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What's the hubbub about exporting LNG?

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Kurt L. Krieger Kurt L. Krieger
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Kurt L. Krieger is a member with Steptoe & Johnson PLLC. He practices in the area of energy and public utility regulation before the FERC and state public service commissions.

As news outlets report on the boom in U.S. shale gas production, more articles are addressing the debate about the export of U.S. produced natural gas as liquefied natural gas, or LNG. This is huge change from the 1970s and even the past decade when LNG import terminals were being built due to concerns the United States did not have enough gas. Exporting U.S. coal supplies has been viewed favorably by many for any number of (good and unfortunate) reasons. However, governmental officials and others are somewhat suspicious and negative on exporting LNG. Natural gas producers, facing persistently low prices here at home, are eager to market gas in higher-priced, global LNG markets. The debate asks: will gas prices become too high here at home? Will we have enough gas supplies? Are gas prices too low and hurting development? Recent studies have something to say about these issues.

Exporting LNG in any meaningful quantity requires transporting natural gas in its gaseous form by high-pressure pipeline to LNG import-export terminals located in coastal areas. There the gas is cooled to -260° F to convert it into liquid with a volume about 600 times smaller. LNG is then easily loaded onto specially designed ship tankers and exported overseas.

Perhaps unknown is that the United States already imports and exports gas in gaseous and liquid forms at locations on the Canadian and Mexican borders. In 2011, U.S. net imports fell by 25 percent to their lowest level since 1992 at around 1,949 Bcf (only about 8 percent of U.S. consumption) because of the overwhelming increase in U.S. natural gas production and resulting lower gas prices.

The siting and operation of onshore LNG import and export facilities are subject to regulation by the Federal Energy Regulatory Commission, or FERC. LNG projects can take four-plus years to permit and construct. To import or export the natural gas itself requires separate approval from the Department of Energy.

Applications to DOE to export to free-trade agreement countries are deemed to be in the public interest and approved. Applications to export to non-free trade agreement countries — with significant consuming markets, like China — face scrutiny to make sure they are in the "public interest." This review includes examining: domestic needs for the gas; threats to domestic supply security; general economic items; and environmental impacts. 

So why not export LNG? Opponents argue that an abundant supply of cheap gas could reinvigorate the nation's manufacturing sector and even the economy in general. Others worry that more exports mean more unconventional natural gas production, and greater negative consequences for the environment.

Among the recent surge in applications to export, DOE has approved only one request in the lower 48 to export LNG to non-free trade agreement countries. As of Dec. 19, another 16 such applications are pending. Putting aside certain LNG terminal physical limitations, the one approved and 16 pending applications propose to export up to about 25 Bcf per day (the U.S. consumes about 70 Bcf of natural gas per day). 

Taking everything into consideration, DOE issued two studies this year that came down on opposite sides of the fence. Other recent studies support increased LNG exports. 

In January 2012, DOE issued its first study reaching the following conclusions about increased LNG exports: Consumers will face higher gas and electric prices, and exports will mostly come from shale gas. The study concluded that a portion of the electric power sector will shift back to coal-fired generation because of increased gas prices, which environmental organizations are quick to view in the negative. 

On Dec. 5, DOE posted a second study commissioned from a private firm. It focused on trade-sensitive and energy-intensive, domestic manufacturing concerns. Unlike the first study, this one (with 63 different scenarios!) concluded that exporting LNG will result in a net economic benefit to the U.S. economy, despite some increase in gas prices.

A study by Rice University, supports the conclusions in this second study. It concluded LNG exports will not have a significant impact on price (predicting a long-run equilibrium price in the $4 to $6 per Mcf range for many years) and international markets will naturally limit the amount of LNG exports. The American Gas Association also recently issued a white paper concluding that we are facing at a decade of gas price stability even with LNG exports. 

The second study observes that increased gas prices may have a negative impact on U.S. manufacturing. Hopefully the resurgence of U.S. manufacturing will continue to occur for a number of other reasons. Without diminishing the importance of energy prices to manufactures, this author notes a recent article (see The Atlantic, "The Insourcing Boom," by Charles Fishman, December 2012) suggesting that factors other than domestic energy prices are bringing manufacturing back to the U.S. 

DOE has withheld action on the pending applications until the second study was completed. We may now see some action during 2013 for applications that have also commenced the FERC pre-filing environmental review process, assuming the national political discourse on the topic is resolved. Given the lead time needed to construct the LNG terminals, it is not likely that exports will significantly increase in the near term. 

The issues are complex. Fortunately they are born from the uniquely American story — how creative new technology has enabled access to large amounts of U.S. gas and oil. In a world thirsty for energy, this is certainly more blessing than curse. As Daniel Yergin, the esteemed energy author and expert, recently wrote, America now has a "new energy reality" that is still unfolding. "This new reality requires a new way of thinking and talking about America's improving energy position and how to facilitate this growth in an environmentally sound way — recognizing the considerable benefits this will bring in an era of economic uncertainty."