the idea that the United States is an exporter of energy in any capacity. Too many Americans remember the times when we were short of energy and needed to import it, and aren't yet comfortable with the identity of the United States as a net exporter. The second is the environmental side. Beyond energy security concerns, the environmentalists say, "Well, look, you know, hydrocarbon exports have an ecological impact, both here and in the broader climate, so shouldn't we be thinking about that before we export?"

Joel Kirkland: We have reporters in Washington, New York, out West, Houston, and in Asia and in Europe. And I think those are the hot points for liquefied natural gas at this point. There's going to be, in theory, export terminals built on the West Coast, although that's going to have to go through some pushback from local communities and there are environmental issues with that and transport issues. Along the Gulf Coast, you know, a lot of people think at least one export terminal will start exporting U.S. liquefied natural gas.

John Garamendi: Don't do it. Don't do it. Gas is a strategic asset that America has. It's one of the few things that we really have in abundance, at least at the moment, and our industries are depending upon that natural gas at a reasonable price. We start exporting, we're going to drive that price into the world market price, which is at least twice as high as the current domestic price.

Pete Olson: Well, first of all, I come to this perspective as a free trader. I mean I believe that democracy and free enterprise is one of the greatest things our country has to export and, because of that, I believe we should export natural gas if we have an excess here in America, which I think we do.

Monica Trauzzi: With an excess of supplies, natural gas producers say they'll reduce development investments unless they can begin exporting LNG. But could that mean higher prices for consumers in the United States?

Bruce McKay: With a global market of about 31 BCF per day, it's hard to imagine that the U.S., as good as we are, can go out and build 10 or 12 BCF per day and capture such a chunk of that market, such that it would really take the gas from the U.S. and raise prices like some have charged it with here. It will really be on the margins.

Bruce McKay: right now gas is about two and half dollars and that may be enjoyable for good consumers at the moment, but I think most sophisticated industry observers and consumers know that that's not sustainable. We have seen, just in recent weeks, a number of big producers pulling back, laying down their rigs and saying they can't justify it. So, there will be some rationality brought to supply and demand, but $2.50 seems below what is sustainable.

Guy Caruso: Yeah, I think given the very strong investment that's been made in shale gas, it's reducing the likelihood we'd have large, volatile movements in price.

Pete Olson: By having a domestic energy production, which we're doing here for domestic production and overseas, we stabilize those prices. Again, I think we'll have a better -- the refineries and the power plants where I live in my district, will have a better, much more certain future, natural gas, how it's going to cost them, as opposed to what we're doing now where it's subject to all these fluctuations out there.

John Garamendi: the real key here is that we do have this extremely important strategic asset, one that does allow us to do things that we couldn't do before and if we open the strategic asset to the world market, it will clearly double.

Monica Trauzzi: Dominion projects its Cove Point, Maryland export project could give the US an economic boost by creating about 15,000 jobs. But could industries that are reliant on natural gas as a feedstock take their business abroad if there's a price spike?

John Garamendi: This is a strategic asset. It allows us, for example Dow Chemical, to come back to America to rebuild its chemical plants and to expand its employment base in America.

John Garamendi: that the natural gas industry would want to drive Dow Chemical, one of the great American industries, out of the United States simply to fatten their bottom line. That is not acceptable. Dow Chemical, in fact, is increasing, in my own district, its production, its employment and rebuilding a plant that's been there for years and years. They were going to go offshore, but with the price of natural gas they're coming back and my people are working. My people are working.

Bill Cooper: Well, I certainly don't want to name names and I don't like to throw stones, but there will be energy-intensive industry groups, whether they use the natural gas as an end product to their customers or whether they use it as a feedstock gas, have certainly voiced opposition now to LNG Exports but it tends to be a concern that they're raising but the evidence points to the contrary.

Lisa Epifani: I think we have a great potential for new jobs and new tax revenues from just the production side, the infrastructure that would be needed and we're talking hundreds of thousands of jobs and millions in revenue. So, anyone who'd be against it, I just can't understand why they'd want to deny the benefits to our economy.

Pete Olson: A majority of the members of Congress don't want us to curtail our exports. Again, one of the things that makes our country great is exporting our resources.

Lisa Epifani: I think we can expect continued efforts on the Hill to try to ban or limit exports and, you know, I think while this is an emotionally attractive protectionist argument, it fails to really grasp market realities and it denies the principles and benefits of free trade. So, I was, you know, very pleased that the House beat back the amendments, the Markey ban export amendments that were on the floor last week and I expect that they will continue to do so. It's going to require education and information to ensure people understand what these exports can produce for our country and what those amendments would actually mean.

