When U.S. natural gas is shipped overseas, it will cost the 99 percent
The Department of Energy appears to be following a “Nigerian strategy” with respect to the nation’s recent windfall of natural gas.
Washington’s policies will benefit the 1 percent who own or run energy companies — and translate into higher costs for most Americans. If you can get a marginally higher price by selling off a valuable natural resource, the department seems to believe, you should do it.
So far, the Energy Department has OK’d every export application that has managed to navigate its complicated approval process. As more natural gas is exported, however, the more foreign appetite for natural gas will bid up U.S. prices, the faster American gas reserves will be depleted and the quicker the U.S. energy-based manufacturing recovery will be choked off. But all these potential problems seem to count for little when measured against the bottom lines of global energy companies.
There is, in fact, an odd cacophony within the Energy Department. Each year its Energy Information Agency produces a much-anticipated roundup and forecast of U.S. energy production. Its newest version suggests only modest growth in U.S. gas exports. By 2040, the agency expects liquefied-natural-gas (LNG) exports — the only way to send gas to countries without pipeline connections — will increase by only 3.5 trillion cubic feet, accounting for less than 10 percent of projected 2040 output. (Liquefied natural gas has been cryogenically chilled to the approximate density of crude oil. It requires special tankers and expensive “regasification” facilities on the importer’s end.)
But that modest forecast is completely inconsistent with the way the Energy Department has been banging out approvals for multibillion-dollar liquefied-natural-gas export facilities. It has so far approved, or conditionally approved, eight projects that would bring the export capacity to 4.4 trillion cubic feet by about 2019. The department also recently streamlined the process, apparently to expedite more approvals. The current priority list has 24 applicants. If just the top 10 are approved — and they all are far along in the process – liquefied-natural-gas export capacity would jump to about 10 trillion cubic feet by the early 2020s — or about a third of all output.
No company casually undertakes such a formidable export application. The average cost of an approval is roughly $100 million. The company’s legal, engineering and environmental teams must go through years of discussions and meetings with hundreds of federal and state officials. The government must examine plant designs and sitings, the company’s financial and management capacity to build and manage a $5- billion to $10-billion project, and its current and future sales contracts. Such processes can develop a life of their own. After a company has spent tens of millions, and cleared hurdle after hurdle, it can become difficult for the government to turn an application down. So the odds are high that at least the next 10 or so applicants will be approved.
The law requires that the Energy Department approve only liquefied-natural-gas projects that are “in the public interest.” In effect, would the United States benefit from a big spurt in gas exporting? One 2012 Energy Department study, by the economic analysis firm NERA Inc., found that exporting gas, in whatever quantities, was always in the public interest.
The firm’s argument was simple: Liquefaction fees guarantee that the per-unit revenues from exported natural gas would always be higher than domestic sales. So “U.S. consumers,” and the nation, would benefit to the extent of this additional income.
The report’s fine print is key, however. NERA acknowledged that exports in any important volume would increase domestic energy prices, which would depress the economy. Since new plants would be almost entirely automated, the hundreds of billions of dollars of investment they required would, on net, divert worker incomes to the employers and owners of capital. Or, as the report explains, exporting is always good for American consumers — especially the “consumers who own the liquefaction plants.” You know, the folks who hang out with consumers who, say, run Exxon or Goldman Sachs.
There are more problems with the NERA analysis. It assumes all liquefaction plants are owned by Americans, which is patently untrue. Because of the immense sums involved, plant after plant has substantial foreign ownership, often Asian, which has the most intense interest in U.S. gas.
Golden Pass LLC, for example, ranks high on the early-approval queue. It is a U.S. limited liability company jointly owned by that leading funder of global jihad, Qatar, and its long-term partner Exxon.
Another myth, which economists at Brookings seem much enamored of, is that exporting inexpensive U.S. gas will reduce global price gouging and increase global efficiency. That is a wan hope, indeed. Roughly half the gas, on current records, will be going to global trading companies — Exxon, Shell, British Petroleum, BG Group, Sempra, Centrica and others.
Exxon, to take just one example, is a partner in gas fields throughout the world. It now sells very expensive gas from Australia and Papua New Guinea to Asian customers at prices up to three times more than U.S. gas. At the same time, its partner Qatar, which is blessed with the cheapest gas in the world, also sells its gas to Asia at the same high price that Exxon does. As long as the global supply of natural gas runs below demand, which will be far into the future, international gas will be selling at the “marginal” price, or at whatever is the highest price that some customer is willing to pay. Consumers will be paying top dollar while the prime beneficiaries are going to be the shareholders of the global energy companies.
The clinching argument from Brookings and other economists is that U.S. liquefied-natural-gas exports will necessarily be small. If they’re right, top global businessmen have collectively blown far more than $1 billion in pointless export- approval proceedings. But the energy companies could instead be gambling on China.
Shale gas has long been a major component of China’s energy forecasts. The country may indeed have the greatest gas reserves in the world, but it now seems to have conceded that, primarily for geologic reasons, very little of it may be recoverable in the foreseeable future, as many in the industry suspected. But since natural gas is the ideal substitute for industrial coal, the sheer toxicity of China’s coal-generated air pollution will drive a massive expansion of gas imports. Recent pipeline contracts with Russia will help but will not come close to closing the gap.
China also has a long record of destabilizing world commodity markets. During its 2000s drive to dominate global steel markets, it drove a tenfold jump in iron ore prices.
Washington may also be far too complacent about the U.S. supply. NERA, for example, assumes that within the medium term, all U.S. gas is equally accessible. That is far from certain. Gas from the Marcellus shale wafts up the wellpipe almost ready to be piped to customers. Other shale deposits may resist giving up their treasures so easily. Consider: Glowing prospects in California’s Monterey shale were recently downgraded by 96 percent, and the estimate of recoverable gas in the Marcellus was reduced by two-thirds in 2012.
The estimates of recoverable U.S. natural gas so casually tossed around now are virtually all based on projections from models — not from extensive drilling. Like the original Marcellus projections, there could be nasty surprises ahead.
The danger for the United States is that it will drift into the position of a raw- material supplier to an East Asian economic juggernaut. The Energy Department has commissioned a new economic analysis of the impact of exporting — and maybe this one will be from a firm with a broader perspective than NERA’s. It should suspend further approvals until that report is finished and properly vetted.
Meanwhile, for the sake of the public, the Energy Department should try to understand why its forecasting and policy staffs are marching to such different drummers.
PHOTO (TOP): The pier at Dominion’s Cove Point liquefied natural gas (LNG) plant on Maryland’s Chesapeake Bay, February 5, 2014. REUTERS/Timothy Gardner
PHOTO (INSERT 1): Pipes are seen at Dominion’s Cove Point liquefied natural gas (LNG) plant on Maryland’s Chesapeake Bay, February 5, 2014. REUTERS/Tim Gardner
PHOTO (INSERT 2): A Blu LNG filling station in Salt Lake City, Utah, March 13, 2013. REUTERS/Jim Urquhart
PHOTO (Insert 3): A natural gas pipeline is seen under construction near East Smithfield in Bradford County, Pennsylvania, Jan. 7, 2012. REUTERS/Les Stone
PHOTO (INSERT 4): A natural gas-powered AT&T van is seen parked in Hollywood, California, March 21, 2013. REUTERS/Jonathan Alcorn