13 May 2013

To export LNG or not? If so, how much is prudent?

Written by Jim Pierobon

President Obama is preparing to decide how much liquified natural gas (LNG) from the the U.S. boom in shale natural gas production it makes sense to export. Economically and geo-politically a LOT hangs in the balance.

If Obama’s first term on energy was mostly about incentivizing renewable energy, his second term is all about whether to embrace growing U.S. supplies of fossil fuels.  What a difference a few years make.

At about $4.30 per million BTUs (British Thermal Units), U.S. natural gas prices are approximately one-third the cost of LNG imported to Europe and one quarter the cost of LNG in China and other Asian nations. With that much of a price differential, the U.S. finds itself in the driver’s seat of the biggest shift in global energy markets since Arab oil producers wrested control of world oil prices from the Texas Railroad Commission.

The surging supplies represent a compelling opportunity to improve America’s energy security and likely keep natural gas prices relatively low. The new-found gas also offers U.S. producers an unprecedented opportunity to profit handsomely by selling their product to the world all while creating thousands of even more new jobs in the U.S. Nurturing new geopolitical relationships with foreign countries and championing free trade wouldn’t hurt either. See this recent report on the trade implications by the Congressional Research Service.

Relying on a single study, Department of Energy (DOE) researchers concluded that unleashing U.S. gas exports would be a net economic benefit to the U.S., this despite an anticipated slight rise in prices to U.S. consumers.  Lobby groups led by the American Petroleum Institute and America’s Natural Gas Alliance have seized on the DOE report along with other studies and are pushing hard to open this lucrative gateway.

But public gas utilities and U.S.-based manufacturing companies reliant on natural gas as a  feedstock are not buying it. Both groups are among those who want to keep most of the mushrooming supplies of shale natural gas at home for domestic use and to help keep prices as low as possible.

Clean energy and environmental advocates are not impressed either. Natural gas may emit lower greenhouse gas emissions than renewables, but it is still a fossil fuel. The Sierra Club asserts exporting LNG is a “dirty, dangerous practice.”

LNG tanker in port, left to rt, CREDIT Sierra Club

There are at least 20 applications for U.S. terminals similar to this one for exporting liquified natural gas. CREDIT: Sierra Club, which wants to stop every terminal it can.

Official trading partners to the U.S. such as Japan already have access to U.S. LNG exports. Most of the companies who want U.S.-produced gas, though,  are not trading partners. THAT is the new market; it’s huge, it’s growing and it cannot be ignored.

So it seems highly likely that Obama will approve exporting LNG to non-trading partners. The question is who will earn the licenses needed and whether they can sustain operations safely and cleanly.

At least 20 companies want in on the transport opportunity and have applied to build a new LNG export terminals along a U.S. coastlines.

If U.S. producers are to secure new export contracts,  they would need to have their terminals operating by around 2017. Given the lead times required to fully permit and build LNG export terminals, many experts assert Obama needs to issue the green light for new terminals within the next year, if not this summer. If he balks, that gas could be supplied by less secure sources such as Russia’s Gazprom or producers in the Middle East. Or it could be supplanted by higher-emitting coal to generate electricity.

By the time the U.S. is projected to become a net exporter of natural gas — in 2020 — it could be too late.  Demand is high now throughout much of Europe, as well as, China, India, South Korea and other rapidly growing Asian markets.

According to Sarah Ladislaw, an international energy expert at the Center for Strategic and International Studies, if a new export regime and long-term supply contracts are not in place by 2017, U.S. producers will miss what she called a “window of commerciality.” After that, U.S. producers will likely find plenty of competition from other exporters.

Obama may have tipped his hand earlier this month in discussing energy with Central American presidents. According to Reuters and the Financial Times, he said U.S. natural gas could be used as a bridging mechanism to relieve its energy demands until alternative energy sources can be increased.

“I’ve got to make an executive decision broadly about whether or not we export liquefied natural gas at all,” Mr Obama said during a trip to Costa Rica. “But I can assure you that once I make that decision, then factoring in how we can use that to facilitate lower costs in the hemisphere and in Central America will be on my agenda.”

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