The DOE and the exporting of liquefied natural gas

01 The DOE and the exporting of liquefied natural gas

Continuing the discussion of natural gas and the new nominee for the Department of Energy, we point to the latest edition of the Economist, which paints the picture of a key issue facing new DOE nominee Dr. Ernest Moniz:

On America’s Gulf coast, massive industrial facilities stand idle. Miles of twisting stainless-steel pipes and huge storage tanks gleam uselessly in the sun. They are a reminder of the hundreds of billions of dollars that America has invested in terminals for handling imports of liquefied natural gas (LNG). Thanks to the boom in domestic shale gas, those imports are no longer needed. America produces nearly as much gas as it consumes, and will soon produce far more.

 The natural gas boom is a huge policy issue facing the US right now, with pressure coming down on the Administration from all sides. The DOE does not have responsibility for implementing regulations on natural gas extraction (such as fracking), but it does issues licenses for terminals exporting liquefied natural gas (LNG). The DOE is currently maintaining a queue of 15 applications to export LNG more freely around the world. The issue of exporting has also 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 White House has refrained from weighing in on LNG exports in public. President Obama, in his February State of the Union speech, reiterated his support for the natural gas industry as a whole. White House energy adviser Heather Zichal said last year 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”

Obama has granted one license so far to Cheniere Energy so that it can retrofit its Sabine Pass for purposes of exporting LNG by 2014. Altogether, 11 LNG receiving facilities exist here and 9 of those are asking U.S. regulators if they can be converted to export terminals. Now, eyes are turning to Moniz, who as a co-chair of an MIT study, recommended that “the U.S. should not erect barriers to natural gas imports or exports.”

A lot of issues are play, including whether any exports would lead to higher natural gas prices at home at a time when the many in the chemical and manufacturing sectors are making key investments due to the cheap supply. However, gas producers clearly stand to benefit from export. One of the realities of the gas fields is that today’s prices are not sustainable as they don’t offer producers enough value to drill profitably. Even accounting for the cost of gas liquifaction and shipment, the spread between U.S. prices and global prices ensures them a better profit from export than they currently get at home.

Share prices have tumbled for firms such as Chesapeake Energy, Devon Energy and Southwestern Energy. Analysts reckon that gas has a “sweet spot”, where drillers can make money while consumers still feel little pain, of around $5-6 per mBTU. But the economics of American shale beds means getting there will take time.

Natural gas prices have rested at less than $3 per mBtus for an extended period of time. In Europe, those prices are $10 for the same unit while in Asia they are $15. LNG producers, naturally, want to ship their goods to where they can fetch the highest price. Such forces would then increase the value of that product here. However, any jump in prices would hurt chemical and other manufacturers, whose processes are used to make all kinds of consumer goods.

The DOE found in December 2012 that prices could rise as much as $1.11 per mBtus over five years. But it still concluded that the overall benefits to the U.S. economy would outweigh that potential price increase. The losers would be the chemical makers like Dow while the winners would be the domestic natural gas producers such as Chesapeake Energy and ExxonMobil.

The subject of whether to allow more LNG exports is causing a rift within the manufacturing community. Dow Chemical testified that American policy ought to be “prudent, responsible and balanced.” Higher prices, it says, would prevent all chemical makers from making capital intensive investments.

But the National Association of Manufacturers disagrees with those positions, noting that increased natural gas production not only leads to more energy jobs but that it also creates new demand for its members’ products. It also said that any denial of export licenses would infringe upon free trade agreements, ultimately hurting domestic businesses that do business abroad.

The Business Roundtable, a collection of CEO’s from companies as varied as Coca-Cola Co and JPMorgan Chase has urged federal officials to open more land to oil, gas and coal interests and approve the Keystone XL oil sands pipeline, but has avoided taking a stand on more divisive issues like the level of natural gas exports the United States should pursue. The CEOs have been meeting with lawmakers recently to push the connection between energy development and jobs.

Now how does the export issue impact the cleantech industry? (See previous post for further discussion). While the low price of natural gas has made the development of renewable projects less economic for power producers, should environmentalists and the renewable energy push for increased natural gas exports?  Many experts believe so.

According to Arno Harris, CEO of Recurrent Energy, a leading developer of solar projects for utilities and large energy customers, “the renewable energy industry should absolutely get behind the idea of exporting natural gas. If gas prices were still at the levels they were three years ago, wind and solar would be solidly competitive with fossil-fired power. And the utility-scale renewable industry wouldn’t be fighting the headwinds it is today. Exporting gas would increase demand and raise gas-fired power prices to a level that would help wind and solar by improving their competitiveness.”

He continues, “…..why should climate advocates get behind exporting natural gas? Wouldn’t that just increase the amount of carbon we’re putting into the atmosphere? One of the big downsides of our gas glut in the U.S. is that we’re now exporting our coal to Europe. Cheap domestic gas is replacing coal at home but that coal is simply being burned elsewhere. Thus the result of low gas prices is to increase global carbon emissions because total fossil fuel consumption is exploding.”

Moniz supports an ‘all of the above’ energy strategy, which includes responsible fracking and also strong support for renewables. Exporting gas would likely increase demand and raise gas-fired power prices to a level that would help technologies such as wind and solar by improving their cost-competitiveness. In addition, lower natural gas prices throughout the world would likely result in the further displacement of coal-fired power plants as well, reducing carbon emissions. However, companies such as Dow are putting a lot of pressure on the US government to protect is low-cost fuel source. The nomination of Moniz has been praised by many policy analysts, who believe the physicist, who was a top Energy official during President Clinton’s second term, is a politically experienced pragmatist. The exporting issue will be one he is forced to deal with soon if his nomination is approved.

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