LNG Exports: ExxonMobil Versus Dow Chemical

A battle is brewing over natural gas exports, which is likely the first of many battlegrounds we must navigate as we continue to move forward without a real energy policy. At stake is the United States' dream of energy independence. By selling a piece of our future natural gas supply through LNG exportation to the highest bidder, we have the potential to let our dream of energy independence slip away. However, if we mandate that the supply of natural gas stay within our boarders, we restrict oil and gas companies from being participants in a true capitalist market, restricting economic profits and jobs creation.  

According to the American Petroleum Institute:

The case for more exports is clearer than ever, and consistent with basic principles of economics. Trade is good. Exports are good. And if we allow natural gas producers to export natural gas when they find opportunities to do so, American workers and our nation's economy will be better off.

Understandably, not everyone agrees. 

In a classic battle of the titans, ExxonMobil  (NYSE: XOM  )  and Dow Chemical  (NYSE: DOW  )  are in a rather public dispute over exports. As the nation's top natural gas producer, Exxon wouldn't mind to see the price of gas a little higher, while Dow is very content keeping things status quo, as it stands to benefit if the price of natural gas stays low. With exports likely to increase the price of gas, and eat into Dow's profits, it's chosen to fight against the rising tide to export our excess gas.

Dow is not alone in its fight, as other heavy manufactures that currently benefit from low natural gas prices have joined the crusade. The group of manufacturing heavyweights that includes aluminum maker Alcoa (NYSE: AA  ) and steel manufacturer Nucor (NYSE: NUE  ) have  joined an organization called America's Energy Advantage. Together, they make a very compelling argument to keep a lid on gas exports.

For every one manufacturing job we create, five more support and network jobs are added to the economy. Further, for every $1 of final sales of a U.S.-manufactured product, we receive $1.34 in output from other sectors of the economy. Those are just some of the reasons why Dow CEO Andrew Liveris has said that, "Rushing to sell natural gas to Europe and Asia risks damage to the U.S. Economy."

Alcoa's position is that we take a step back and consider the complete picture. The company:

Favors a balanced approach to energy policy, developing domestic and international markets while avoiding distortions that increase domestic price and/or price volatility. Stable and competitive energy costs help grow employment in industrial jobs, an important contributor to strengthening the middle class and the communities and regions where these employers are located ... While Alcoa agrees that there is a role for reasonable exports of LNG in the US gas market, we caution that quickly expanding exports of US LNG to non-Free Trade Agreement (FTA) countries, which represent over 80 percent of global LNG demand, could raise US prices substantially.

The worry here is that exporting our gas would drive up the price of domestic natural gas, thereby stifling growth as this key competitive advantage is eroded  The problem is that we can only estimate the effects exports would have on the market and, as you're probably well aware, few estimates actually prove true. In this case, according to estimates (opens into a PDF)  by the Energy Information Administration, the price of natural gas will rise in the future, whether or not we export. However, under a low volume export scenario, prices would increase by a further 14% over the next decade.

While that sounds like a lot, once you consider the overall volatility of natural gas, it makes it hard to put too much weight behind that number. For example, over the past year, natural gas has traded as low as $1.95 per million BTUs, and as high as $3.90 per million BTUs. So, rumors of a cold winter could, in theory, have more of an impact on the price of natural gas than exporting it overseas. 

However, the other thing to consider, as Alcoa points out in its position statement, is that price increases could be as much as 54% under some scenarios if LNG exports hit 12 billion cubic feet per day. That's just half of the capacity represented by applications that have already been filed, which you can see from the following map:

Source: FERC website

The real question is, are rising natural gas prices are such a bad thing? You'll note that, among the projects on that list, there is one by ExxonMobil. The company's Golden Pass Terminal, if approved, would enable the energy giant to sell natural gas overseas at higher prices. That means more drilling jobs, construction jobs and, of course, profits for investors. As a widely held stock by both mutual funds and exchange traded funds, those profits will touch many Americans.

On the other hand, higher natural gas prices could hurt the consumer, and has the potential to derail our manufacturing renaissance. As you can see, this is a real political hot potato with clear winners and losers, with a lot of questions in between. 

That's one reason Nucor, which is completing the construction on a $750-million plant in Louisiana, isn't taking any chances. The new plant uses natural gas to strip oxygen from iron ore to make direct-reduced iron. This, when combined with scrap, can make steel at a much lower cost than scrap alone. However, without cheap natural gas the economics aren't as favorable. 

The company has joined America's Energy Advantage to help curb exports in order to keep natural gas prices down. Right now, access to low-priced natural gas is a huge competitive advantage for the company. That's one reason why the company entered into a 20-year supply agreement with Encana (NYSE: ECA  ) to lock in its gas costs. It won't use the gas to fuel the plants; instead, it will sell the gas as a hedge against any price spikes in gas it buys locally.

The whole issue here is that there simply isn't enough demand coming from these heavy users to produce enough profits for companies like Encana and ExxonMobil. It's this classic battle of supply and demand that only has a clear solution depending on which side of the equation you stand on. If you're invested in producers, then you want to see gas go higher. However, if you're a consumer who looks at your utility bills, or is invested in heavy gas, you'll favor curbing exports.

That's what makes this such an intriguing issue to follow. Both sides are, of course, motivated by profits and, therefore, have a self-interest to protect. Not only that, but both have reasonable, if not compelling, arguments that deserve to be heard. Personally, I lean toward allowing exports, though my preference is to see us develop more ways to use it here at home.

