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Debate Surrounds Race to Export America's Natural Gas

Some U.S. manufacturers, utilities and consumer advocates worry exporting gas will drive up electricity prices and deepen reliance on coal.

Feb 21, 2012
Natural gas drilling in the Marcellus Shale of Pennsylvania

Energy companies are honing plans to export natural gas faster than President Obama can call the United States the "Saudi Arabia of natural gas," and that's raising new questions about the country's energy policies.

Multinational energy firms and some economists say exporting natural gas is a no-brainer: the cost of producing natural gas in the United States has plummeted with the explosion in shale gas production, while prices remain high elsewhere in the world. That means exports could ease the U.S. trade deficit while stimulating job growth.

But some U.S. manufacturers, utilities and consumer advocates counter that exporting natural gas will drive up electricity prices, deepen reliance on dirtier coal and discourage investment in domestic manufacturing. A government study released last month reinforced their concerns. The independent Energy Information Administration (EIA) predicts that U.S. natural gas prices could jump 36 to 54 percent if every export plan currently on the table goes through. Electricity prices could rise 2 to 9 percent, the report says.

Even as the debate intensifies, energy companies are laying foundations to become the first to export natural gas from the United States. No export facilities currently exist in the continental United States, but eight companies have applied to build them. At the facilities natural gas is cooled to -260 degrees Fahrenheit, so it becomes what's known as "liquefied natural gas," or LNG.  At 1/600th the volume as its gaseous form, LNG can be loaded onto special tankers berthed at the new facilities and shipped across the world. (Paragraph includes correction, 03/04/2012)

The size of the proposed terminals varies, but each would process between 1 billion and 3 billion cubic feet of gas a day, according to applications they filed with the Federal Energy Regulatory Commission (FERC). If all eight were built—and that's a big if—their combined capacity would allow them to export about 18 percent of the 67 billion cubic feet of gas the U.S. consumes in a day. Meanwhile, the Energy Information Administration expects the United States to become a net exporter of natural gas by 2016, while it's expected to export more gas by pipeline than it imports by 2025.

It's clear why exports tempt the industry. A thousand cubic feet of natural gas—which provides roughly the same amount of energy as a barrel of oil—currently costs $14 to $15 in Asia. In Europe, the same amount of gas sells for $8 to $9. In North America, it trades for only about $4, down 9 percent from what it was at the outset of 2011.

"In my entire career there's only been two other cases where the world has changed so fundamentally for the big energy business," said Mikkal Herberg, an Asian energy specialist who teaches at University of California, San Diego and once led ARCO's global energy program.

"I wasn't entirely convinced until three to four months ago that the U.S. is going to be a big exporter," he said, but recent events and market conditions turned his thinking around. "The economics of sending U.S. gas to Asia are awfully good right now, assuming these shale gas supplies are as good as we think they are and that economists have confidence that these high prices can last."

Herberg and other experts doubt that all of the terminals will pan out. The investment can be huge, with a single facility costing hundreds of millions of dollars to build. The permitting process is difficult, involving clean water, coastal zone, clean air and other environmental and land use restrictions that state officials might add on top of federal rules. And getting permission to export is difficult, because companies must prove the sales are in the national interest if they ship to countries that don't have free trade agreements with the United States.

Potential exporters might also be dissuaded by the historic volatility of the natural gas market.

Half a decade ago, energy companies were scrambling to build LNG import terminals. But by the time they had weathered organized public opposition and regulatory oversight, they discovered that the U.S. shale oil boom had destroyed the economics of LNG imports. Some import partnerships went bankrupt. Others rapidly changed course and began applying for export permits.

What's more, unlike oil, gas isn't traded at a global, standard price. Not only do prices differ wildly in various parts of the world, but the trade of natural gas is also subsidized and restricted by a complex web of laws in exporting and importing nations.

The Energy Information Agency emphasized that volatility in its report.

"EIA recognizes that projections of energy markets over a 25-year period are highly uncertain and subject to many events that cannot be foreseen, such as supply disruptions, policy changes, and technological breakthroughs," the report says. The authors also warned that their study was limited and didn't account for other variables, such as world energy markets, macroeconomics, or how price changes may affect the demand for natural gas on a global scale.

Despite these challenges, one company, Houston-based Cheniere Enegy, Inc., has already received permits to build a natural gas export terminal in Sabine, La. where it already has an LNG import terminal. On Jan. 30 Cheniere signed an agreement to sell 3.5 million tons of LNG to Korean Gas Corporation beginning as early as 2017.

Gas Consumers Oppose Exports

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