March 8, 2012

Exporting Natural Gas?

One of the most striking of U.S. energy predicaments is whether to encourage the export of natural gas from the United States. 

Four years ago, the question did not arise; the assumption was that the United States would need to import large quantities of liquefied natural gas (LNG) in order to overcome domestic shortfalls. In 2008, the price of natural gas reached $13.69 per million British thermal units, almost back to the crisis levels reached in 2005 after Hurricane Katrina. Since that time, the price of natural gas has fallen to $2.30, far below the cost of production, and production itself has exploded, growing 41 percent since 2005. New techniques of hydraulic fracturing, or fracking, have made for an energy revolution, and have produced unprecedented disparities in pricing between natural gas and everything else. Natural gas prices in Asia, reports The Wall Street Journal, are now 8 times those in the United States.

The controversy over whether to build new export terminals, as the Journal notes, has made for strange bedfellows, with the petrochemical industry and the Sierra Club, for different reasons, standing side-by-side in opposition. Those in favor of encouraging exports include the domestic natural gas producers, big importers like Japan and Europe, and wind, solar, and coal companies hammered by the collapse in natural gas prices. Beyond the economic and political interests at play, however, there is also a profound tension between strategic and economic objectives, on the one hand, and environmental objectives on the other. The controversy, in basic respects, thus replicates the debate over whether to build the Keystone Pipeline.  

Energy companies have found so much natural gas in U.S. shale rocks they want to begin exporting it. But the push is creating a political clash with an unusual set of opponents who think American gas should stay in America.

Gas producers are eager to find new markets after seeing the glut of U.S. gas depress prices to a 10-year low. Big gas importers, such as Japan, are lobbying through diplomatic channels to persuade the U.S. to open the export spigot.

Lining up against exports are some strange bedfellows in industry and the environmental community. The American Chemistry Council, a trade group of chemical makers, says a long-term supply of cheap natural gas would drive enormous investment and job creation in the U.S. petrochemical industry. It has warned the government against "undermining the availability of domestic natural gas."

The chemical industry is being joined by the Sierra Club, a major environmental group, which frets that giving natural-gas producers new customers overseas will lead to more hydraulic fracturing to break up the shale and release the gas, a technique dubbed fracking that has raised environmental concerns. . . .

The issue could come to a head this spring as the Department of Energy prepares to decide whether issuing export licenses for gas is in the national interest. The department has said it will rely in part on a report about the economic impact of exports, due within weeks.

Proponents say allowing exports could create more jobs in the natural-gas industry by encouraging new wells. Recently, some companies have shied away from drilling because domestic gas prices are so low and there is no way to sell the fuel overseas.

Exports also could also help trim the U.S. trade deficit, Energy Secretary Steven Chu said last month. "Exporting natural gas means wealth comes into the United States," he said. Once a big energy importer, the U.S. has begun to turn into an export powerhouse by shipping out refined products such as gasoline.

The U.S. currently exports a small amount of gas to Japan from a 43-year-old facility in Kenai, Alaska, which chills the gas to turn it into a liquid before it can be put on supercooled tanker ships. But there aren't any large-scale terminals to create liquefied natural gas, or LNG, to ship overseas. . . .

One proposed export terminal—Cheniere Energy Inc.'s project at Sabine Pass, La.—already has won Department of Energy approval to ship to most nations. Seven other projects are seeking similar signoffs. If all are built, which is seen as unlikely, they could export about 25% of current U.S. gas production.

Creating an export trade is expected to boost prices and production of gas, a fuel used to heat about half of U.S. homes and generate a quarter of the nation's electricity. The Energy Information Administration, the statistical arm of the U.S. Energy Department, recently said gas exports could push domestic prices up over the next decade between 14% and 36%, depending on the pace of export-facility construction.

Increasing exports of gas could help both coal and renewable power, both of which are struggling to maintain market share against inexpensive gas-powered electricity generation. . . .

Cheniere's Mr. Souki said the biggest support for exports should come from "every politician in a state that produces gas, and there are 32 states that produce gas today," since exports bring in royalties and taxes.

The Sierra Club opposes creating more incentives to drill, citing long-term effects of natural-gas production, such as methane that escapes into the atmosphere from wells. It also has concerns about potential groundwater pollution from fracking and the amount of energy used to chill gas to 260 degrees below zero so it can be shipped. "It becomes a net negative in terms of climate impact, and for that reason alone we would oppose" the terminals, said the group's Mr. Brune.

Recently, U.S. diplomats have been encouraging global LNG production because they see potential strategic benefits, such as weakening Russia's power in gas markets.

"In the last five years, LNG that had been originally slated for U.S. markets has been diverted to European spot markets, forcing gas-on-gas competition as Russian suppliers had to accept lower prices for pipeline gas," said Robert Cekuta, a senior State Department official in the energy and economics bureau, speaking last month in Indonesia.

Russell Gold and Keith Johnson, “Odd Alliance Says No to Gas Exports,” The Wall Street Journal, March 8, 2012

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As the price of natural gas has fallen back to 1990s levels, the wind, solar, and coal sectors have taken it on the chin. The following chart shows the coal index ($DJUSCL, in red), the solar exchange traded fund (TAN, in green), and the wind etf (FAN, in purple).

Jeremy Grantham's latest quarterly letter contains the following chart showing the natural gas/crude oil energy equivalent ratio over the last fifty years. He notes that "there have been several recent decades in which the BTU equivalent price for natural gas did, at least for a second, reach parity with oil. But now [as of 2/8/12] it is at just 14% of BTU equivalency, the lowest in almost 50 years." (click to enlarge)

Here are a couple of additional charts from Floyd Norris, "Gas Costs More, or Less," New York Times, March 30, 2012. Note that the price of crude oil in the chart is for West Texas Intermediate. The extreme ratio displayed in the bottom chart (showing oil at a 8.35 multiple to natural gas for energy equivalent value) would be even higher were it compared to Brent Oil, which has averaged around $125 per barrel the last few weeks.


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