Kevin Book: Congress is unlikely to do anything about this unless something bad happens, and by bad I mean a significant price spike in natural gas. But it doesn't take Congress to have a problem here. The problem can happen administratively. Gas can be declared a short supply good and added to Department of Commerce's export control list. There's a whole lot of things that could happen in the courts outside of the FERC and DOE process.

Monica Trauzzi: With the EIA recently adjusting its gas estimates for the Marcellus shale formation, does the US have an adequate supply to support the proposed exports?

Bruce McKay: If you look at the companies that are considering building major chemical processing facilities in the Marcellus region, they wouldn't do that if they also didn't have great confidence that the supply is there and will be there for decades to come. They don't look at it in terms of single-digit years. They're looking at it in terms of decades as well.

Kevin Book: The export life for most of these projects, when you think about them financially, is a 20-year window. Going from a 100-year reserve life to a 60-year reserve life, or even a 40-year reserve life, is still well in excess of a 20-year project life. But a bigger question is what does that EIA number mean? It means that we went from a tiny amount of recoverable reserves to an enormous amount that wasn't quite as enormous as the original enormous amount. It's still a very large number. Four hundred TCF is an enormous amount of gas.

Guy Caruso: I think the most attractive thing about U.S. LNG exports is the low cost. Right now, because of the shale gas revolution, we have a Henry Hub price of under $3 a million BTUs. The most recent contracts that Japan signed, from Australia especially, are $16 and $17 a million BTUs delivered in Japan. We have seen estimates that the U.S. LNG exports could be delivered to Japan for between $7 and $10 a million BTUs, so the economic incentive is overwhelming.

Bruce McKay: So far, we have had tremendous interest from many parts of the world. Europe and Southeast Asia are, of course, both very interested in LNG supplies. Japan, we know what's happening there with the nuclear plants being shut down. Many of those will not be restarted. They're moving to more gas-fired power generation. They don't have any domestic gas supply, so they'll be importing their gas in the form of LNG.

Monica Trauzzi: The US Department of Energy is currently considering 7 applications for non Free Trade Agreement LNG export facilities.

Kevin Book: An un-attributable quote from DOE is something to the effect of one permit is a permit, two permits is a policy. The non-FTA export licenses are currently the big hold-up. The idea is that you could export into the countries where there isn't a bilateral natural gas trade relationship, which means all of the destination markets that exporters want to service and all of the markets that are full of buyers that want to buy our gas. And why is DOE holding off? Well, obviously, this is a political firestorm. If the administration is on the wrong side of this issue and four or five export licenses have been given out, and then suddenly gas prices spike before the election, it will be easy to see how the argument can be made that we were undermining energy security.

Guy Caruso: My own view is that most of these permits will be approved, but it's going to be a slower process because of the concerns that are being raised by Congress and other consumers of natural gas.

Bruce McKay: We filed last fall. It is now being processed. We asked for a decision from DOE by June of this year. We don't have a reason to believe that we're not on track for that, but that was what we would like in order to keep on schedule.

Guy Caruso: I just returned from a trip to Japan and one of the most important questions being asked was will this be a reliable supply and is it possible that we'll sign an agreement and then have it either cut back or revoked?

Lisa Epifani: Revocation of an LNG authorization by DOE would be an extraordinary step and it would certainly be outside of DOE's standing principles of honoring contract sanctity and commercial arrangements and I think that DOE would find it very difficult too to even exercise the authority it has asserted to revoke contracts. There's some legal questions about the interaction of a couple of the provisions in the Natural Gas Act.

Lisa Epifani: What I do think is that DOE would be very careful before it revoked anything because it will chill infrastructure investment, it will chill financing and it's not just in LNG. If the government is willing to take that step there, what else would they do?

Lisa Epifani: But I think optimistically I would guess that three to five terminals, export terminals, get built in the U.S. and Canada and they go into operation in a time of 2015 to 2018 and I think, given that time period, hopefully global economic strength will match that and there will be a strong market for LNG.

Monica Trauzzi: A macroeconomic study requested by the Department of Energy on the impacts of LNG exports is expected to be released this spring. DOE says the study will be instrumental in its final decision on pending permit applications. For E&ETV, I'm Monica Trauzzi.