With U.S. natural gas prices still low by historical standards, American energy companies are busily surveying foreign export markets for liquefied natural gas, or LNG. They see exciting arbitrage opportunities abroad, especially in Asia where natural gas commands multiples of its domestic price.
But before energy companies can export LNG to foreign countries that don't have a free trade agreement with the U.S., they'll require approval from both the Department of Energy (DOE) and the Federal Energy Regulatory Commission. For some time now, the DOE had been awaiting the results of a study examining the macroeconomic effects of LNG exports.
Well, that study was just released and its conclusion has some very different implications for different industries and companies. Let's take a look at some of the winners and losers resulting from U.S. LNG exports.
Results of the new study
After being delayed twice, the results of the study, which was commissioned by the DOE and carried out by NERA Economic Consulting, a global research firm, were released earlier this month. NERA's conclusion? LNG exports would have an overall positive impact on the U.S. economy.
The study analyzed the economic consequences of gas exports under more than a dozen different scenarios and concluded that, under all of them, the U.S. would enjoy net economic benefits from greater exports. The report elaborated (link opens a PDF):
Across the scenarios, U.S. economic welfare consistently increases as the volume of natural gas exports increased. This includes scenarios in which there are unlimited exports. The reason for this is that even though domestic natural gas prices are pulled up by LNG exports, the value of those exports also rises so that there is a net gain for the U.S. economy measured by a broad metric of economic welfare or by more common measures such as real household income or real GDP.
The study estimated that gas exports could increase the price of U.S. natural gas by between $0.22 and $1.11 per thousand cubic feet, depending on variables like the intensity of demand from U.S. manufacturers and the number of export terminals that are constructed. However, it concluded that the potential benefits of LNG exports would outweigh the costs of more expensive natural gas for consumers and companies.
Winners from greater LNG exports
As the NERA report acknowledged, the benefits of LNG exports to the U.S. economy would not be evenly distributed. The most obvious and largest beneficiaries will be companies that explore for and produce natural gas in North America, such as Chesapeake Energy (NYSE:CHK), Ultra Petroleum (NASDAQ:UPL), EXCO Resources (NYSE:XCO), and Devon Energy (NYSE:DVN). Due to a sustained period of low gas prices, these and other gas producers have been forced to curtail gas drilling and instead shift their resources toward liquids-rich opportunities, which are more profitable.
Higher gas prices will also mean more business for energy services firms, such as Schlumberger (NYSE:SLB), Halliburton (NYSE:HAL), Baker Hughes (NYSE:BHI), and Weatherford International (NYSE:WFT). These companies are instrumental in providing the equipment and expertise required to explore for and produce oil and natural gas. Moreover, with the rising complexity of drilling in shale reservoirs, their services should continue to see strong demand.
Another sector that should see a positive impact from rising gas prices is coal, a substitute for natural gas. While many suggest that the sector is in secular decline, an increase in the price of natural gas will no doubt boost demand. As we've seen over the past couple of years, utility companies with the flexibility to switch between plants will do so when one option is more economical than the other.
Due to low gas prices, utilities have been switching over from coal-fired plants to gas-powered ones in droves. Alternatively however, if prices were to rise to a level where utility firms would be better off using coal, companies like Alpha Natural Resources (OTC:ANRZQ) and Peabody Energy (NYSE:BTU) would reap the rewards.
Losers from greater LNG exports
In sharp contrast to domestic gas producers, energy services companies, and coal companies, American manufacturers, especially those whose energy costs are a large share of their total operating costs, will likely be negatively affected by a rise in U.S. natural gas prices, albeit to varying degrees.
Over the past few years, American manufacturing has been one of the biggest beneficiaries of rising domestic gas production. The reason has to do with the vast and varied array of uses for natural gas. Manufacturing firms use the clean-burning fuel not only to power their facilities, but also as a raw input in the manufacture of items as diverse as plastics, paints, fertilizers, dyes, medicines, photographic films, and explosives.
American chemical companies have reaped especially great rewards. They tend to be heavy users of ethane, a shale gas derived natural gas liquid, which they use as a primary feedstock in a number of different applications. In sharp contrast, European and other overseas chemical companies use naphtha, a more expensive oil-based feedstock.
Thanks to this cost advantage over their foreign competitors, U.S. chemical firms are investing more heavily in their operations onshore. For instance, Dow Chemical (NYSE:DOW) has announced plans to build a new ethylene facility along the U.S. Gulf Coast by 2017, as well as plans to invest in similar ethylene and propylene units in the U.S..
Dow and other chemical manufacturers argue that allowing American firms to export natural gas would threaten the future of American manufacturing, a sector that has recently regained global competitiveness largely on the back of low gas prices.
As you can see, greater exports of LNG from the U.S. will have different effects on different sectors and companies. Overall though, I agree with the NERA report and believe that allowing greater exports of LNG should provide a net economic benefit for the U.S. economy.
LNG exports should help balance the supply and demand of natural gas and should help reduce price volatility. They should also provide jobs to high-skilled workers at various steps along the manufacturing value chain. However, policymakers should be cautious – as I'm sure they will be – in the number of export projects they approve, carefully assessing the economic impact of each one.
And finally, while I completely understand the concerns of American manufacturers regarding higher gas prices from LNG exports, I think there are some caveats worth noting. Many of the materials required for building and operating a liquefaction facility come from U.S. manufacturers themselves. For instance, General Electric (NYSE:GE) is one of the largest manufacturers of gas turbines, pumps, pipes, and compressors.
These and other necessary components of an LNG export facility have to be built and installed, which generates business for GE and other domestic manufacturing companies. And since building these components requires steel and other raw inputs, benefits also accrue to steelmakers and companies that produce raw inputs.
Hence, it is important to recognize the complex and nuanced nature of the LNG export process. Exporting the stuff won't simply fatten the pockets of executives at U.S. energy companies, but rather, its benefits should also be felt across the entire LNG manufacturing value chain.