One of those uses is, of course, expanding manufacturing capacity here at home. Alcoa is in prime position to take advantage of growth that some expect will lead to total industry revenue approaching $160B by 2017. Based on this prospective, and several other company-specific factors, Alcoa is certainly worth a closer look. For a Foolish investment perspective on this global giant, simply click here to get started.


Read/Post Comments (5) | Recommend This Article (4)

Comments from our Foolish Readers

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 March 08, 2013, at 8:02 PM, PeakOilBill wrote:

    China has more shale gas than the USA. Watch how much LNG fuel leaves China. Can you say ZERO?

    Exporting finite fossil fuels, for which there is no substitute, is the dumbest thing a country with a large population can do unless, like Russia, your economy would collapse without the money from doing it, or like the Arabs, you need the cash to buy food, or have such a tremendous surplus that it will last for many decades. Other exporters do it for the bribes and riches the rulers amass from the oil sector. They stick their stolen billions in first world tax haven banks.

    Admiral Hyman Rickover said it best after he invented the nuclear submarine, when he warned the people of the USA to, "conserve oil to the greatest extent possible." The new technology of horizontal drilling saved us from peak oil for a decade or so, but it can't last because mother nature isn't making any more oil. Natural gas either, nor coal, or uranium. They are all FINITE, and long before they are completely gone, their rising price will destroy the financial system, and civilization as we know it, must collapse. Do you want to speed that process along here in the USA, or delay that event as long as possible by hoarding the fossil fuel under our feet for our own use? Will we put profit today before the potential survival of our grandchildren? Probably. That is how greed works. THEY will be the ones to discover that greed isn't good, and that creating an infinite amount of electronic money can't produce a single drop of crude oil, or a cubic foot of natural gas.

  • Report this Comment On March 08, 2013, at 8:12 PM, BCM999 wrote:

    Here's an idea: Let's allow wheat to be sold overseas only in the form of cereal! Or let's ban Detroit from exporting cars because that will apparently reduce the price of cars for U.S. consumers. Or maybe, just maybe, U.S. automakers would close factories and fire workers in order to build just enough cars for the domestic market. And maybe those same automakers would then go invest in plants overseas -- and hire workers there -- to build cars for foreign markets.

    Natural gas currently sells for about $3.50 per MMBtu in the U.S. The cost to liquify, transport, and then regasify natural gas overseas is in $5-8 dollar range, making for a delivered price of $8.50-$11.50. If a company in the U.S. can't be competitive with that type of cost advantage for a major input then that company ought to find another line of business.

    Lobbying for an export ban is rent seeking, plain and simple.

    Economic sanctions are something we impose on others, not ourselves.

  • Report this Comment On March 08, 2013, at 8:30 PM, Probullrider wrote:

    Alcoa has been bitten in the past. They used to have natural gas holdings in south Texas in the 1950s and 1960s to back up their smelter. Then they got greedy and sold them for quick cash and had to shut down the plant few years later when gas prices went sky high and environmental issues hit them.

    The battle is between some gas field and oil companies jobs only or these jobs plus all the more wide spread jobs at Dow, DuPont, and conversion of our economy to natural gas (think conversion of rail and trucks to liquified natural gas and most power plants for starters).

    With the improved technology of fracking, it is estimated we will have more than enough natural gas and probably liquid petroleum for our needs in a few years in spite of the administrations best efforts to restrict drilling. Without the proper energy policy, this production will be subject to pricing determined by outsiders and demands in China, India, Europe and the emerging world and will be shipped out of the USA. We will not get control of our own resources as to price and supply and will be subject to economic blackmail as is now the case.

    Most Americans believe in free markets but we do not have one in petroleum with OPEC largely in charge. We need an energy policy that optimizes petroleum production and requires the control of pumping and establishes reserves. A pricing system must be conceived that provides a fair price for land holders, drillers, producers, pipelines and refiners. Ethanol must be taken out of our gasoline as it is foolish to burn corn and reduce the BTU value of our gasoline. Natural gas usage in every conceivable way must be used including trucks and rail and coal must not be demonized as carbon and carbon dioxide have been shown to be non issues with climate change. Money wasted on so called renewable energy credits for wind and solar must be stopped.

    We need an energy policy to stop shipment of our petroleum out of the country. A rational energy independence policy would get this economy out of recession, create thousands of jobs, lower energy costs to Americans and allow them to spend this money on other things.

    One way to stop shipment of our petroleum to the world markets would be to impose a royalty or export tax to make such shipment too expensive to make economical sense. This payment, if collected, should not go to any government; state, local or federal. It should go to US consumers in the form of an offset to the federal tax on gasoline, heating oil and other petroleum products. Without serious changes in energy policy, energy independence is folly.

    Pro

  • Report this Comment On March 09, 2013, at 5:44 PM, PeterMolinaro wrote:

    This is not a battle between Dow and Exxon. This is about rebuilding American manufacturing, growing good middle class jobs and adding maximum value to our once in a lifetime natural gas bounty. A thoughtful, balanced approach to LNG exports can assure a win-win-win for producers, consumers and our manufacturing economy.

  • Report this Comment On March 12, 2013, at 11:38 AM, amvet wrote:

    It is reasonable to debate the pros and cons of exporting LNG. It is even more reasonable to debate wheather or not the projections of massive, low cost, long term NG production are valid.

    My take is that when we take the true cost of our NG and add LNG costs, our gas will be more expensive in Europe than Russian and Norwegian gas. Meanwhile, Russia is building LNG facilities in Eastern Russia to export to nearby high price Asia. Luckily, we still have our one old profitable LNG export facility in Alaska.

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