To Export or Not to Export: Benefits and Consequences of Exporting US Natural Gas

For the first time in a long time, the US has natural gas, and a lot of it. In the wake of the advent of modern hydraulic fracturing – or “fracking” – US proven domestic reserves and production have boomed which has led many to call for the US to begin exporting liquefied natural gas (LNG). After nearly 200,000 public comments on the matter, the US Department of Energy granted its second conditional authorization to export LNG. Freeport, a LNG receiving and regasification company, was granted conditional approval to export up to 1.4 billion cubic feet per day of LNG from its terminal on Quintana Island, Texas to countries that do not have a Free Trade Agreement (FTA) with the US (countries with an FTA previously received approval). Current US federal law and the Natural Gas Act together required approval of natural gas exports to all countries by the US Department of Energy. The final decision on the matter of LNG exports still remains subject to environmental review and final regulatory approval, and is not expected without additional comment from parties with strong views on both sides of the debate.

Calls for the US to begin exporting domestically produced LNG stem from the fact that natural gas prices in the European and Asian markets have remained significantly higher than the Henry Hub price – the primary price point for North American natural gas. The massive disparity in prices has motivated many in the US as well as abroad to urge the federal government to begin permitting natural gas exports. But opposition to exporting the gas has also risen, as Jonathan Chanis highlights in a recent article in American Foreign Policy Interests. The administration must ensure, he says, that for welfare reasons rather than legal, exporting natural gas would not be detrimental to US residential and industrial consumers. The debate has given rise to questions regarding whether the price of natural gas would rise for US consumers in response to the US exporting the product, and whether the resulting higher domestic natural gas prices would be offset with substantial gains from international trade.

These contingencies were addressed in a recent report solicited by the US Department of Energy and completed by NERA Economic Consulting. The NERA report concluded that in every scenario, which permitted exports of natural gas, the US could be expected to experience net economic gains. That is, the report concluded that the US economic benefit from exporting would be greater than the decrease in capital and wage income for US consumers. Moreover, NERA’s analysis reveals that US net economic gains would increase with the quantity of natural gas exported.

The study focused on six scenarios estimating the effect on US welfare given various export levels and the resulting domestic natural gas prices, aside from additional supply and demand shock scenarios. The Liquid Natural Gas (LNG) export quantity scenarios ranged from a low-volume/low-growth to a high-volume/high-growth scenario, and each was compared to the results of a baseline estimate of no additional exports. Welfare outcomes were calculated by comparing the increase in income levels from wealth transfers associated with LNG exports, to the increase in the price of goods and services purchased by the US consumer. Prices were calibrated to give the same results for natural gas prices at the same levels of LNG exports, as those forecasted by the US Energy Information Administration in its Annual Energy Outlook of 2011.

The low-volume/low-growth scenario set export capacity at six billion cubic feet per day (bcf/d), phased in at a rate of 0.5 bcf/d per year. On the other end, the high-volume/high-growth plan fixed export capacity at 12 bcf/d, implemented at a rate of three bcf/d per year. For reference, the US produces a little more than 80 bcf/d and consumes roughly 70 bcf/d.

NERA’s report estimates that domestic natural gas prices will rise in response to exports, on top of forecasted increases present even in a non-exporting scenario. At the onset of exporting, the authors predict that prices would increase in a range from zero to $0.33 per thousand cubic feet (2010$/Mcf) relative to the baseline forecasted increases in a non-exporting scenario. And after five years of growing exports, the authors predict that prices would increase in a range of $0.22 to $1.11 (2010$/Mcf) more than they would in a non-exporting scenario.

A major assumption of the analysis presumed that the upward range of US natural gas prices would be constrained by arbitrage opportunities. That is, price competition among global gas suppliers would drive importing nations away from US LNG whenever the cost of importing from the US, generally wellhead prices plus transportation, increased above the price from other supplier nations. As such, the model showed that while US consumers would experience modest price increases, domestic natural gas prices will not converge to the price of natural gas in other markets.

While the report asserts net economic gains, the study concedes that the consequences of exporting natural gas will not be positive for all socioeconomic groups, specifically those whose income depends exclusively on wages or government transfers. These conclusions were based on NERA’s global natural gas partial-equilibrium model and a separate macroeconomic model, employed to estimate the effect of exporting natural gas on all economic interactions in the domestic market.

Importantly, the potential for a rising natural gas price is not the only concern surrounding the export debate. While the NERA report has a thorough discussion on the net economic impacts, it bypasses one of the key issues highlighted by Chanis: the financing and construction of the export terminals and natural gas liquefaction plants necessary for exporting the energy source. Preparing natural gas for export requires converting the gas into liquid form. While the US has the advantage of an established natural gas infrastructure, there is a scarcity of liquefaction plants for natural gas, which are essential for ensuring economical storage and transport. In order for the US to export LNG, the natural gas industry would have to build these facilities for about $4-7 billion each, according to Chanis’ estimation.

There are also significant objections to the export of LNG for environmental reasons. Environmental groups and advocates have voiced concern that permitting the export of US natural gas will escalate the use of hydraulic fracturing domestically and sustain the use of fossil fuels abroad. These concerns, especially in the wake of President Obama’s inaugural address, will be major roadblocks to exporting natural gas.

The debate over natural gas exports is heating up and promises to only get hotter. The recent US Department of Energy report detailing the economic benefits of increased trade will provide more fodder for the pro-export faction. However, opposition from those advocating for the groups forecasted to be injured from higher prices, and those advocating for environmental protection, will be strong. Amid the debate, there is one certainty: this decision will have powerful effects on the world energy market for years to come.

Feature Photo: cc/Ari Moore