Rep. Ed Markey (D-Mass) Suggests Restricting LNG Export Licenses

http://democrats.naturalresources.house.gov/content/files/2012-01-04_LTR_ExportingNaturalGas.pdf

 

Linked above is the January 4, 2012 letter from Rep. Ed Markey (D-Mass) to US Energy Secretary Steven Chu, questioning the prudence of large-scale natural gas exports.  In his letter Mr. Markey reasons that LNG exports facilities will absorb domestic natural gas supply in the coming years and dramatically raise natural gas prices.  His letter lists a number of potential negative impacts of natural gas exports, including “the potential price impacts of exports and the residual impact of higher gas prices on electricity generation and manufacturing, the potential for more volatile natural gas prices, and the environmental impact of raising the cost of gas, which he characterized as a “bridge” fuel from coal to renewable energy.”(1)  The ultimate point of the letter is to suggest to Mr. Chu that the federal government must limit LNG export licenses, which Mr. Markey argues will do all sorts of wonders for the consumers, businesses and the economy in general.

 

In a preliminary response, the Brookings Institution asserts that Mr. Markey’s arguments are half-cooked and questionable at best.  Their response is very insightful and calls into question a number of Mr. Markey’s claims.  I will not try to regurgitate their work, but will direct you to the link at the bottom of this entry.  What I would like highlight are the economic perils of interventionist policy and the damaging effects that it would have on our economy and our energy industry at home and abroad.

 

First, it should be noted that limiting natural gas exports would likely have similar effects to a price ceiling.  If natural gas prices are kept artificially low by eliminating a source of demand, we can expect that the energy industry will contract to reduce supply.  (Note: the recent drop in natural prices to ~$2.50/Mcf has already caused contraction to occur naturally.  Names such as Conoco and Chesapeake have already announced gas well shut-ins.  At $2.50/Mcf the economics of dry gas wells do not work.)  As this contraction occurs we can expect to see energy company failures (primarily E&P, OFS and midstream), job losses, decreased tax revenue and lost land-owner royalties and similar such economic pain that is typical when government intervention unexpectedly severs a critical source of industry demand.

 

We should also consider the individuals and companies that pioneered the technological revolution that unlocked all of this shale gas in the first place.  They have accomplished nothing short of a natural revolution.  Why?  Because they believed that a free market price awaited their product.  It is a dangerous signal to send hard-working and creative business leaders that the government may at any time step in to destroy the value of their work product.

 

The same logic applies to the hundreds of billions of foreign and domestic capital that has flowed into this country over the last 10 years.  Thanks to the drilling and completion expertise/technology that our industry has created, any oil and gas company in the world that wants to operate shale has to pay a US industry peer for an apprenticeship developing one of our shale plays.  Or invite us onto their soil for a lesson (as is happen right now in Poland, which has a massive prospective shale play that will end up producing big profits for our O&G companies).   Where did this expertise come from?  The expectation that if shale gas was unlocked, those that poured their time and money into do so would be rewarded.  What would happen if our government gets a reputation for interventionist policy?  Capital sources will be scarce the next time our energy industry is called to mobilize.

 

By the way, prospective Asian buyers of LNG are already betting that Washington will limit exports.  They project that exports will be limited to 2 of the 8 proposed terminals.  They see US LNG volumes as a major supply risk and as a result are avoiding our product.(2)  This will do wonders for our natural gas market efficiency and our reputation as a leader of the globalized, free market economy.

Stay tuned for Mr. Chu’s response.

 

Sources:

(1)    http://www.brookings.edu/opinions/2012/0117_natural_gas_ebinger.aspx

http://energy-musings.com/node/281#2

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3 responses to “Rep. Ed Markey (D-Mass) Suggests Restricting LNG Export Licenses

  1. Pingback: The Folly of Anti-Trade Thinking | CommonOil.com

  2. robschimmel

    Rep. Ed Markey’s protectionist rhetoric and hypocritical treatment of U.S. energy companies (when compared to his actions for the biotech industry in his home state of Massachusetts) offends the intelligence and belief in sensible democracy for anyone that has a basic understanding of the energy business and global capital flows.

