Opinion

The Great Debate

The Case Against Natural Gas Exports

By Charles R. Morris
August 19, 2013

President Barack Obama has made middle-class jobs and natural gas two of his top second-term policy objectives. Both could be undermined if his Department of Energy (DOE) continues to approve gas industry applications for exporting American gas.

There is already a move in Congress to remove DOE’s authority, so approvals can move even faster, and the oil and gas industry has thrown all its lobbying muscle behind this effort to steamroll through the permission process.

Natural gas, the cleanest of the hydrocarbon-based fuels, has long been a primary choice for heating and power generation, as well as an essential raw material, or “feedstock,” for a vast range of chemistry-based products, including every kind of plastic, synthetic cloth and high-tech composite materials. When gas supplies came under pressure in the late 1990s, the chemical industry — and most other energy-dependent U.S. heavy manufacturers — were hard hit.

Just within the last few years, however, the shale gas revolution has turned the economics of the natural gas industry upside down. Hundreds of small entrepreneurial companies rushed into production, outstripping pipeline capacity or the ability of customers to refit their fuel operations. For the last few years, the industry has been drowning in unsellable gas. Many wells were mothballed — they can be easily restarted — and producers shifted their attention to shale “liquids” that replicate most of the lighter derivatives of crude oil, including gasoline, which commands far higher prices.

The spot price of gas is set in the New York futures market, based on trades at a major Louisiana collection center called the Henry Hub. During the worst of the glut, the Henry Hub price dropped below $2 per thousand cubic feet (Mcf), well under the cost of production. But now new pipeline construction has broken the worst pipeline bottlenecks, and customer demand is rising, so prices have been hovering near $4 per Mcf for some time.

The industry is generally profitable when gas sells in the $4 to $6 range, and most forecasts expect U.S. prices to settle at around $5 per Mcf for the foreseeable future.

As an energy bargain, $5 gas is equivalent to $25 to $30 per barrel of crude oil — so the United States is suddenly extremely attractive to energy-intensive industries. Hydrocarbons account for about half the cost of production of organic chemicals for example, and BusinessWeek recently headlined the industry’s “Rush to the U.S., Thanks to Cheap Natural Gas.”

An industry trade group has identified 97 new chemical manufacturing projects underway, with some $72 billion in new investment, about half of it from overseas. And they come from far and wide: the big Dutch conglomerate, LyondellBasell, Taiwan’s Formosa Plastics, Russia’s EuroChem. In the steel industry, Nucor is converting to a new energy-intensive high-efficiency method of iron production that had previously been uneconomic. Austria’s Voestalpine, a Nucor rival, is building an American clone of the Nucor plant; half of its product will be exported back to Europe.

These are all billion-dollar, long lead-time investments, so major job impacts won’t start being felt until about 2015. But they will have long-term staying power. The job implications, taking into account supply chain, spending multipliers and other spinoff effects, are in the millions.

That is the backdrop for the lobbying confrontation now taking place in Washington. Overseas, prices for natural gas are far higher than here because they are almost always “oil-linked” — tied to the per-unit energy cost of crude oil. Prices in the energy-thirsty manufacturing districts of east Asia is four times as high as in the United States. The gas industry suffered financially during the glut, and producers are casting envious eyes at the vast profits waiting for them overseas.

To be exported, gas must be liquefied at cryogenic temperatures to achieve an energy density that justifies processing and shipping costs. That requires building liquefaction installations, which must be approved by the DOE. Three projects have already been approved, and 25 more are in the queue, with perhaps half at fairly advanced stages.

But the industry’s clamor for expedited approvals is opposed by an alliance of large manufacturing companies, led by Nucor and Dow Chemical, and including Huntsman Chemical, Celanese, Alcoa and the American Public Gas Association. They warn that large-scale exporting at international prices will inevitably push American prices up to international levels and risk smothering a U.S. manufacturing revival.

Both sides in the debate have produced a battery of studies supporting their positions.  The oil majors are leading the export drive, since most of them have acquired large positions in American gas. They argue that free market forces will protect against price increases, because burgeoning world gas supplies and a rapid build-out of liquefaction plants will create a buyers’ market in global gas. Opponents argue powerfully that the export lobby is wildly overestimating future supplies and processing capacity. Debates that turn on warring forecasts, like this one, quickly devolve into shouting matches.

