(John Kemp is a Reuters market analyst. The views expressed are his own)
By John Kemp
LONDON, Jan 20 (Reuters) - Critics will seize on a government report, showing U.S. natural gas exports could raise prices for domestic users, to press the Department of Energy to withhold permission for a string of new LNG export terminals.
But restricting gas exports to ensure a captive supply of cheap energy for U.S. chemical companies and other manufacturers would constitute a crude form of protectionism. It is not consistent with U.S. policies favouring free trade abroad and free markets at home.
Restrictions would send a terrible signal to trading partners at a time when the United States is pressing for better access to markets in China and across the developing world, and would discourage investment by domestic energy producers.
The Department should stick to current guidelines which state that “the market, not government, should determine the price and other terms for imported or exported natural gas. The federal government’s primary responsibility ... will be to evaluate the need for the gas and whether the import or export arrangement will provide the gas on a competitively priced basis ... while minimising regulatory impediments to a freely operating market”.
The Natural Gas Act requires any person wanting to export or import natural gas to obtain prior permission from the U.S. Department of Energy’s Office of Fossil Fuels (DOE/FE). The Department must authorise transactions unless it finds they are not in the public interest (15 USC 717b(a)).
Exports to countries with which the United States has concluded free trade agreements (FTAs) are automatically deemed to be in the public interest and must be granted without modification or delay (15 USC 717b(c)).
The Department has already granted approval for seven liquefied natural gas (LNG) projects to export up to 9.5 billion cubic feet (bcf) of natural gas to free-trade partners such as Canada, Mexico and Chile.
Most FTA partners are small or are themselves energy exporters, limiting their attractiveness for U.S. gas companies. But a deal is pending with South Korea, which is a big gas importer and could be a significant customer in future.
In contrast, exports to non-FTA countries remain subject to the public interest test. DOE/FE has approved only one application, from Cheniere Energy’s Sabine Pass LLC to export up to 2.2 bcf to non-FTA customers.
DOE/FE accepted the company’s own analysis that “the ability to export natural gas as LNG will greatly expand the market scope and access for domestic natural gas producers and thus serve to encourage domestic production when low domestic gas prices might not otherwise do so”.
It also accepted the company’s contention that existing and projected supply is “sufficient to simultaneously support the proposed export and domestic natural gas demand both currently and over the 20-year requested authorisation”.
The 2.2 bcf of gas that could be exported by Sabine Pass represents a tiny fraction of the projected 64 bcf/day domestic market for natural gas between 2015 and 2025, limiting its impact on gas availability and prices.
But DOE/FE is also considering applications from another seven projects that could boost daily exports to as much as 12.5 bcf, equivalent to 20 percent of projected domestic consumption, which could potentially have a decisive effect on both availability and pricing.
Relying on the analysis submitted by would-be exporters raises tricky issues for policymakers. And while each individual project may not have an adverse impact on domestic gas customers, the cumulative effect of approving all of them could be material and negative (the “salami-slicing problem”).
To take a comprehensive, impartial view DOE/FE last year commissioned an independent study from the Energy Information Administration (EIA), DOE’s independent statistical and analytical arm. Export critics have seized on the results to push for permit applications to be rejected and for Congress to stiffen the law.
In its report on the “Effect of Increased Natural Gas Exports on Domestic Markets”, EIA examined a range of scenarios for exports (6 bcf/day, 12 bcf/day) and growth in gas supplies (baseline, high shale gas ultimate recovery, low shale gas ultimate recovery).
It ran them through its integrated National Energy Modelling System (NEMS) to study the impact on gas consumption and prices, as well as competing fuels like coal, and carbon dioxide emissions.
EIA is careful to spell out the limits of its analysis. In particular, it notes NEMS is not a world energy model. The study does not address “the interaction between the potential for additional U.S. natural gas exports and developments in world natural gas markets”.
As I have written elsewhere, by the time the United States is ready to start exporting significant volumes of natural gas after 2015, rising exports from conventional gas producers (Australia, Qatar, Algeria) and growing production from shale (China, Argentina) may restrict the opportunity for profitable exports, leaving North America with a string of white-elephant LNG export trains to complement its existing fleet of idle import terminals.
Notwithstanding those caveats, the EIA’s analysis shows exports raise prices for residential customers and industrial users in every instance compared with the case of no exports.
Projected Henry Hub prices rise from $5.17 per million British thermal units (mmBtu) without exports in 2015-2025 to as much as $5.83 with low exports (6bcf/d) or $6.51 with high exports (12 bcf/d).
In the worst case, if high exports are coupled with lower than expected shale development, prices rise to $9.51. In the best case, low exports coupled with rapid shale development, projected prices fall to $4.29, though they are still higher than they would be without exports ($3.92).
EIA observes that in all cases increased domestic production satisfies 60-70 percent of the increase in exports. Only 30-40 percent will come from price increases and reduced domestic consumption. For the most part, lower domestic consumption would come from lower gas combustion in the power industry, where gas would be replaced with coal, raising carbon emissions.
In a response, the lobbying group Industrial Energy Consumers of America (IECA), issued a press release claiming the study showed “exporting liquefied natural gas may increase U.S. consumer prices for the fuel from as low as 36 percent to as much as 54 percent in 2018. Natural gas exports would also increase electricity costs between 2 and 3 percent on the low end to as much as 9 percent”.
“By anyone’s measure, these are substantial cost increases,” said IECA President Paul Cicio.
IECA failed to mention that large projected percentage increases come at a time when gas prices are touching their lowest level for a decade. Even under the worst-case scenario, prices would remain far below the recent peaks set in 2008 and 2005.
And gas will still remain cheap compared with oil. “Natural gas prices in all of the cases are far lower than the price of crude oil when considered on an energy equivalent basis,” according to EIA. “Projected natural gas prices in 2020 ... roughly correspond to an oil price range of $20 to $36 per barrel ... In 2030, projected baseline prices ... range from $25 to $47 per barrel in energy equivalent terms.”
In most scenarios, U.S. consumers will pay more if LNG exports are allowed, but the impact will be modest. Surging shale production will ensure customers do not face a return to the high prices experienced earlier in the decade.
IECA is suggesting the federal government intervene to block exports to reserve gas for domestic energy users rather than export it. But that would be protectionist. The practical effect would be the same as the quotas China has been applying to exports of rare earths to reserve them for its own manufacturers, which the United States is challenging at the World Trade Organisation.
Presumably, U.S. manufacturers will want access to overseas markets for all the chemicals, fertilisers and other products they make with cheap gas. Encouraging protectionism is not in their interest. For the relatively modest rise in prices LNG exports might cause, there is no reason to depart from well-established principles of free trade and free markets. (Editing by Anthony Barker)