The future of natural gas

Experts: LNG exports should not stall growth

Proposed liquefied natural gas export facilities won’t raise prices much in the next four to five years and may not have much effect on fuel costs in the long term, according to some economists and energy industry experts.

If natural gas prices remain low but not too low, Louisiana will see tens of billions invested in petrochemical plants and LNG export terminals and also thousands of construction and permanent jobs that accompany them, according to state Economic Development Secretary Stephen Moret.

Experts believe shale formations will produce a natural gas supply so vast that the new demand from all these projects can be met without gas prices returning to “the high, volatile levels” of a few years back, Moret said in an email.

But prices should recover enough that more exploration will take place in the Haynesville Shale.

The state’s chemical industry worries that if too much gas is exported, manufacturing costs will rise and halt the growth that inexpensive natural gas has fueled. Export proponents say the wealth of domestically produced shale gas means that won’t be a problem.

So far nine domestic export terminals have been proposed, including three in Louisiana, according to the U.S. Department of Energy. The facilities could export close to 14 billion cubic feet per day, more than 20 percent of the country’s daily natural gas production — if they are built.

David Dismukes, associate director of the LSU Center for Energy Studies, said that’s unlikely.

“The rule of thumb is half the projects put down on paper get developed, if that much,” he said. “I don’t see this being a whole lot different. In fact, I see a lot less.”

For one thing, building a gas liquefaction facility requires a huge amount of money, Dismukes said.

The first piece of Cheniere Energy Inc.’s Sabine Pass facility in Cameron Parish will cost an estimated $4.5 billion to $5 billion before financing costs. Other proposed facilities’ costs have been estimated at $2 billion to $8 billion.

Also, the Energy Department must approve the export facilities’ construction, Dismukes said.

“It will be interesting to see when DOE puts its foot down and says, ‘OK, no more export licenses,’” Dismukes said. “My guess is that you might see DOE put its foot down before the market puts its foot down.”

Charles Ebinger, director of the Brookings Institute’s Energy Security Initiative, said another factor complicating the export picture is the amount of time it takes to win regulatory approval.

The process, which cannot be described as rapid, may soon be modified to make it even lengthier, he said.

Proposed exports have gained lots of media attention lately.

A January report by the U.S. Energy Information Administration says natural gas prices could jump 36 percent by 2018 if exports reach 12 billion cubic feet per day over a four-year period. Other reports predict much smaller price increases. A November economic analysis by Deloitte, for instance, says exports of 6 billion cubic feet per day would increase prices less than 2 percent, or 12 cents per thousand cubic feet, between 2016 and 2035.

Ebinger said some studies showed greater impacts because researchers assumed that all of the country’s LNG import stations would become export terminals.

While that may occur, it won’t happen for many years, Ebinger said. A more realistic projection is that exports could reach 6 billion cubic feet per day around 2018.

“While it’s very difficult to model this .... On balance we feel that the price impacts would be very low, probably on the low end of studies we looked at,” Ebinger said.

That would be good news for consumers, petrochemical manufacturers, exporters and power companies – almost everyone except producers and landowners.

Still, manufacturers are not amused by the prospect of exports jacking up the price of natural gas, economist Loren Scott said. Petrochemical companies, which use natural gas as a feedstock, lost thousands upon thousands of jobs in the late 1990s and 2000s when natural gas prices ballooned to $14 per thousand cubic feet.

But in the last few years, massive amounts of gas production from shale formations have given the U.S. petrochemical industry a big price advantage over its European counterparts, Scott said. In a moribund global economy, domestic firms have managed to grab a larger share of the world market, and the reason is cheap natural gas.

A number of media outlets, including the Wall Street Journal, have reported that manufacturers are fighting to protect that advantage and the push for exports. U.S. Rep. Ed Markey, D-Mass., has offered bills to ban LNG exports until 2025. Environmental groups also oppose exports but for a different reason: the pollution they say is caused in producing gas from shale formations.

The American Chemistry Council and the Louisiana Chemical Association are among those that don’t oppose exports, although some member companies have slammed the idea.

The chemical industry just wants government policies that make sure natural gas is available, said Greg Bowser, executive vice president of the Louisiana Chemical Association.

“We want to make sure that’s the best use of that natural resource,” Bowser said.

It doesn’t make sense to ship LNG to Asian countries so they can use low-cost labor to make products that will then compete with American goods, Bowser said. It’s also a bad idea to create high natural gas prices by draining the supply through exports and putting the country at a competitive disadvantage.

Cheniere spokesman Andrew Ware said the issue with industrial users is misunderstood.

“What ultimately drives their investment and capital decisions is not so much natural gas as natural gas liquids, the ethane, propane and butane,” Ware said. “That is the critical feedstock for their sector.”

And the key to gaining access to those liquids is to produce natural gas, Ware said.

But right now, the domestic supply of natural gas is so great that prices have fallen to 10-year lows, Ware said. Producers are shutting in wells and cutting future investment in gas formations.

Meanwhile, producers in oil-rich shales in Texas and North Dakota are burning off natural gas, a waste of a product that’s at a premium in other countries, Ware said.

Natural gas sells for as much as $16 per thousand cubic feet in Japan and South Korea while the U.S. price has been less than $3. The Massachusetts Institute of Technology has estimated it costs around $4.25 to freeze the gas and turn it into a liquid, ship it overseas, and then turn the liquid back into a gas. Even with those added costs, domestic LNG would offer a cheaper alternative.

The question is, for how long?

According to DOE, it takes four years or more to permit and build an export terminal. The facilities operate for at least 20 years.

Ebinger said U.S. gas exports should be able to compete on price.

But if all the proposed export terminals are actually built, there is no way to dump all that capacity into the market without a major impact on price, Ebinger said.

The global trade in LNG was around 30 billion cubic feet per day in 2010. The proposed U.S. facilities could produce nearly half that amount. Meanwhile, other LNG facilities are being built or have been proposed in other countries, such as Australia.

Dismukes said if DOE doesn’t limit the number of export terminals, the development of shale formations in other countries probably will.

“There’s boodles of shales all over the place,” Dismukes said.

The formations have been found in China, Europe, and Latin America, Dismukes said. If those formations start to get developed, they’re going to start competing with U.S. shale gas.

Scott said he is worried about what happens to U.S. manufacturing if Europe gets its act together.

If the United States takes so much business that European countries lose jobs, people will rethink their opposition to using hydraulic fracturing to produce shale gas, Scott said.

“They’re going to say, ‘Wait a minute. We’ve been stupid not to do fracking in our back yard. We’re losing all these jobs,” Scott said. “It’s stupid.”

It will take some time, but those countries, particularly France, will find a lot of natural gas and produce it, Scott said

“When that happens, all these wonderful advantages our manufacturing sector has will go away,” Scott said.