Why America Should Export LNG

There has been vocal opposition to American businesses' plans to export liquefied natural gas, or LNG. No one has been louder than the Dow Chemical's (NYSE: DOW  ) CEO Andrew Liveris. He recently testified in front of the Senate Committee on Energy and Natural Resources as well as wrote an op-ed in The Wall Street Journal calling for the government to take a balanced approach to natural gas exports. While it sounds nice, his suggestions for how the government should proceed ring of protectionism. Read on to find out what's happening now, what the debate is over for exporting natural gas, and how you can profit from all this.

Exporting natural gas
If you aren't familiar with what's been going on in the natural gas world, check out this article "The U.S. Natural Gas Story in 15 Charts."

In May 2011, the DOE approved Cheniere Energy's (NYSEMKT: LNG  ) application for exporting LNG to countries not in the Free Trade Association. At the same time, the department commissioned a report to study the effects of approving any more companies, as the DOE has responsibility to make sure new terminals do not "subsequently lead to a reduction in the supply of natural gas needed to meet essential domestic needs." 

In early December the DOE's report on the macroeconomic effects of LNG exports on the U.S. economy finally came out. The report concluded that exporting LNG is a big net positive opportunity for the U.S. While prices would rise from $0.22 to $1.11 over five years, the "benefits that come from export expansion more than outweigh the losses from reduced capital and wage income to U.S. consumers, and hence LNG exports have net economic benefits in spite of higher domestic natural gas prices." 

Dow condemns the DOE's report
Immediately after the DOE report came out, Liveris released a statement condemning it, saying that the report is "flawed, misleading, and based on outdated, inaccurate and incomplete economic data. The report fails to give due consideration to the importance of manufacturing to the U.S. economy." A month later in prepared remarks to the Senate Committee on Energy and Natural Resources, Liveris laid out a counter-proposal to the DOE. Liveris wants the government to restart the public interest study process and do public interest studies on each individual project with a long list of criteria for each export application.

Without getting into the specifics of all the criteria Liveris wants the DOE to consider, the debate over natural gas exports really comes down to a concluding line in Liveris' comments: "At Dow, we are implementing a comprehensive plan to take advantage of the structural change that has occurred in the natural gas market, a market that we believe is working."

It's hard to argue the natural gas market is working when it is artificially constrained by producers' inability to export the commodity. This leads to the massive price disparity between the U.S. and the rest of the world.

There's no doubt the U.S. has a competitive advantage in natural gas. The U.S. has massive reserves of natural gas trapped in shale rock and the infrastructure to extract it, a feature which will take other countries years to develop.

The U.S. competitive advantage of low natural gas prices will persist even with exports as it costs an estimated $4-$5 per thousand cubic feet to liquefy and ship natural gas to Asia and Europe. Manufacturers, the energy sector, and consumers all stand to benefit from a robust natural gas market.

Liveris and Dow Chemical are hoping that the U.S. government will keep the natural gas market artificially constrained to the benefit of chemical companies and other manufacturers whose exports are not restricted. We are already seeing the effects of the restrictions on natural gas.

If something is unsustainable it will stop
Natural gas companies can't make money at the low price natural gas now sells for, which is why there has been an exodus from drilling for natural gas in the U.S. For instance, the two largest U.S. natural gas producers, ExxonMobil (NYSE: XOM  ) and Chesapeake Energy (NYSE: CHK  ) , spent the past year decreasing their natural gas drilling and increased their focus on oil and natural gas liquids. If it weren't for associated gas from oil wells natural gas production would have already started to decline in the U.S.

It was only a little over five years ago that the manufacturers and utilities were worried about a lack of natural gas supply causing major price increases to American consumers and manufacturers. Now those same groups take cheap supply for granted. The U.S. has a competitive advantage in natural gas supply; the country should promote a robust market of which exports are a part.

How you can profit
Only time will tell what will happen with exports in the U.S. natural gas market. No matter what happens, one of the safest ways to play these trends is to invest in the midstream operators that are absolutely necessary to sustain America's energy boom. Kinder Morgan is one of these operators, and one that investors should commit to memory due to its sheer size – it's the third-largest energy company in the U.S. – not to mention its enormous potential for profits. In The Motley Fool's new premium research report on Kinder Morgan, our top energy analyst breaks down the company's growing opportunity, as well as the risks to watch out for, in order to uncover whether it's a buy or a sell. To determine whether this dividend giant is right for your portfolio, simply click here now to claim your copy of this invaluable investor's resource. As an added bonus, you'll receive a full year of key updates and guidance as news develops, so don't miss out!



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  • Report this Comment On February 28, 2013, at 6:01 AM, facewood wrote:

    Why should Dow worry about the price of natural gas rising due to LNG exports? Propane, ethane and butane, the chemical firms' feedstocks, are stripped out of natgas before it's liquified for export.

  • Report this Comment On March 01, 2013, at 1:15 PM, azdannyboy wrote:

    I hope the Government does delay any more export permits, go Dow. I have a sizable position in Cheniere. Delays only get them closer to getting trains 1 & 2 on line (2015) and delays to other companies would put them farther out. As it is even approval was granted to other companies they would not be able to be on line until 2017 or 18. I consider LNG a strong buy.

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