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Energy Department Prepares To Weigh In On Natural Gas Exports

Agency looks at impacts on economy, including effect on chemical industry

by Jeff Johnson
January 7, 2013 | A version of this story appeared in Volume 91, Issue 1

Credit: Newscom
Some 15 port facilities are being planned to load tankers and ship U.S. liquefied natural gas to international markets.
LNG tanker docked in Japan…part of international trade in natural gas
Credit: Newscom
Some 15 port facilities are being planned to load tankers and ship U.S. liquefied natural gas to international markets.

A decision by the Department of Energy later this year may prove to be of key importance to the chemical industry. DOE will decide how much natural gas can be exported from the U.S.

The new surplus of U.S. natural gas—a result of hydraulic fracturing of shale gas deposits—has generated a sharp decline in the domestic price of natural gas. It also has set the stage for a potential surge in new manufacturing investments, particularly for most of the chemical industry, which uses natural gas and ethane for feedstock and energy. But a lot of exports could push prices up.

The plummeting prices and high gas supplies have driven a “once in a generation” transformation of the chemical industry, notes Calvin M. Dooley, chief executive officer of the industry trade group American Chemistry Council.

“The U.S. has gone from one of the highest cost producers of chemicals four or five years ago to now one of the world’s lowest cost producers,” Dooley says. Consequently, ACC expects some $45 billion in new chemical industry investments for U.S. plant expansions over the next four or five years. Similarly, some $30 billion more will be invested by related industries because of the gas bonanza, according to ACC.

The upcoming DOE decision will determine how much of this natural gas can be exported to the rest of the world and, as a result, what impact those exports will have on U.S. gas prices and supplies as well as on U.S. manufacturing.

Because of the flood of new gas supplies, many energy companies are forging billion-dollar plans to construct U.S. port facilities to cool, pressurize, and liquefy the gas in preparation for exports via sea shipments. With U.S. natural gas prices in some cases one-fifth those of other countries, these companies hope to take advantage of the lucrative international gas market.

Some 15 permits to construct liquefied natural gas (LNG) facilities have been filed by these energy companies. These permits, which collectively request permission to export up to 29.2 billion cu ft per day, are now pending before DOE, which by law must approve them, unless it finds that the exports “will not be consistent with public interest.” In its evaluation of the permits, the agency must consider a range of factors, including economic, energy security, and environmental impacts.

Several politicians, industries, and consumer groups have voiced fears that exports of natural gas may drive up domestic prices, raising fuel prices and curtailing industry expansion. Over the past year and a half, to guide its decision, DOE commissioned two reports.

The first report, by the Energy Information Administration, was issued in January 2012. The group examined the impact on domestic natural gas prices if exports increase. EIA developed several scenarios and found that natural gas prices would increase, but it did not closely examine the overall impact on the U.S. economy. The report predicts under one scenario that the average annual production in the U.S. over the period 2015–35 will be 24.2 trillion cu ft.

The other report, released last month, considers the macroeconomic impact of gas exports on the nation. The firm NERA Economic Consulting conducted the study. Like EIA, it noted that gas prices will rise, but its report presents an overall rosy impact on the U.S. economy.

NERA found net gains to the U.S. economy from LNG exports if U.S. prices remain low compared with those in other countries and if U.S. supplies remain ample. Looking at several scenarios, the report predicts the U.S. gross domestic product to grow by between $4.4 billion and $47 billion annually by 2020 because of gas exports. However, not all sectors will profit equally.

The chemical sector and others that face stiff international competition, that are energy intensive, and that depend heavily on natural gas are more at risk from the expected price increases, the report notes. But still, it predicts declines in sector output of less than 1%.

Although individual workers in natural-gas-related energy companies will gain, the NERA report says, the large number of workers in companies that use rather than sell gas may be harmed, as will individuals who have not invested in gas-related natural resource companies.

The report’s clear message, however, is that gas exports are good for the U.S. economy despite the expected rise in domestic prices.

When the NERA report came out in December, Dow Chemical was not pleased. The report is “flawed, misleading, and based on outdated, inaccurate, and incomplete economic data,” said Andrew N. Liveris, Dow’s chief executive officer.

Overall, Liveris said the report downplays the importance of manufacturing to the U.S. economy and the “tremendous competitive advantage that affordable, abundant domestic natural gas offers to the nation.”

“Instead,” he continued, “the report offers the baffling conclusion that the U.S. would be better off using its domestic natural gas advantage to fuel growth and jobs in other regions versus strengthening the U.S. economy through manufacturing and benefiting consumers with lower energy costs.”

Exporting LNG, he charged, is a “one-time value” for the country.

However, when quizzed on Fox News shortly after the report came out, Liveris backed off a bit, saying Dow strongly believes in “exports and free trade.” But he warned that through “unintended consequences” of exporting gas, it could affect the price of oil. If that happens most of the new manufacturing investments would disappear. “That would be a tragedy,” he said, “and we must not let this happen.”

Dooley and ACC do not appear to share his view. “We fully understand and appreciate Dow’s concerns,” Dooley says, “and we have similar concerns.” Dooley says there should be a “robust and very balanced assessment of domestic benefits of LNG exports.” But meanwhile, he stresses, ACC’s board has a policy position that acknowledges concerns such as Dow’s but doesn’t oppose exports of LNG.

Several members of Congress have also weighed in on the issue. Among them is Sen. Lisa Murkowski (R-Alaska), who supports exports, and Sen. Ron Wyden (D-Ore.), who has expressed concern over possible gas price increases and the impact of exports on the U.S. economy. Both sit on the key Senate Energy & Natural Resources Committee, Wyden as chair and Murkow­ski as ranking minority member. Members of the House of Representatives are also split in their views of exports.

DOE will accept comments on the NERA report until Jan. 24 and then accept comments in response to those comments until Feb. 25. It will then make its decision on the applications. In the end, analysts in this area expect DOE to consider applications on a case-by-case basis. Once DOE acts, the Federal Energy Regulatory Commission must also approve export terminal construction.


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