    On February 14, 2012, Rep. Markey took action on the January 4, 2012 letter he sent to US Energy Secretary Steven Chu, which questioned the prudence of large-scale natural gas exports (please reference Bills Seek to Ban U.S. LNG Exports). As noted in the article, Rep. Markey introduced the following two bills that would ban U.S. exports of liquefied natural gas (LNG):
    • North America Natural Gas Security and Consumer Protection Act, would prevent the Federal Energy Regulatory Commission (FERC) from approving new LNG export terminals until 2025.
    • Keep American Natural Gas Here Act, would require that gas produced from taxpayer-owned federal lands would have to be resold to U.S. consumers. The bill also stipulates that any gas pipeline for which a right-of-way has been issued to cross federal lands must offer that gas for domestic sale only.

    According to Rep. Markey, “Low natural gas prices are a competitive advantage for American businesses and a relief for American families, and exporting our natural gas would eliminate our economic edge and impose new costs on consumers. This is America’s natural gas and it should stay here in America.”
    The logic behind Rep. Markey’s statements is simplistic at best, and likely misleading. As referenced in the initial blog posting, the Brookings Institution finds that opponents of natural gas exports overlook the fact that this issue is complex and requires more examination, particularly since the outcome of increased LNG exports on domestic gas prices is not known with certainty. Per the Brookings article:
    A report often cited by opponents of natural gas exports, compiled by Navigant Consulting, states that exporting 2 billon cubic feet/day of gas would result in a $0.35 (11 percent) increase in natural gas prices by 2015. However, the model is based on a static supply curve, which means that it does not incorporate increased investment in production as a result of higher natural gas prices, and therefore exaggerates the domestic price response.(2)
    Any elementary student of economics understands that if supply is held constant and demand is increased, then prices increase. However, Rep. Markey’s faulty logic is what causes real economic pain for Americans. For example, Chesapeake Energy’s operated, dry gas, rig count will decrease by 50 rigs to 24 in 2012 from 75 in 2011.(3) Think about the economic costs from the numerous rig workers who will be without work due extended low natural gas prices. Think about the avoided capital investment (in the billions of dollars) from domestic energy companies due to the fact that development cannot move forward when natural gas commodity prices prohibit an economic return. I guess Rep. Markey is not aware of the fact that foreign companies like CNOOC partner with U.S. companies such as Chesapeake Energy to finance shale gas development and create American jobs.

    Clearly, Rep. Markey does not realize the hypocrisy of his legislative actions against the energy industry in light of his support for and the campaign funds he receives from MassBio, a trade group representing biotech interests in his home state of Massachusetts. Read this from MassBio’s 2011 Annual Report:

    In 2011, MassBio launched Global Gateway, a series of sessions designed to connect MassBio’s international partners with Massachusetts-based biotech & pharma business development contacts, venture capitalists and angel investors…Eleven companies from outside the U.S. began operations in Massachusetts in 2011, among them: SciVax USA (Japan), Izon Science (New Zealand), Fraunhofer USA (Germany), Variation Biotech and Enobia Pharma (Canada), and Prism Idea (UK).(4)
    I guess Rep. Markey likes foreign companies to invest in American biotech jobs and export American biotech expertise. He clearly does not mind if foreign companies make money from selling biotech products to Americans while potentially raising American consumer costs. But, Mr. Markey has judged that advocating protectionist ideology on the natural gas industry benefits his chances for re-election more than if he upheld the sensible global view of biotech that he has demonstrated in his relationship with MassBio.
    Sources:
    (1) http://www.rigzone.com/news/article.asp?hpf=1&a_id=115173
    (2) http://www.brookings.edu/opinions/2012/0117_natural_gas_ebinger.aspx
    (3) http://www.eaglefordshale.com/news/chesapeakes-operating-plan-natural-gas-loss-eagle-ford-gain/
    (4) http://www.massbio.org/writable/homepage_documents/year_in_review_2011.pdf

  3. Pingback: Banning Natural Gas Exports Revisted | Energy, Technology, & Policy

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