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LNG Exports: The Winners and Losers

A liquefied natural gas (LNG) tanker arrives at a gas storage station in Japan. The fuel came from an export terminal in Sakhalin, Russia.

(This post has been updated with a correction on current LNG terminals in the U.S.)
Not too long ago, when it came to liquefied natural gas, the talk centered on import terminals. But all that has changed thanks to fracking for shale gas in places like Pennsylvania and Texas. Several weeks ago, the Department of Energy released its long-awaited report on liquefied natural gas exports. The “Macroeconomic Impacts of LNG Exports from the United States” gave an enthusiastic thumbs-up to sending U.S. natural gas overseas. But this week, a Democratic congressman has called for a new study.
The U.S. has two export terminals, in Sabine Pass, Louisiana, and the ConocoPhillips LNG export terminal in North Cook Inlet, Alaska. In order to transport large amounts of natural gas overseas, it must be cooled to the point where it becomes a liquid and shipped via tankers. The Federal Energy Regulatory Commission is reviewing eight new export terminal proposals, including one in Cove Point, Maryland.  And six additional sites have been identified, all along the Gulf Coast. The report’s authors say in all the market scenarios examined, LNG exports resulted in a net economic gain.

“In all of these cases, benefits that come from export expansion more than outweigh the losses from reduced capital and wage income to U.S. consumers, and hence LNG exports have net economic benefits in spite of higher domestic natural gas prices. This is exactly the outcome that economic theory describes when barriers to trade are removed.”

The Winners

The push for exports makes sense for producers who have become the victims of their own success. U.S. Natural gas prices have plummeted in recent years due to increased production in gas plays like the Marcellus Shale. The price of natural gas in the U.S. now hovers around $3.50 per million British thermal units. But in Europe that same amount of gas fetches more than $10. So exports would help producers by reducing domestic supply and increasing prices. The report, conducted for the DOE by the economic consulting firm NERA, says exports make sense as long as there’s a glut of natural gas with low production costs in the U.S. and a high demand overseas. The study concludes that new LNG export terminals would result in just slight increases in the price of natural gas.

“Natural gas price changes attributable to LNG exports remain in a relatively narrow range across the entire range of scenarios. Natural gas price increases at the time LNG exports could begin range from zero to $0.33 (2010$/Mcf). The largest price increases that would be observed after 5 more years of potentially growing exports could range from $0.22 to $1.11 (2010$/Mcf). The higher end of the range is reached only under conditions of ample U.S. supplies and low domestic natural gas prices, with smaller price increases when U.S. supplies are more costly and domestic prices higher.”

The report’s authors point out that even with the highest price jump, natural gas remains much cheaper than oil. This is good news for producers, pipeline companies that would transport the gas to the export terminals, and those who invest in these companies.

The Losers

But the report does say LNG exports will depress real wages, due to increased costs in fuel.

  “Households with income solely from wages or government transfers, in particular, might not participate in these benefits.”

So not everyone has rallied behind this report. Manufacturers in particular, have seen a resurgence with the low price of natural gas in the U.S., both as a feedstock for plastics, and as a cheaper fuel. George Biltz, the vice president of energy for Dow Chemical, recently told StateImpact Pennsylvania that shale gas has transformed the petrochemical industry.
“It’s created the kind of competitive advantage in the plastics and petrochemical industry that I haven’t seen before in my 33 years at Dow Chemical,” said Biltz. “It’s a massive competitive advantage for this industry.”
Biltz says in the late 1990s the U.S. started to run out of cheap natural gas. Prices that were once about $3.50 per million British thermal units, jumped as high as $14 before 2008. Since natural gas liquids are the raw materials for plastics, and the largest cost to a manufacturer, a lot of those industries left the U.S. But Biltz says those jobs are coming back thanks to cheap natural gas. Dow Chemical criticized the DOE’s study as “flawed.”
“The report issued by the DOE on liquefied natural gas (LNG) exports is flawed, misleading, and based on outdated, inaccurate and incomplete economic data,” said DOW CEO Andrew N. Liveris in a press release. “The report fails to give due consideration to the importance of manufacturing to the U.S. economy. Manufacturing is the largest user of natural gas in the U.S., and creates more jobs and more value to the U.S. economy from natural gas than any other sector.”
Liveris says manufacturing acts as a much greater job creator than export terminals, and called the report’s conclusions “baffling.”
This week, Congressman Edward Markley, the leading Democrat on the Natural Resources Committee, says the economists who conducted the study used old data. Markley wrote a letter to Energy Secretary Stephen Chu asking for a new study, saying the NERA report may have underestimated the negative impacts of LNG exports.

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