Thursday, December 6, 2012

U.S. LNG Exports? No Bonanza

There was a lot of excitement today from the release of  reports from the Energy Information Administration and a report commissioned by NERA Economic Consulting.  The basic conclusion: the U.S. has potential to become a significant exporter of liquefied natural gas (LNG).

To readers of this blog, this issue shouldn't be a surprise, as an April 2012 post was entitled, "Can The U.S. Increase Natural Gas Exports?" Older posts talk about the potential for natural gas to serve both economic and carbon mitigation objectives.

So, what's new today?  Nothing really. Higher U.S. exports of LNG leads to higher prices than in the baseline scenario AEO2011, or the Annual Energy Outlook 2011.  Domestic markets respond to the higher prices with additional supplies to replace 60-70% of the exported gas, with most of the additional supply coming from unconventional sources, specifically shale.  Electric utilities, in this forecast, respond by switching back to coal, which is not good for carbon dioxide emissions.

The NERA group makes a calculation of net economic benefits from the LNG exports and concluded that all the scenarios tested show net economic benefits from exporting LNG, even after taking into account higher prices paid by utilities, consumers, and commercial energy users.

Trade associations representing manufacturers have already spoken out against the export strategy.  However, NERA states that only about 10% of U.S. manufacturing sector shipment values have energy content that represents more than 5% of their shipments.  The potential loss of output or employment in these resource processing industries is at most about 1% per year.

The most economically beneficial scenario modeled by NERA is one in which gas produced from shale is produced in volumes at low cost enough to replace all the exported gas, something which is not yet proven.  World gas demand rising sharply would drive prices up, benefiting the liquefaction projects that have four year build cycles and twenty year lives.  If LNG supplies were to be constrained in the rest of the world, particularly Asia, that would be very beneficial to this scenario.  However, this scenario seems to be wishful thinking.

An important thing to keep in mind is the fundamental difference between international markets for natural gas and for crude oil and liquid hydrocarbons.  The latter are globally integrated, so local prices cannot deviate much from world prices except for commodity differences, transport costs and taxes. Natural gas markets are not globally integrated, so gas can be priced at $0.75 per MM Btu in Saudi Arabia, $3.50 per MM Btu in the United States, and $16 per MM Btu in Asia.

The EIA report does not make it clear where the U.S. LNG exports would go, but we have written in the above linked post that it seems unreasonable to expect that U.S. exports could displace Russian exports to Europe. The first reason is that Russia and the former soviet republics represent the number one global production base, and second,gas exports into Western Europe are a pillar of Russian strategic foreign policy.

The likely destination for U.S. LNG exports would be Asia, particularly China and Japan.  Japan especially looks like a promising market whose potential may have been enhanced by the decision to exit  nuclear energy production. Political relations between the U.S. and Japan would probably clear international supply and construction agreements quickly.

As Rice University's Baker Institute research has pointed out, the global elasticity of supply for natural gas may be significantly higher than most sources project because of the "shale revolution" and other potential new sources.  The recent natural gas price situation in the United States is somewhat anomalous because Baker researchers say it is the product of  relatively mild winters and a long, deep recession. Were natural gas prices to normalize into the $4-6 MM Btu range, then gas supplies could significantly exceed projected global demand in the period 2020-2035.

What is happening in the U.S. shale industry is somewhat akin to what happened in the early wildcatting days in Pennsylvania when oil was truly "black gold."  The gold rush is on in the Bakken.  This industry is still young, evolving, and untested by an environmentally-related production crisis.  This does bear watching.

So, yes there is certainly potential for the U.S. to export LNG, particularly to Asia, but it won't right our trade balance by itself.  Some things that we should not forget that would be helpful in preparing ourselves for a more energy-efficient and carbon-mitigating future include:

  • a carbon tax
  • building a smarter and more efficient energy grid with lower transmission losses
  • attacking commercial and residential energy consumption through better design and retrofitting. 
  • reconsidering the role of nuclear energy in reducing carbon emissions in a portfolio with natural gas, oil and renewable sources at the margin.

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