Should the U.S. Export Liquefied Natural Gas?

It's no secret that the U.S. is awash with natural gas. A massive glut has kept prices depressed for quite some time now, motivating companies to export the stuff to international markets, where it fetches a higher price.

The issue of allowing liquefied natural gas, or LNG, to be exported to foreign countries without a free trade agreement with the U.S., as opposed to being used domestically, is a contentious one. U.S. gas producers are eagerly pushing for it, while parties that have benefited from a sustained period of low gas prices are vehemently opposed. What should be done?

Growing interest in the LNG export trade
With domestic gas prices likely to remain constrained by massive inventories for at least the next year or two, U.S. energy companies are eyeing overseas markets. Asia, where gas can sell for as much as five times the U.S. price, stands out as one of the most lucrative opportunities.

Several companies, notably Cheniere Energy (NYSEMKT: LNG  ) , Freeport LNG Development, and Sempra Energy (NYSE: SRE  ) are trying to get in on the LNG export business early. The majority of their proposed projects would be located near the U.S. Gulf Coast and would likely be exported to parts of Europe and Asia. Japan, where natural gas prices have skyrocketed in the aftermath of the Fukushima disaster, remains a prime export target.

In addition to these more specialized energy firms, the integrated majors are looking to get a piece of the action, too. Earlier this year, ExxonMobil (NYSE: XOM  ) , ConocoPhillips (NYSE: COP  ) , and BP (NYSE: BP  ) announced their intentions to move forward with a major LNG project. The project, expected to potentially cost more than $65 billion, will entail building a natural gas pipeline in Alaska to export LNG to markets in Asia.

The venture is expected to have a major impact on the Alaskan economy, as well as on domestic manufacturing companies, such as steelmakers that will supply the required steel and other inputs for the 800-mile  pipeline. However, the venture, along with a handful of similar projects, will require federal approval before it can export LNG to foreign markets.

But getting approval for such projects has proved to be a diffucult task. According to Cheniere's president of marketing, Davis Thames, it will probably take at least a year for LNG exporters to complete the permit process with the Federal Energy Regulatory Commission .

The two sides to the LNG debate
There are numerous policy questions to consider when granting approval for such export projects. Large domestic gas producers, such as Ultra Petroleum (NYSE: UPL  ) , EOG Resources (NYSE: EOG  ) , and Chesapeake Energy (NYSE: CHK  ) , would be the primary beneficiaries. Over the past couple of years, depressed natural gas prices have hurt their primary business, forcing most to curtail gas drilling and redirect their focus to liquids-rich opportunities.

On the other hand, low gas prices have been a major boon to American consumers, who need gas for heating and power, and to domestic manufacturers, many of whom use gas to power their facilities and as a raw input. Chemical manufacturers such as Dow Chemical (NYSE: DOW  ) have voiced concern that export projects would drive up gas prices substantially, thereby eroding their competitive advantage.

From a political standpoint, it's a tricky debate. If lawmakers say yes to exports, they might have to take the heat for higher prices in the future. If they say no, they'll likely be blamed for destroying jobs.

As for the potential economic impact of LNG exports, a newly released study commissioned by the U.S. Department of Energy and conducted by NERA Economic Consulting, a nonpartisan global research firm, concluded that LNG exports would confer a net economic benefit to the U.S. under more than a dozen different scenarios. The study found that, while exports would raise domestic gas prices slightly, the potential benefits would outweigh the potential costs.

Other similar studies on LNG exports' impact on domestic gas prices have arrived at different conclusions. For instance, a study by the U.S. Energy Information Administration carried out earlier this year found that gas exports could drive prices more than 50% higher, assuming an export volume of between 9% and 18% of daily domestic production. However, separate analyses by the Brookings Institution and researchers at Rice University concluded that exports would have a relatively modest impact  on U.S. gas prices, concurring with the NERA report.

To export LNG or not to export LNG
The tremendous interest and capital investment in LNG projects highlights an emerging trend -- America's gradual shift from being a major energy importer toward being a large producer with plenty of scope to become a significant energy exporter.

While exporting LNG will no doubt create winners and losers, I agree with the broader argument of the NERA study -- that LNG exports would produce a net economic benefit for the U.S. economy. It's probably true that the increase in gas prices would hinder the so-called domestic "manufacturing renaissance," but the impact may not be as severe as some claim.

Building and operating an LNG export facility is a highly complex and capital-intensive process. And not only does it provide jobs for many high-skilled workers, but it also creates other economic benefits along the entire manufacturing value chain.

For instance, components such as gas turbines, pipes, compressors, and pumps that are required by LNG terminals generate business  for American companies like General Electric (NYSE: GE  ) , one of the largest domestic manufacturers of such items.

In addition, these products require raw inputs like steel, which helps American steel companies and producers of raw materials. It's all part of a lengthy and complex supply chain whose benefits are easy to overlook when vested interest groups are busy lobbying for their own causes. As an outside observer, it's easier to see that LNG exports will likely be a good thing overall for the American economy.

As the second largest producer of natural gas in the U.S., Chesapeake Energy would benefit tremendously from high natural gas prices. While the company has received a lot of negative media attention recently, energy investors would be hard-pressed to find another company trading at a deeper discount. Its share price depreciated after negative news surfaced concerning the company's management and spiraling debt picture. While these issues still persist, giant steps have been taken to help mitigate the problems. To learn more about Chesapeake and its enormous potential, you're invited to check out The Motley Fool's brand-new premium report on the company. Simply click here now to access your copy, and as a bonus, you'll receive a full year of key updates and expert guidance as news continues to develop.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 18, 2012, at 9:50 PM, kthor wrote:

    We should just have Cheniere the exclusive export Terminal with no more than 5-10 terminals in the future ... keep most Gas in the US, keep it low and jobs will benefit within America!

  • Report this Comment On December 25, 2012, at 1:55 PM, smithjkbp wrote:

    Yes on exports- let the market decide, The market will yield no more than 10 Gulf of Mexico export terminals. The Sasol gas-to-liquids plant will sponge about 2 terminals worth of shale gas. These plants and the upstream drilling and production equal home grown jobs, real jobs, long term jobs.

    Alaska needs to get to work on their LNG export plans before they get left behind (again).

    Combined cycle (high efficiency) gas fired power plants will ultimately drive gas prices up to a point that will kill the economics of more than 10 export terminals.

    Right now it's a matter of getting in the game or getting left behind.

  • Report this Comment On January 04, 2013, at 11:42 PM, sniggity wrote:

    It's interesting that we're discussing "if lawmakers say yes...if they say no," and not, "What specifically gives lawmakers the right to regulate natural gas exports?"

    Two hundred years ago or even one hundred years ago, the idea of The United States Government regulating the sale of a product (not merely assessing a revenue tariff) was laughable. Now look at us, so politically lobotomized and economically uneducated that we frame our modes of thinking entirely from what we are permitted to do (by the good graces of our fair rulers).

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