When the data can’t be trusted, principles should rule. And the oil industry invokes one of the most strongly held American values: Let the free market decide. Governments should step aside, the big oil companies are insisting, and let the market work out the allocations — that’s what markets do best.

Right. This just highlights the hypocrisy in the pro-liquefaction argument. Global oil and gas are not traded in free markets.

World oil prices are carefully managed by the Organization of Petroleum Exporting Countries (OPEC) cartel. Knowing a good deal when they see it, the world’s largest gas producers, Russia and Qatar, both of whom produce gas more cheaply than the American shale industry can, keep gas prices resolutely oil-linked. It’s raining money for all of them.

A recent study by London’s Centre for Global Energy Supplies made detailed estimates of the actual wellhead cost of the world’s oil.  At classic free-market, marginal-cost pricing, 90 percent of it would be cost-competitive with American natural gas. So why is it three or four times as expensive? Because if there were a true free market in oil, the Saudis, Qataris and all the other oil kingdoms would be insolvent — just as they were when their pricing discipline broke down in the mid-1980s. After all, those palaces and the blackmail payoffs to terrorists cost a lot of money.

Cartel discipline has been maintained for many years now. So production is controlled to keep oil prices at the highest level the world can pay without slipping into recession. And the oil majors, of course, share in the windfall.

The oil industry, which has waxed fat within one of history’s most successful price-fixing regimes, now pretends to welcome the development of a global buyers’ market in natural gas. But if a world of nearly unlimited gas supplies and gas liquefaction capacity ever came to pass, the oil cartel would collapse because natural gas can be a petroleum substitute across such a broad range of petroleum-derived products.

Oil prices would plummet to marginal-cost levels, and the desert kingdoms, as in the 1980s, would again be strewn with rusting Mercedes limousines. ExxonMobil, now the largest U.S. gas producer, wants us to believe that this is the future it is hoping for.

There are multiple clues to the industry’s real position. One is from Exxon’s second quarter financial review for stock analysts. The company has been on a global investment binge, and was asked, specifically with regard to south Pacific investments, when shareholders would start to see the benefits. Pointing to projects coming on stream next year, the company spokesman stressed that they were “either oil-based or oil-linked gas” — so profits would be very high.

Or consider how the oil majors are positioning themselves in the liquefaction market. One project high in the DOE approval queue is a 70 percent/30 percent partnership between Qatar and Exxon. Doubtless Exxon will supply the gas at cost and Exxon and Qatar will sell it — at oil-linked prices. About 25 percent of the approved liquefaction project capacity has already been contracted for by BP. Which will behave in exactly the same way.

Fortunately, we don’t have to rely on forecasts. There is a real-life experiment underway in Australia. They have been exporting natural gas for some time in modest amounts. But a number of big projects will start coming on line next year, and local gas prices have already tripled — though there is ample supply and there has been little change in production costs. Suppliers apparently “prefer to sell the LNG to the likes of Japan and South Korea who will pay a premium for it.”

One major Australian fertilizer and ammonia producer that had been planning a new billion-dollar plant at home, has cancelled it to relocate in Louisiana. The chief executive officer, in an interview, said he was confident that the United States would carefully limit exports.

One can only hope. 

PHOTO (Top): A natural gas well is drilled in a rural field near Canton in Bradford County, Pennsylvania, Jan. 7, 2012. REUTERS/Les Stone

PHOTO (Insert A): A natural gas pipeline is seen under construction near East Smithfield in Bradford County, Pennsylvania, Jan. 7, 2012. REUTERS/Les Stone

PHOTO (Insert B): A gas drilling site on the Marcellus Shale is seen in Hickory, Pennsylvania, Feb. 24, 2009. REUTERS/ Jason Cohn

PHOTO (Insert C): The Exxon Mobil refinery in Baytown, Texas, Sept. 15, 2008. REUTERS/Jessica Rinaldi

