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 (OTC:UPL), EOG Resources (NYSE:EOG), and Chesapeake Energy (OTC:CHKA.Q), 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.