Markets Outpace Regulators in Evaluating LNG Export Projects

Natural gas exports are clearly in the US national interest, concludes a year-long Brookings Institution study, and the Department of Energy should approve the nine export applications now pending.

All the projects won't get built because there's not a big enough global market for all the liquefied natural gas they could produce, said Charles Ebinger, Director of the Brookings' Energy Security Initiative, who led the study team.

But markets have proven far more efficient than governments at sorting out which projects should get built, Ebinger said. Project owners will have to get customer commitments for 70-80% of their capacity before they can get financing, he said. Liquefaction plants and terminal facilities can easily run to a billion dollars.

The Department of Energy has to decide whether an export project is in the "national interest." The department has approved unrestricted exports up to 2.2 Billion cubic feet per day from Cheniere Energy's Sabine Pass liquefied natural gas import terminal, and the Federal Energy Regulatory Commission has okayed construction of a liquefaction facility there to enable exports. The facility is expected to start operation in 2015-16.

But applications are pending for nine other facilities, for exports totaling 11.5 billion cubic feet/day more. Current US natural gas production is running about 82 Bcf/d, according to the Energy Information Administration, so all those exports potentially cover 17% of US production. Exports are routinely approved to nations with US Free Trade Agreements, but those countries are not big gas importers. Aspiring exporters want authorizations to sell to non-FTA countries.

DOE has held up decisions on those applications for studies on their impacts, on domestic prices but also on jobs, trade balance, energy security and other factors. Deputy Assistant Secretary for Oil & Natural Gas Christopher Smith has said DOE is concerned the impacts may be cumulative, bringing later applications into more question.

Ebinger said the Brookings study team concluded the international market would absorb no more than about 6 Bcf/d of US exports.

Forecast Price Impacts 'Modest'

The study finds that exports in that range would raise prices in the U.S., but by a percentage "in the mid-single digits" from current levels, said Ebinger. Gas prices now are at historic lows because shale production is so high.

That level of price increase would produce no more than a "modest impact" on the US economy and might be outweighed by economic benefits of new trade and by the strategic advantages of moderating costs to allies who are currently paying very high prices for LNG, he said.

Opposition to LNG exports has come from the electricity and chemical industries, which both use natural gas and benefit from low prices.

The sudden new supplies from shale have revitalized the US chemical industry, lowering its costs and boosting its global competitiveness.

The unusually low prices have also made natural gas the odds-on favorite of electricity producers, who have been using cheaper natural gas instead of coal wherever they can.

For much more on natural gas prices and its widening impacts on the US power sector, click here. For more on the linkages in the world energy sector being prompted by natural gas development, read here.

Producers needing to replace coal capacity to comply with the Environmental Protection Agency's mercury rule are also looking to build natural gas-fired generators, though many remain leery of natural gas' history of price volatility and worry gas exports would bring it back. Cheap gas has undercut the business case to replace coal with renewables.

Opposition also comes from environmental groups objecting to the hydraulic fracturing technology that has enabled the new shale production, and from several members of Congress who say natural gas is a strategic resource that should be kept for use in the US.

A government decision to restrict exports would be an implicit subsidy and favor industrial consumers over natural gas producers, Ebinger said.