How Much Natural Gas Can America Export?

It appears that Energy Secretary Dr. Ernest Moniz is fulfilling his promise that the Department of Energy would move quickly on LNG export decisions. Since his confirmation as Energy Secretary in May, we have seen two LNG facilities be granted LNG export licenses. The approval of these facilities is making it more clear every day that LNG exports will become a a reality here in the United States. The question remains, though: How much LNG can the US support on a sustainable basis? Let's look at this question and see if we can come up with a reasonable solution.

Source: Golar LNG Investor Presentation

Where we're at
This week's approval of the Lake Charles, La., facility proposed by British energy company BG Group and a subsidiary of Energy Transfer Partners  (NYSE: ETP  ) means that the U.S. will have the ability to export 5.6 billion cubic feet per day of natural gas, but we won't actually see the first volumes move out of the U.S. until sometime in 2015, when Cheniere Energy (NYSEMKT: LNG  ) brings its facility online.

According to analysts at Goldman Sachs, the U.S. can realistically sustain about 7.7 billion cubic feet of LNG exports by 2020 without significantly affecting natural gas prices. If we were to use that number as a benchmark, then it means we could see the approval of the next two facilities that are in line for approval: Dominion's (NYSE: D  ) Cove Point facility in Maryland, and Freeport LNG's request to double the capacity of its already approved facility in Texas. If approved, these facilities would be complete by 2018. Considering there are another 13 facilities lined up behind them and natural gas production is expected to increase well past 2020, then it's very possible we'll go past that 7.7 billion cubic feet per day -- although it's very unlikely that we'll ever see all 23 billion cubic feet per day of capacity come online that is currently proposed. 

By the numbers
So how much do we need to grow natural gas production to meet LNG demand? Well, in 2012 the U.S. produced an average of 65.9 billion cubic feet per day. So let's calculate how much U.S. natural gas would need to grow to meet this demand based on some hypothetical export scenarios. 

Export Scenario Compounded Annual Growth Rate (CAGR) of Natural Gas Production Needed to Meet LNG Export Demand
5.6 bcf by end of 2018 (only facilities that have been approved to date coming online) 1.64%
7.7 bcf by end of 2018 (Goldman Sachs estimate) 2.23%
8.5 bcf by end of 2020 (Morgan Stanley estimate) 1.75%
23 bcf by end of 2028 (all proposed facilities coming online within 15 years)  2.02%

Author's calculations.

To be clear, this is how much natural gas production would need to grow on top of any anticipated growth in domestic demand or shipments via pipeline to Mexico. So we would need production growth in excess of these numbers to satisfy all parties. Just to lend some perspective to these numbers, from 2007 to 2012, the U.S. increased its natural gas production at a CAGR of 4.55%. You could argue that this time of production wildly oversupplied the market, but it does make the case that we can produce at those levels if necessary. 

Then again, the biggest gripe that opponents of LNG exports have is that they believe those exports will drastically affect cheap domestic gas prices, which have spurred a revolution in manufacturing here in the United States. So how much do opponents believe is a manageable amount of natural gas? Dow Chemical (NYSE: DOW  ) CEO Andrew Liveris, one of the most adamant critics of LNG exports, went on record last year saying that 15% of natural gas production dedicated to LNG would work for all parties involved, although 10% or less would be a smart move for domestic manufacturing. So let's take those estimates, apply a more conservative 2% CAGR to natural gas production, and see the potential volume of gas we could export over various time horizons.

Volume projections for LNG exports based on market share (volumes in billion cubic feet per day)

Market Share 2015  2018 2020 2025 2028
5% of production  3.43 3.63  3.78 4.18 4.43
10% 6.85 7.27  7.57 8.36  8.87 
15% 10.2 10.9 11.25  12.54  13.3 

Author's calculations

Based on these numbers, the current approved facilities would take about 7% to 8% of natural gas production when they're up and running, and Goldman's "sustainable levels" estimate would put exports at 10.2% of production. If we were to hold Liveris to his word, then he should be relatively pleased with the current pace of LNG exports.

What a Fool believes
Here's the difficult thing to understand about opponents of LNG's argument: They're afraid that it will raise prices, but the success of both industries is reliant upon cheap gas prices. More specifically, LNG exporters need Henry Hub spot prices to remain below $5.10 per million BTU to make it a profitable venture. 

Ultimately, the biggest challenge for U.S. LNG exports isn't its battle with domestic consumers, but rather the stiff competition it will face from other regions that will look to export their own new-found gas reserves. Global demand for LNG is expected to grow by 8 billion to 9 billion cubic feet per day between now and 2020, and the trio of Chevron, ExxonMobil, and Royal Dutch Shell have a combined 10 billion cubic feet per day capacity outside the U.S. on the drawing board. So it seems as though chemical manufacturers need not worry about the price of domestic gas, because LNG exporters will need the pricing advantage on U.S. gas just as much as they do.

It may take several years before we can determine the winners and losers in the LNG space. Fortunately for you, your investment portfolio doesn't need to suffer because of it. Our analysts have unearthed one behind-the-scenes energy giant that is poised to profit regardless of LNG's outcome. Let us help you discover this company by checking out our special report: "The Only Energy Stock You'll Ever Need." Simply Click here to get free access to this valuable report.


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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 August 11, 2013, at 10:15 AM, True411 wrote:

    Another poorly-done analysis by the Fool. The largest LNG carrier ships hold up to 266,000 m3 of LNG. That's just shy of 10 million cubic feet. To ship 7.7 billion cf per day, the ports would have to load 820 of the largest ships per day. However, there are a total of only 200 of these ships worldwide along with less than 200 smaller ships.

    To reach 7.7 Bcf /day, most of this would have to go out on pipelines to Mexico and Canada, but those two countries have their own natural gas supplies.

    The bottom line? Bogus story. There's no way the US can export this much nat gas, not until many more LNG carrier ships are built.

  • Report this Comment On August 11, 2013, at 10:16 AM, tkeracer619 wrote:

    As much as they can until the price is comparable to electricity per btu.

    They don't like you heating your home or cooking with natural gas for cheaper then it costs them to produce the electricity.

    Xcel charges me double rates during the summer months because I am a heavy user. Last year the bill for the 3 summer months was $2400. That's $800 a month. In other words, the $52,000 solar setup I just installed on the roof along with tax breaks will pay itself back in 8 years. Last months bill was -$26. Suck an egg xcel.

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