Time to get serious about exporting natural gas

As with all commodities, the price of natural gas is determined by supply and demand. Today the supply is abundant, a consequence of the shale gas revolution, while demand is muted due to a sluggish economy. Because of America’s large and growing reserves of natural gas, potential supply will exceed anticipated domestic demand for many years to come. Indeed the Potential Gas Committee, a coalition of utilities and production companies, recently boosted its estimate of recoverable reserves by 26 percent to 2,384 trillion cubic feet—an amount equivalent to 90 times last year’s consumption.

Though domestic demand for gas may grow only slowly, there’s a huge global market for the commodity. With Japan retreating from nuclear power after the Fukushima accident, their need for gas to generate electricity has risen exponentially. Because Germany is planning to phase out nuclear power over the next decade, that country’s demand for natural gas will escalate as well.  China and Korea are also expected to be huge gas importers for the foreseeable future.

To ship American gas across the oceans, of course, it must first be liquefied, requiring huge investments in liquefaction plants, export terminals and special liquefied natural gas (LNG) carriers.   To date, only two projects have been approved by the U.S. Department of Energy—one  in Sabine Pass, Louisiana being developed by Cheniere Energy and another in Freeport, Texas being developed by a group of limited partners that includes ConocoPhillips and subsidiaries of Dow Chemical and Osaka Gas Corporation.  Both of these projects are secured by long-term supply agreements with companies such as Korea Gas Corporation and Chubu Electric Power Corporation.  20 other applications are currently being evaluated by the Department of Energy, including potential investments by Korean and British companies.

A new a study by the McKinsey Global Institute provides yet more evidence of the potential for U.S. LNG exports. The study, Game Changers: Five Opportunities for US Growth, found that boosting exports would decrease the U.S. trade deficit by between $11 billion and $27 billion each year.  Moreover, McKinsey predicts that continued development of domestic shale gas resources could create 1.7 million jobs in the United States by 2020.  But that depends on the viability of supplies, which, in turn, demands that the U.S. open more of its natural gas resources to the global market.

Unfortunately, some members of Congress, as well as some corporations and environmental groups, are pressuring the DOE to go slow by claiming that exporting LNG will be bad for the economy and bad for the environment.  Sen. Edward Markey (D-Mass.) argues that exports will push up prices, reduce the competitiveness of U.S. business, and slow the transition away from dirtier fuels. Dow Chemical, one of the most vocal opponents of LNG exports, says America would be better off using its “cheap” natural gas to boost domestic manufacturing as opposed to indirectly shifting jobs abroad.

{mosads}These arguments are flawed. First, there’s a big difference between “cheap gas” and the “dirt cheap” gas available today. Indeed, if prices don’t rebound from their currently depressed levels, we may not have any gas to export at all. What’s more, since LNG is produced from “dry” gas, exports will not significantly diminish the availability of natural gas liquids, such as ethane and benzene, which are the principal components of many manufactured products.

According to a recent study by the American Council for Capital Formation, a DOE permit to export gas comes after a lengthy process of pre-filing and obtaining approvals from many other regulatory agencies. For example, the construction and operations of LNG terminals are overseen by the Federal Energy Regulatory Commission (FERC).  Before an LNG export application can even be submitted to FERC, the applicant must file 13 required “resource reports” that are then reviewed by up to 20 separate federal and state agencies, a process that can take several years.

Because of this regulatory bottleneck, America is in danger of “missing the boat” on LNG exports.  While we dither, countries like Qatar, Canada, Australia and Russia are rapidly expanding their export capacity. What’s more, by exporting some of our natural gas, America will also be fighting climate change. Greenhouse gas emissions (GHGs) in the U.S. are at a 20-year low, even though the economy is one-third larger. This drop has occurred not because of environmental mandates but because of the substitution of natural gas for coal as a boiler fuel. Similarly, by exporting gas, the US can help other countries reduce their GHGs, particularly those like China and India that rely heavily on coal for power generation.

At present, though the U.S. is the world’s number one producer of natural gas, our exports are negligible.  Now is the time to get serious about entering the global gas market in a big way.  With gas prices currently averaging $10 in Europe and $15 in Asia, American gas is a bargain. Even if Henry Hub prices should rise to $6 or $7 over the next decade, American gas will remain competitive in the global market.

As an energy-abundant nation, America should logically be a major energy exporter. This is already the case with coal, and there is no reason we can’t become one of the world’s largest gas exporters as well, with all the attendant job creation and environmental benefits that will follow.

Weinstein is associate director of the Maguire Energy Institute in Southern Methodist University’s Cox School of Business and a fellow with the George W. Bush Institute.