(John Kemp is a Reuters market analyst. The views expressed are
By John Kemp
LONDON Jan 20 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
REQUEST FOR EIA STUDY
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.
EIA EXPORT SCENARIOS
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
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
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
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.
GAS PRICES TO STAY LOW
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
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)