Natural Gas:

Former FERC Commissioner Spitzer weighs in on LNG export debate

With Rep. Ed Markey (D-Mass.) introducing legislation this week that would ban exports of liquefied natural gas from the United States, how will Congress address the issue this year? During today's OnPoint, Marc Spitzer, a partner at Steptoe & Johnson and former commissioner at the Federal Energy Regulatory Commission, explains why LNG exports have emerged as a critical part of the energy policy discussion. He also weighs in on the permitting process and potential action by Congress to stop exports.

Transcript

Monica Trauzzi: Hello, and welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Marc Spitzer, partner at Steptoe & Johnson. Commissioner Spitzer most recently served on the Federal Energy Regulatory Commission. Commissioner, nice to you see.

Marc Spitzer: Good to see you. Glad to be back.

Monica Trauzzi: Commissioner, exporting liquefied natural gas is emerging as a major issue here in the United States this year, with the Department of Energy needing to decide whether to grant permits for several terminals around the country. Why do you believe this is emerging as such a critical issue?

Marc Spitzer: Well, it's an interesting mix, and fascinating mix, of environment, economics, politics. And the root, the origin is in the shale revolution that's gripped the entire country. It has changed the industry from an exploration and production basically to a manufacturing process, where the process has driven down costs, increased efficiency, explored areas that never used to be subject to natural gas exploration, Pennsylvania, West Virginia, Ohio now, parts of Michigan, had not historically been producing gas. And as a result, we have an enormous supply, which is an amazing change. When I came to FERC in 2006, we had gas shortages. Hurricanes Katrina and Rita destroyed offshore natural gas infrastructure. So the offshore platforms are very vulnerable to disruptions from weather. And the natural gas spot prices hit $15. So when I was back at the Arizona Commission, the rate payers were paying $15 an MCF for gas, whether it's from the distribution company or gas used for electricity generation. And look, in the space of a few short years, a complete revolution in the production and distribution of natural gas.

Monica Trauzzi: We're starting to see more action from the environmental community on this issue. The Sierra Club filed objections with DOE against three LNG export terminal applications. Is this something you expect the courts might take up or that we might see Congress acting on this year?

Marc Spitzer: Well, there are multiple issues, and of course, my former colleagues at FERC ultimately are called upon to approve, based on an application, export terminals. FERC has approved a number of import terminals. Those are regasification facilities. The process is not as complex for taking LNG that's imported into the U.S. in liquefied form and gasifying it for distribution throughout the United States. The process of what they call liquefaction trains is much more complex, because then take natural gas produced in the United States and liquefy it and then store it for ultimate export, and so the liquefaction process I understand is four to six times as expensive as a regasification terminal. And of course, those import terminals that were built, there's no importing of natural gas because the price, again, has flipped, and the economics are upside down, the economics of these projects are upside down. So the entities are seeking to somehow recapture or monetize their investment by converting the import terminals into export terminals, and that's -- the fascinating aspect of the environmental issue is an interest by some environmentalists in moving away from generation of electricity through coal, which is approximately 48 percent of the power generated in the U.S., through coal-fired generation, to move that more towards natural gas. But then the environmental community is concerned about the environmental impacts of shale production. So it's sort of a catch-22. Similarly, the producers of natural gas, they have a glut of supply. Their processes have become so efficient they've almost become victims of their own success, in a way, and that the efficiency has led to more supply than they can handle. So they're looking for a way to increase demand for natural gas.

Monica Trauzzi: This --

Marc Spitzer: One way is generation for power. The other way is vehicle fleet. But they find export to be almost the silver bullet in terms of increasing demand for natural gas.

Monica Trauzzi: It sounds like industry has a lot to lose if they're not able to start exporting. I mean, could we see -- what negative impacts could we see on industry?

Marc Spitzer: Well, on the production side, there was talk of $1 gas, because there are storage issues, and the storage facilities can't accept any more. If we have -- continue to have a warm winter throughout the country, you're going to have a short-term blip. And $1 spot price for natural gas at the Henry Hub would send shivers down the spines of anybody who's involved in the production of natural gas. Then you have the issue of the -- of the industrial consumers of gas, who are concerned about the issue -- the impact of export on their prices. They obviously have the inverse relationship with the producers: the lower, the better, in terms of their price. But again, the question is overall, from the Department of Energy, from the FERC, from the Congress, who are the entities that would have regulatory oversight, determining what is in the public interest of the United States in terms of export, and will that potentially change over time. It's arguable that a decision by DOE in the early stages of the export boom might be reversed subsequently if there is a finding that there's an impact -- negative impact on U.S. consumption patterns, and if prices are going up. So these are -- in some areas we're speculating, but if you ask anyone, myself included, when I took office at FERC in 2006, whether I would have foreseen exports of LNG by the U.S. when it was assumed that we were going to be net long-term importers, speculation's hazardous in this business.

Monica Trauzzi: How does Japan play into all of this? I mean, how much might they be willing to pay for gas from the United States, and how big of a factor are they playing in the debate here in the United States?

Marc Spitzer: Well, Japan is ultimately a consumption hub. The Fukushima crisis has caused Japan to reconsider its commitment to nuclear power, so they're increasing the number of natural gas generation facilities in Japan. The spot price is very high. The Panama Canal is being expanded in '13 to permit some of the larger LNG tankers to go through the Canal instead of having to circumnavigate South America. So export facilities in the Gulf Coast would have much lower transportation cost to Japan with the expanded Panama Canal. And so there is considerable interest in long-term exports to not just Japan, but China and Korea as well, and those are potential markets for the producers. They -- you have what remain the same environmental concerns and the same potential opposition from groups that consume natural gas, who might view globalization of the natural gas market not in their interest.

Monica Trauzzi: All right. This is an issue that we're going to continue to watch. We have to end it there. I thank you for coming on the show.

Marc Spitzer: Thank you.

Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.

[End of Audio]

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