On Tuesday, the Department of Energy's (DOE) assistant secretary for fossil energy, Christopher Smith, testified before a congressional committee on liquefied natural gas, or LNG, exports. While he acknowledged the opportunities natural gas provides, he said that the DOE would not rush to any decisions on exporting natural gas.
Natural gas boom
Natural gas is a massive opportunity for the United States. However the opportunity is being curtailed as low prices have caused companies to stop drilling for natural gas and switch their focus to oil. SandRidge Energy (NYSE: SD) was one of the first natural gas drillers to switch its focus from natural gas to oil back in 2008. The rest of the industry has been following the shift with even natural gas leader Chesapeake Energy (OTC:CHKA.Q) now concentrating on drilling for oil. The natural gas production boom has only lasted because drilling for oil yields some associated natural gas which has kept the level of natural gas production in the U.S. stable.
While natural gas prices are low in the U.S., they are two to four times higher around the world. Natural gas companies would like to take advantage of the price disparity, but currently the U.S. does not have the capacity to export LNG. Cheniere Energy (NYSEMKT:LNG) got permission from the DOE in 2011 to export LNG to countries that are not members of the free trade agreement; however, after approving the proposal the DOE decided to hold off on approving any more until studies could be completed on the macroeconomic effects of LNG exports and to make sure that LNG exports did not "subsequently lead to a reduction in the supply of natural gas needed to meet essential domestic needs."
Natural gas companies would like to export as soon as possible as they are losing money on natural gas. Opposing natural gas exports are Dow Chemical (NYSE:DOW) and other manufacturers that use significant amounts of natural gas, for exports will raise the price they must pay for natural gas.
Yesterday, the DOE's Smith testified that the department is committed to the publicly transparent process it has set out for export application reviews. In his statement, Smith emphasized that "DOE is committed to moving this process forward as expeditiously as possible. DOE understands the significance of this issue -- as well as the importance of getting it right."
In the question and answer session that followed, Smith went on to recognize that the issue is contentious and that the DOE will not hurry the export reviews. According to Politico, Smith said: "We’re moving forward in a way that’s open, transparent and which yields a decision that’s going to withstand the scrutiny it’s going to receive. A decision that doesn’t withstand scrutiny is not going to be useful for the concerns you have and will be the wrong decision for the country."
The DOE is right to not hurry the export reviews, but hopefully the government sticks with its timelines and acts in a timely manner. We have seen in the Gulf of Mexico how government delay can seriously constrain production. Hopefully the government begins approving export applications and the process is not bogged down by rehearings and court reviews.
The U.S is not the only country trying to take advantage of the disparity between North American prices and the world's prices. Canada is also seriously considering LNG exports as it recognizes it can make significantly more money selling its natural gas elsewhere. The country already has one facility up and running at Kitmat which is a joint venture between Chevron (NYSE:CVX) and Apache(NASDAQ:APA). While the facility is rather small and currently not connected to a pipeline, work is under way to rectify the situation.
North America has a significant competitive advantage in natural gas compared to the rest of the world. That advantage is not being fully exploited as low prices hamper more production. No matter how the export decisions go, that natural gas needs to be moved from the fields to where it is in demand.