Comments
21 comments so far | RSS Comments RSS

Mr. Morris you can stop with the ‘Big Oil Conspiracy theories’.. Someone of your purported stature should know better than to try ‘scaremongering’ to make a point.
The US can have both sizable exports of LNG and stable NG prices at home.. such is the largesse of Shale..
We both know the DOE will never approve all of the LNG terminals and the US will tax heavily all LNG exports increasing Fed revenues.
While exporting LNG will marginally help our enduring Trade Deficits as well as creating 000′s of US jobs, the major benefit will be the enormous political ‘goodwill’ generated primarily in Asia. This will provide future Presidents who understand foreign relations, significant leverage where today we have none..
Why don’t we try and write a balanced and thoughtful opinion piece that will move the discussion forward in a meaningful way; rather than spewing this weary re-cycled partisan BS. You do your readers a major disservice..

Posted by willich6 | Report as abusive
 

I am not sure. But something tells me that the price is given without the costs of nature rehabilitation. The shale gas production affects a great deal of land.

One of the reasons the Chinese still decided to import our Russian natural gas instead of developing shale gas projects.

Posted by OUTPOST2012.NET | Report as abusive
 

Excellent analysis, looking at the subject from many angles, thanks.

I suggest a couple of other factors could also be considered, which may limit the potential for US LNG exports:

. US Shale gas production costs will likely increase when new environmental protection regulations are imposed on drillers, to prevent earth and water pollution as well as earthquakes. Such regulations are currently being studied by various Federal departments and agencies.

. The cost of building and operating liquefaction plants and LNG storage port terminals may exceed some of the current projections, thereby increasing export LNG costs.

. There are many new large gas production projects underway around the world, both on and off-shore, especially in Asia, the Mid East, So. America, Africa and Northern Europe. When these new projects are fully operational, they will cause an influx of LNG supply and therefore may result in lower LNG global pricing, thereby making US LNG less competitive for export, which may result in under-utilized LNG terminals.

And one last remark: the US has had one gas liquefaction and LNG export terminal in Kenai, Alaska, for a long time, operated by Conoco Phillips. It is currently dormant as far as exports are concerned, and only supplies Alaska, while it used to export LNG to Japan. It is also unconnected with the US mainland, as there is no gas pipeline over such a long distance (across Canada) and that there is not a single US built, owned, flagged and operated LNG tanker (out of a world fleet now reaching 400 x ocean LNG tankers), as would be required by the Jones Act to ship LNG between two US states.

Posted by llouest | Report as abusive
 

Excellent article.

The natural gas industry enjoys many benefits from the American people. For example the natural gas industry could not exist without the highways built and paid for by the American citizen. Nor could pipelines be constructed without the courts and without eminent domain wielded on behalf of natural gas producers.

The gas itself comes from the bowels underneath the land of America, and certainly could be considered a national treasure from some philosophical points of view, owned by everybody.

America’s government must keep in mind, first and foremost, the interest of the American people, the citizens.

The owners of the natural gas fields are typically wealthy people who inherited title to those lands from their parents and grandparents.

They, the rich kids who inherited the shares of the gas companies, didn’t make the land or the gas. They mainly just met with their lawyers, and signed some documents. And then flew off to Aspen for fun.

I say keep the natural gas here in America where it can help drive down energy prices for the American consumer.

Exporting the natural gas is akin to offshoring jobs. Someone gets immensely wealthy, and the American citizen becomes poorer.

Do not help people ruin America.

Posted by AdamSmith | Report as abusive
 

I’m not an expert, but a friend who is an O&G lobbyist explained it to me this way, which seems to make sense. The companies that own the drilling rights have to drill within certain period of time or forfeit the rights. Once drilled, to not pump or to pump and then store aren’t economically practical. (I think I got this right.) This not to say that making money sooner rather than later isn’t also a big motivator, but there are other factors.

Posted by PCScipio | Report as abusive
 

As a mining engineer I am familiar with the basis of the argument made in this article. That LNG-export is solely in the interests of the industry and their shareholders is fairly well established. However, blocking LNG-exports would be an unusual step for the US because it doesn’t have an energy policy. However, who’s to say whether the government sees, or cares about the big picture of jobs, and the competitive dynamic of doing just this. As things stand, chemical producers using US natural gas for feedstock indeed have an immense cost advantage, which means jobs. Similarly, foundries, power plants, and other users of large scale amounts of energy have an advantage, which will dissipate with LNG-export. I guess it’s a matter of benefit for the few or benefit for the many, and this treads dangerously close to political thoughts contrary to the American way. We’ll see, won’t we? If I were a betting man, I’d put my money on the outcome being influenced by the vast number of dollars being spent to influence the politicians. What else is new?

