AEM
GGP: An Abundance Of Riches? US Natural Gas, Manufacturing And LNG Exports
The statements, opinions and data contained in the content published in Global Gas Perspectives are solely those of the individual authors and contributors and not of the publisher and the editor(s) of Natural Gas World.
This is an excerpt of an article by the Baker Institute, also published by Forbes on July 5, 2017.
Can US shale gas support domestic manufacturing expansion while increasing U.S. LNG exports? In recent months several industrial users of natural gas and some politicians in natural gas consuming states have questioned the open, free market approach to LNG trade taken by the Obama administration. They argue that unrestricted US LNG exports may hurt U.S. domestic users of natural gas, including both industry and retail consumers. These concerns are not unique to the US. In fact, the same reasons have been behind Australia’s decision to enact a regulatory measure that allows restrictions on LNG exports in case domestic market natural gas shortages emerge.
This is happening as the new U.S. administration is taking its first steps to define its position toward the country’s role in the world LNG market, while reassuring the public about its strong commitment to increasing US manufacturing output and jobs.
In this post, we evaluate whether the United States should follow the Australian example out of concern that a commitment to free trade in LNG could derail its efforts to support American workers and American industry. Our analysis indicates that limiting LNG exports from the U.S. is not an effective tool to ensure health of the country’s manufacturing sector and the administration should steer away from such measures.
Will U.S. LNG Exports Result in Domestic Natural Gas Shortages?
Before we move to the U.S. case, it is important to underline that, for the reasons we detailed in our post on Australia’s LNG policies, any effects of restricting LNG exports in that country are limited, short-lived and, in a long-term damaging to Australia’s natural gas industry and economy. Ultimately, the policy neither addresses nor improves the issue of natural gas shortages that emerge in the Eastern and Southern provinces.
We believe that any analogous policy applied in the U.S. would be missing the mark even more profoundly given the differences between the U.S. and the Australian natural gas markets.
To start, the shale revolution in the US, which is still very much in its infancy, is leading to an upward reassessment of the US natural gas resource base. And the constant reductions in the cost of development lead to downward pressure on US natural gas prices and greater gas availability for both, domestic use and exports.
In addition, per EIA 2017 Energy Outlook, U.S. LNG exports (net) are expected (in a base case) to absorb only around 10-12% of the total U.S. natural gas production over the next decade or so. This is far below the 50% of Australia’s natural gas that is exported today or the 2/3 or so forecasted for the 2030s. And even if LNG exports were to double over what EIA forecasted, US natural gas production (and imports from Canada) would also increase such that even 20 bcfd of LNG exports would represent only between 20-25 % of US production (2015 DOE Study, tables: D-28 through D-30 and D-46 though D-28).
Also, U.S has an extensive natural gas pipeline network that is well integrated and allows natural gas to flow relatively freely -with some exceptions- across states thereby preventing regional price increases due to lack of interconnecting infrastructure. Integration with Canada provides additional gas supply to US markets (Figure 1).
Figure 1.
AEMU.S. Natural Gas Pipeline Map
Source: American Energy Mapping via Pipeline 101.
The extensive pipeline infrastructure in the U.S. helps also with respect to any state-level regulatory restrictions that have been or could be imposed on oil and gas development. For example bans on hydraulic fracturing in NY or Maryland do not prevent the flow of shale (or non-shale) natural gas from other states. This is diametrically different from Australia where extensive bans on natural gas developments in consuming regions coincide with lack of interstate pipeline connections and can result in regional shortages. The price spikes that follow cannot be resolved by production in other parts of the country.
As such Australia provides a cautionary tale to the U.S. and its consuming regions. Additional pipeline capacity will be for example soon needed in certain parts of the U.S., such as in the Northeast (N.E) to meet growing demand in the electric power sector. Given the existing and/or any future bans on natural gas production in the that region, any block on construction of additional pipelines will inevitably result in higher natural gas prices relative to the rest of the US. Those price spikes would not be production-or LNG export-related. Instead, they would result from a shortage of pipeline capacity. Thus, LNG export restrictions could not possibly solve it.
Will U.S. LNG Exports Drive Domestic Natural Gas Prices and Hurt Manufacturing Industry?
As shown by 2015 DOE study* of potential LNG exports scenarios, US natural gas prices through 2040 would rise but would always be lower than prices of LNG delivered in Asia and Europe. This difference reflects liquefaction costs, ocean transport and regasification that those non-US customers must incur. In fact, in over 20 scenarios investigated by the 2015 DOE study, the price differential between the US Henry Hub price and the natural gas prices elsewhere ranges from $3/mcf to $15/mcf. For example, the price advantage the U.S. has over Europe is anywhere between $3/mcf and $7 mcf. (Figures 18 and 19 in the DOE study.) As a result, U.S. industrial consumers of natural gas will continue to have a cost advantage over European and Asian competitors even under scenarios with much higher export levels than those assumed in the DOE base case.
