Report: Market should dictate exports

05 06, 2012 by The Advocate

The United States should allow the market to dictate exports of liquefied natural gas and avoid laws that promote or limit shipments, according to a new report by The Brookings Institution.

The cost of producing, processing and shipping the natural gas, and the global market for LNG will limit the amount of U.S. gas that can be profitably exported, the study says. Each new export terminal will increase the price of natural gas a little, which will make it more difficult for each additional terminal to make money.

David Dismukes, associate director of the LSU Center for Energy Studies, agreed with the study’s conclusions.

“I think ultimately the market is going to provide its own discipline as to how much leaves the United States in terms of exports,” Dismukes said. “There’s a lot of gas in other places in the world, and a lot of it is very, very affordable.”

When natural gas prices pick up globally, there will be more incentives for those low-cost areas to increase their production, Dismukes said. The competition will limit U.S. exports and should alleviate some of the concerns about exports’ impact on prices, which for U.S. consumers are at a 10-year low.

The U.S. Department of Energy has gotten applications for nine export facilities, three of them in Louisiana. In addition, three Canadian export facilities have been proposed.

The proposed U.S. plants would be able to export 14.8 billion cubic feet of natural gas per day — nearly 40 percent of it from facilities in Louisiana.

The three in Louisiana and their daily capacities are Cheniere Energy’s Sabine Pass facility, 2.2 billion cubic feet; Cameron LNG in Hackberry, 1.7 billion cubic feet; and BG and Southern Union in Lake Charles, 2.0 billion cubic feet.

The report says some of those facilities probably won’t be built. Those that are will face increasing competition from foreign suppliers of shale gas, as well as an Australian LNG facility capable of exporting 12 billion cubic feet per day.

The petrochemical industry and utilities, major users of natural gas, have questioned the wisdom of a wide-open LNG export market. The petrochemical industry, a major part of Louisiana’s economy, has gained a major price advantage over foreign competitors as a result of low natural gas prices. But petrochemical firms worry the advantage wrought by gas production from shale formations will disappear if unlimited LNG exports are allowed.

Consumers would also suffer if utilities are forced to pass along higher fuel prices to customers.

Some critics have pushed for federal legislation to limit LNG exports.

The Brookings report says that’s a bad idea.

“Efforts to intervene in the market by policy makers are likely to result in subsidies to consumers at the expense of producers, and to lead to unintended consequences,” the report says. “They are also likely to weaken the position of the United States as a supporter of a global trading system characterized by the free flow of goods and capital.”

The study says LNG exports will likely have only a modest impact on domestic natural gas prices and a limited effect on the competitiveness of U.S. industry and job creation.

The terminals cost billions of dollars and it takes years to get state and federal approval for the facilities and to build them.

However, environmental activist Wilma Subra said there is another factor to consider in LNG exports.

Exports will also encourage continued drilling and production from shale formations, and that will have a “huge impact” on the environment and people’s health, Subra said.

“I think that’s the part that’s not being looked at and addressed,” Subra said.

The Brookings report says the three major environmental issues for shale gas production are water, emissions and other pollution, such as noise.

In hydraulic fracturing, water, sand and chemicals are forced underground under high pressure to crack rock formations and release the natural gas or oil from shale formations. The main environmental focus has been the risk of contaminating surface water and water tables, the enormous amount of water used in the process and disposing of wastewater from fracking.

Several studies on fracking and its environmental impact are under way, the report says, but so far there has been no conclusive evidence that fracking is linked to groundwater contamination.

Dismukes said there’s an easy solution for the industries concerned that LNG exports will hurt business.

“They can start contracting up these supplies themselves,” Dismukes said.

A lot of gas producers want the certainty of a guaranteed price, at the right price point, Dismukes said. Those producers are willing to negotiate longer-term deals.

The problem for industrial users, such as Dow or PPG or OxyChem, is that they can’t accurately predict where the market will be five years from now or what they’re going to be producing, Dismukes said. The uncertainty makes it riskier to commit to a longer-term contract for natural gas.

There’s less risk for utilities, with their captive customer bases, Dismukes said. It makes sense for power companies to commit to longer-term deals.

It also would make sense for one of the many petrochemical companies that recently announced plans to increase production capacity, an increase tied to low natural gas prices, to lock in some of that price advantage, Dismukes said.