Posted by jbeech | Report as abusive
 

There is no good argument against exports. All of the large studies have shown that natural gas prices will barely be affected by exports. The geopolitical advantage is also a major reason for exports. Of course we should use more right here too. We are behind the rest of the world in using natural gas for transportation. Please see: References on the Natural Gas Revolution https://docs.google.com/document/d/19Yf0 MWpo91vrlu-mmJtjB1ERukjJo5W41oi4RZVQBug/ edit

Posted by ronwagn | Report as abusive
 

@willich6: Read Article 1, Section 9, Clause 5 of the US Constitution: “No Tax or Duty shall be laid on Articles exported from any State.” The US cannot tax natural gas exports.

Posted by minderbinder | Report as abusive
 

The argument both ways — between producers seeking imports and manufacturers and other large consumers trying to prevent them — if easily understood on the basis of pure self-interest. Not to put that down too much because self-interest is the essence of a free-market economy. But the point is that if the US government is going to violate free market principles to benefit the manufacturers, there must be an explicit policy trade-off. Not a vague promise, but a concrete guarantee that manufacturers will not be merely using promises of “jobs” as a bait for politicians. But rather concrete assurance that cost savings will result in jobs. We can’t just be taken for suckers on this, and this opinion piece reads like sucker candy, bought and paid for by the manufacturing interests. BTW, the balance of trade benefits of gas exports would be no small thing for the country as a whole.

Posted by From_California | Report as abusive
 

Mr. Morris needs to remember that fixed price contracts for LNG were needed to support multiple billions of $ of investment to liquefy, transport and receive/regas LNG. That set those LNG prices relating to his comments that suggest are instead the result of cartel policy, not the cost of natural gas at the wellhead. And since returns must be locked in to make an FID, those prices are not influenced by cartel thinking.

Also, as US gas will increasingly be shale sourced, our wellhead cost will be higher than most other countries. That is not a factor in US vapor gas prices. But since LNG technology and ships give no one an edge and cannot offset higher wellhead costs, any major US LNG export volume will be competing in a global market from a higher cost base and this will retard major export expansion.

And, remember, most current US export proposals are from terminal operators looking to lock in returns on LNG production investments and they are not taking global commodity risk. Their customers will be taking commodity risks, and starting from a higher wellhead base is a disadvantage. So there is likely a finite buyer base and few proposed export projects will simply be extensions of US gas reserve holders.

Last, even if Morris is right and oil cartel players will control US gas exports, that is done through limiting supply, not allowing unlimited sales.

Frankly, fundamental market economics in the US do not paint a favorable picture for massive export volumes. The few early adopters will do well (and many will commit to terminals as a hedge) the rest will not. (The reverse of this model had many “buyers” of terminal capacity on the import side, but this has not led to significant import volumes.) The market determines winners and will the US will be the best arbiter for US exports.

Posted by jaygottlieb | Report as abusive
 

The Big Oil bugaboo again. “The oil companies are the root of all evil in the universe.” I for one don’t believe it.

Let them export the surplus gas. It will be good for the overall economy. Because we have a domestic surplus, disruptions in supply are far less likely than they would be with energy from the Middle East or South and Central America. Prices always go up and down, but energy extracted at home is always more stable price-wise and usually less expensive, particularly when there is a glut.

Posted by theduke89 | Report as abusive
 

This is not a conspiracy.

This is how businesses are actually supposed to operate; seek the highest possible profit for the things they produce. The highest possible profit is overseas, not in the domestic market.

Therefore, natural gas producers want to and must sell overseas, because they have a fiduciary duty to their investors to seek the highest possible profit.

Posted by Burns0011 | Report as abusive
 

The government will do what Corporate America tells them to do. Consideration for the American people and what’s best for America doesn’t even enter into the equation. It’s all about money and Corporate America’s bottom line.