If U.S. prices were to rise above Japanese and European levels (as some hypothesize) there would be no need to artificially (via policy measures) limit US exports. Buying expensive U.S. gas, incurring liquefaction and shipping costs, and selling the gas below the price of natural gas in the US, would be highly uneconomic and unreasonable, given other, cheaper LNG sources.
Important to point out is that the DOE study also confirms that higher natural gas prices in the U.S. will have negative impact on some natural gas‐intensive manufacturing sectors. Compared to a 12 Bcf/d of LNG exports scenario, with 20 Bcf/d of LNG exports, some sectors—such as glass, cement, and chemicals —would see small relative declines in output (see Figure 2).
Figure 2 .
DOESector Impacts: 20 Bcf/d vs 12 Bcf/d LNG exports. Avg. annual difference 2010 $Bn, 2026-40
Source: DOE. The Macroeconomic Impact of Increasing LNG Exports
However, the study also shows that these declines are outweighed by gains in manufacturing industries that benefit from increased investment in natural gas upstream and midstream sectors as well as from increased construction activity (including metals). One should also expect manufacturing gains related to increase in overall economic activity. As a result, the aggregate impact of LNG export on the manufacturing sector is small and positive. In addition, under all export scenarios considered in the study, U.S. GDP is higher than in the case when no exports occur (Figure 3).
Figure 3.
DOEMacroeconomic Impact of Increasing LNG Exports to 20 Bcf/d from 12 Bcf/d
Source: DOE. The Macroeconomic Impact of Increasing LNG Exports
It is also important to add that the DOE study does not expect LNG exports to soar beyond 10 mbd as competition from other LNG exporting countries will deter US liquefaction investment over the next 10 years or so. In general, higher LNG export scenarios require either global growth of consumption that would be much faster than in the reference case or supply constraints in other LNG exporting countries. Both scenarios are rather implausible.
In particular, it is unlikely that natural gas supply from the rest of world will be constrained (by factors other than price). We’ve already mentioned an expected rise in LNG exports from Australia. We can also expect increased production that feeds into LNG exports from Qatar, which recently announced its intention to remove the long standing moratorium on new developments in its prolific North Field. One also needs to take into account that with the lifting of Iran sanctions, the Iranian side of the North Field (known as South Pars Field) is open for development , including prospects of future exports of Iranian LNG. Russian gas developments that will send gas to China/Asia and Europe will also provide competition for US natural gas exports. Thus, many of the proposed LNG exports projects that have been proposed for the U.S. are not likely to be built any time soon.
So What Should the U.S. Do about LNG Exports?
Some U.S. industrial gas consumers urge the new administration to follow Australia’s lead and toughen LNG export rules. Dow Chemical has been vocal in the past questioning the wisdom of regulatory approval of large exports of LNG. Paradoxically, despite these lobbying efforts, the chemicals sector, one of the most natural gas intensive sectors, seems bullish about the future no matter what transpires. And this includes Dow Chemical, which has recently completed two large chemical projects in the US and has proposed an additional $4 B in investments. Consider also the Exxon-Saudi announcement in April 2017 to build a $10 B chemical plan in Corpus Christi.
Generally, any fears over restricting LNG exports have done little to deter investment in the U.S. Even in 2013-2014, at the peak of the debate over unrestricted LNG exports, there were about $100 billion of announced new chemical projects in the US. In April 2016, the announced investment in US chemical facilities had risen to $164 billion. The surge has been “(…) linked to plentiful and affordable natural gas and natural gas liquids (NGLs) from shale formations (…).” The trend continues and has been reinforced by improvements in unconventional drilling productivity .
For now it looks like the new administration is heeding the trends in US LNG investment. The recent trade discussion with China points to President Trump’s willingness to support the flow of LNG to non-FTA countries. And while the terms of the trade deals are still far from set, it is important that they are not stifled by misguided arguments to keep U.S. natural gas exclusively for domestic consumption. Also, any policies that impact market rules are bound to have unintended consequences. The U.S. learned this the hard way with respect to oil exports ban and the negative consequences the ban brought to the U.S. oil industry and economy before it was retracted in 2015. Hopefully, the new U.S. administration took note.
Anna Mikulska is a nonresident fellow for the Center for Energy Studies at Rice University’s Baker Institute for Public Policy.
Michael Maher is a senior program advisor for the Center for Energy Studies at Rice University’s Baker Institute for Public Policy.
*Kenneth B. Medlock III, Director of the Center for Energy Studies, Rice University’s Baker Institute for Public Policy, was the principal author of the natural gas market analysis in the DOE study. The study looks at the cumulative impacts of U.S. liquefied natural gas exports at various levels of US and global natural gas demand and production, and various ranges of the US natural gas reserve base. The study is one of two commissioned by the DOE "to inform [the department's] decisions on applications seeking authorization to export LNG from the lower-48 states to non-free trade agreement countries."
The statements, opinions and data contained in the content published in Global Gas Perspectives are solely those of the individual authors and contributors and not of the publisher and the editor(s) of Natural Gas World.