Strange Bedfellows Debate Exporting Natural Gas

08 22, 2012 by Businessweek

The shale gas revolution is starting to pay small dividends for U.S. consumers. As electrical utilities rush to switch from coal to gas, peak electricity rates have fallen in nearly every market. According to the U.S. Consumer Price Index, utility gas service for things like heating and cooking is now 13 percent cheaper than it was 12 months ago. That’s great and all, but taken together those savings don’t add up to much. Electricity and gas bills account for only about 4 percent of our total spending.

While the recent bounty of cheap natural gas helped revive U.S. manufacturing, which has added 500,000 jobs since February 2010, its broader benefits to the U.S. economy are harder to come by. There simply aren’t enough uses for cheap natural gas to make a big impact on growth or costs; not yet, at least. As a result, natural gas producers have fallen victim to their own success. They’ve drilled so much so quickly that they’ve crashed the price to below $3 per million Btu. In many cases, drilling natural gas these days is a losing proposition, which is why it’s slowed down so much. There are only 484 natural gas rigs operating in the U.S. right now, about half as many as a year earlier.

An obvious remedy to this glut would be to start exporting the stuff to Asia and Europe, where prices are as much as five times higher. Easier said than done. The U.S. has virtually zero capability to do that right now. Not only would companies have to build a handful of multibillion-dollar export facilities to liquefy natural gas so it can be loaded onto ships, they first have to get the government’s approval. That’s a trickier and more fraught debate than it might seem, one that’s creating some unlikely bedfellows that cut across traditional political alliances. For starters, oilman T. Boone Pickens and the environmental group Sierra Club both oppose exporting natural gas, though for very different reasons. Pickens’s opposition is more strategic; the Sierra Club’s stance is strictly based on its environmental concerns. The group opposes “unrestricted” fracking and feels that natural gas competes with renewables like wind and solar.

In a recent, scathing letter printed in USA Today, Pickens wrote that current Americans would go down as the “dumbest generation ever” if the U.S. exported its natural gas. “Why let our foreign competitors take advantage of our cheap energy?” he asked. In a phone interview last month, Pickens tried to soften his position, pointing out that he believes private natural gas producers have the right to sell in any market they want. Pickens would much rather find more domestic uses for natural gas, such as equipping cars and trucks to run on it instead of gasoline. That still qualifies him as an outlier. Most of the oil-and-gas crowd strongly supports exporting domestic natural gas to overseas markets. Lacking any huge rise in domestic demand, gas producers see exports as their primary salvation from this pit they’ve dug themselves.

Users, on the other hand—such as utilities and big chemical and industrial manufacturers—would rather keep natural gas captive to the domestic market. Their fear is that by exporting it, you expose natural gas to international prices and make it more expensive domestically. Natural gas is the rare commodity with a big price disparity in different markets. Connecting those markets would bring those prices more in line with each other, or so the theory goes. A report (PDF) issued by the Energy Information Agency in January concluded that the more we export, the more domestic prices will likely rise.

These anti-export companies have to be careful about being too adamant in their opposition, though, lest they come across as anti-free market. A spokesman at DuPont (DD) declined to discuss the company’s position on natural gas exports, though as a big user it has certainly benefited from record-low prices. The folks at Dow (DOW) e-mailed over a statement that began: “First, we would like to set the record straight. Dow supports free trade and has not taken a position that opposes U.S. [liquefied natural gas] exports.” The statement then went on to lay out all the benefits that cheap natural gas has had for manufacturers, before concluding: “[D]ecisions around the export of natural gas should include a rigorous analysis of potential impact on the domestic economy and job creation, and place a high priority on the manufacturing sector.”

Instead of a high priority on the production sector. Most estimates indicate that exporting natural gas will increase domestic production, which would in turn create jobs for producers but actually wind up hurting manufacturers. Michael Levi, a senior fellow at the Council on Foreign Relations (CFR), put out a study in June concluding the benefits of exporting natural gas outweigh the negatives. On the plus side, Levi thinks that by exporting its natural gas, the U.S. can disrupt the world’s “opaque and politically entangled natural gas markets.” Meaning it could provide competition to Russia, particularly in Europe. He estimates that natural gas exports could eventually create 60,000 jobs in the production sector and along the natural gas supply chain; however, it would lead to a reduction of about 6,000 jobs in energy-intensive industries such as manufacturing due to higher natural gas prices. In the long run, Levi believes that job gains due to exports will be offset by losses elsewhere.

Environmental groups are also split on the issue of whether to export natural gas. The Sierra Club is flat-out against it, and is just as opposed to natural gas as it is to oil and coal. After all, it is a fossil fuel. In a phone interview, Deb Nardone, director of the Sierra Club’s Beyond Natural Gas campaign, took no solace in the fact that natural gas has displaced millions of tons of coal as a source of electricity in the U.S., burning cleaner and cutting utility emissions. Nardone said that she was much more in favor of “jumping over natural gas and ushering in renewable energy.”

The Natural Resources Defense Council, however, takes a more nuanced approach. Ralph Cavanagh, a senior attorney and co-director of the NRDC’s energy and transportation program, supports exporting U.S. natural gas because of the “environmental upside associated with the displacement of coal in China and India.” Cavanagh says that while he agrees with the Sierra Club that the top environmental priority should be developing renewable energy, “given the heavy international use of coal, substituting natural gas for coal is a good thing environmentally.”

None of this is likely to be settled anytime soon. The U.S. is almost sure to enter 2013, and probably 2014, exporting the same amount of natural gas as it currently does: which is almost none. The bulk of what it does export (PDF) gets piped into Canada and Mexico. To reach the really big markets in Asia and India and Europe, natural gas has to get super-chilled to -260F, turned into liquefied natural gas (LNG), and put on a ship. The only LNG export facility in the entire country is a small one up in Alaska called Kenai. ConocoPhillips (COP) is sending small shipments of LNG to Japan from Kenai, but there’s demand for so much more.

In the last two years, companies have rushed to apply to the Department of Energy for approval to build terminals to export LNG to non-Free Trade Agreement countries, which is basically everybody. Non-FTA countries account for 91 percent of global GDP. The DOE has received 15 applications (PDF) to export domestic LNG, mostly out of the Gulf Coast. It’s approved just one: Cheniere Energy’s (LNG) $10 billion Sabine Pass terminal—which just happens to be located right next to the import facility the company finished in 2008, back when it looked like the U.S. was going to need huge amounts of imported LNG. The timing couldn’t have been worse. The shale gas revolution started in earnest the following year. That idled import facility is evidence of just how volatile the natural gas market is, and how risky it is to build an export facility.

This point may or may not be lost on the companies scrambling for approval. According to Levi from the CFR, that long line of applications may represent false demand: While it costs billions to actually build an export terminal, it only costs $50 to apply for the right to.