Posted by Des3Maisons | Report as abusive
 

It seems that the real debate here is whether to “Nationalize or Socialize” energy or not. Many countries have, and more are leaning that way. I’m undecided myself. For the USCA, nationalizing would benefit the country in many ways. But as a world citizen, keeping energy available to all societies is not only morally good, but good business too.

Posted by tmc | Report as abusive
 

Regardless of the decision, the one certainty is the gas needs to be transported from point A to point B. As for me and my money, we’re invested in pipeline companies.

Last I found the comment above that “… owners of the natural gas fields are typically wealthy people who inherited title to those lands from their parents and grandparents” extremely funny, if not horrifically ignorant. The writer has obviously not visited the shale-gas regions in south-eastern Ohio. Nestled in the foothills of Appalachia it was one of the poorer areas in the country.

Posted by GeoCitizen | Report as abusive
 

This is from the author.

The main point of the article, which none of the comments has picked up on (which doesn’t reflect well on me I admit) is that global oil and gas markets are NOT a free market. Prices are managed by the OPEC cartel(by withholding their own inexpensive oil and gas) primarily to meet the needs of their state budgets, and incidentally feed terrorist machines. Whenever the cartel has broken down, oil and gas prices fall to levels pretty close to that of American shale gas.

Economics teaches a ‘theory of the second best’: if a market is fundamentally distorted, as the world oil and gas market currently is, you can’t improve things by adding a free-market tweak is some sub-sector.

North American gas now is priced pretty much in accord with free-market principles, and as the glut is worked down, which is happening now, will offer fair free market profits. Our advantage over other countries in energy is not because we have the cheapest energy — we don’t (Qatar and Russia’s gas is much cheaper) but because it is a haven of free market pricing, while they both link to cartel pricing. The danger of large-scale exports, is that it will allow the OPEC cartel to dictate prices here too — as seems to be happening in Australia.

I can’t imagine how that could be a good thing. Especially since so much of actual export will be owned by foreigners.

Posted by crmorris | Report as abusive
 

As a US consumer, I’m paying about $1/therm for my natural gas. That is about 1ct/MJ, or about $28/thousand cuft (MMcft).
The money I pay for OUR own nat gas goes right back into the US economy.
Meanwhile, nat gas companies sell OUR nat gas for something like $5-$10/MMcft overseas.
I’m telling you, WHY would we want to sell out our OWN nat gas for pennies on the dollar overseas, if we can sell it to ourselves at a much higher price ?

Posted by RobDekker | Report as abusive
 

We quit being a colony over 200 years ago. Export finished goods, not raw materials. Use our own cheap energy instead of importing or converting it to a more expensive fuel. And quit sheding trillions in blood and treasure to protect disloyal oil companies and governments. Econ 101, folks.

Posted by alowl | Report as abusive
 

The huge Nexus Pipeline is proposed to take Pennsylvania and Ohio shale gas to Windsor, Ontario, Canada, entirely for the export market. But the owners of the pipeline are working with local governments in Ohio to rush into plans to cooperate on getting rights of ways on our Ohio properties for a high volume, high pressure line. I am just a citizen, but it seems to me that this gas, in view of our strategic national policy to acquire energy independence, should be treated by Congress as a U.S. strategic natural resource.

Posted by CharleneKing | Report as abusive
 

Our nation needs to tap it’s wealth of natural gas but doesn’t need to export it. I remind us of past opportunity created by war in Europe which escalated crop prices drawing so called suitcase farmers who ravaged the land in quest of recognized short term profits. I remind us that later war in Asia recreated such opportunity, again drawing those opportunists whose selfish actions brought back those dust storms in the 1950s. Only large numbers of farmers government contracted to follow regulations formed in the late 1930s prevented millions of acres of needed farmland from being turned into a permanent American desert.
We have no protections in place today to prevent serious damage to our precious water supply. That along with fact that restricting our natural gas to domestic use will help create a needed renaissance of domestic manufacturing should be sufficient reason to abstain from exporting it!

Posted by donee | Report as abusive
 

The author’s conjecture is that OPEC can control world gas prices and keep them artificially high. How on earth does this lead to the conclusion that the U.S. should not export gas to profit from those artificially high prices?

Posted by QuietThinker | Report as abusive
 

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