To Export or Not To Export?

As a result of the profitability and success of fracking, the production of LNG, or liquefied natural gas, is now higher than ever. We produce so much LNG that many fracking sites have resorted to flaring, or burning off, the excess natural gas that they are unable to find use for. As a result, there has been extensive debate about whether to export the excess LNG to other countries for profit. Both backers and opponents of the shipping of LNG to other countries have been finding ammo for their side of the argument.

A recent report commissioned by the Dow Chemical Company was done in order to “examine the importance of natural gas-intensive manufacturing to the U.S. economy and how LNG exports could impact growth and other major (natural gas) demand sectors.” [1] This report was in response to a government study by NERA Economic Consulting, which concluded that the export of excess LNG to countries who have an extremely high demand, such as China, would provide “net economic benefits.” [2]

However, in the report by the Dow Chemical Company, a direct economic benefit comparison between keeping natural gas state side and exporting it to other countries was completed. It was found that if 5 billion cubic feet of natural gas was used stateside for production or research, it would contribute $40 billion to the US economy. If that same amount of natural gas was liquefied and exported, it would only result in a profit of $2.3 billion. [1]

From the report, it seems obvious that the path to take is to keep the natural gas within the United States for domestic uses. However, while the supporters of export do not deny the numbers, they claim that the report’s comparison is misleading since “exports do not represent and either/or scenario.” [1] Strictly exporting or strictly keeping the natural gas within the US is not the only option. We can use the natural gas for domestic uses such as production and research, and then any leftovers can be sold to other countries as LNG, resulting in a best-of-both-worlds scenario. Various studies have shown that this option is viable due to the “United States [having] an abundant supply of natural gas, more than enough to meet growing domestic demand and allow for exports.” [1]

Choosing one option over the other is further complicated by the fact that several companies, such as BP, have already signed contracts for the long term export of LNG, which will be affected by any decisions made going forward. [3] Also, several reports say that the “US shale revolution hinges on exports.” [4] By shipping the excess LNG overseas, we are able to support innovation at home.

Another option from the left field is to sell the fracking technology to the countries that demand the excess natural gas that we produce. By selling the technology instead of the gas itself, the US would be able to keep all of the natural gas for domestic use (and thus its ~$40 billion benefit) as well as still gaining some profit from overseas from the technology.

There is no one “100% right” answer to this problem. There are many pros and cons to each avenue available to the natural gas companies, and extensive analysis must be completed in order to provide enough information on what step to take from here.

Sources:

[1] http://fuelfix.com/blog/2013/03/15/export-debate-heats-up-over-economic-benefits/

[2] http://fuelfix.com/blog/2012/12/05/government-report-predicts-big-economic-boost-from-natural-gas-exports/?cmpid=eefl

[3] http://fuelfix.com/blog/2013/02/11/bp-takes-on-20-year-lng-export-contract/?cmpid=eefl

[4] http://fuelfix.com/blog/2013/03/06/future-of-u-s-shale-revolution-hinges-on-exports-execs-tell-ceraweek/?cmpid=eefl

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3 Comments

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3 responses to “To Export or Not To Export?

  1. Thanks for the post and good overview of some key issues that surround the exportation option of LNG. For an issue like this, with significant political implications, it is important to point out that all of the third parties and industries involved have different reasons to support or reject the idea of exportation. For this reason, one has to be cautious when interpreting different reports produced by different agencies. Dow chemical company, for example, will be positively affected if natural gas remains domestic. As a chemical company, Dow uses a significant amount of natural gas as an input into many of its chemical processes. Therefore, keeping the price of natural gas low keeps their costs low. For some cost perspective, in the United States, natural gas prices are around $3.30 per thousand cubic feet. Compare this to $10 – $11 in Europe and over $15 in Asia. On the other hand, Exxon Mobil, a producer of natural gas, has an incentive to export their natural gas to take advantage of the higher international natural gas prices. In general, low US natural gas prices are good for consumers and potentially harmful for producers. For this reason, when following this issue online and in the press, it might be a good rule of thumb to follow the money.

    Interesting Links
    1. http://www.bloomberg.com/news/2013-01-24/dow-chemical-fights-ally-exxon-s-natural-gas-export-push.html
    2. http://www.nytimes.com/2013/01/05/business/energy-environment/exports-of-us-gas-may-fall-short-of-high-hopes.html?pagewanted=all&_r=0

  2. drummond1

    Excellent post on a very important issue. I do share the concern of the first commenter regarding the possible bias of the Dow Chemical study since Dow is a major user of natural gas as a feedstock for their operations. I do agree that there is a large market for the exportation of technology, although I am not certain how this will affect domestic exports in the long term. I believe that there are up to eleven LNG plants currently in the pipeline for government approval. Given the high capital costs and long payback period for these plants, I would be very concerned that simultaneous technology exports would erode the arbitrage opportunities currently available. The margins seem pretty low in Europe given the $4-$5 / mcf costs of liquifaction and transportation, but high margins certainly exist in Asia. These margins will dramatically decrease in Asia, however, once international prices start to fall and domestic prices start to increase due to massive exports, and once nations in the region begin to extract their own shale resources.

  3. Colin Meehan

    Such an interesting and important topic. I have often heard anecdotally that manufacturing in the U.S. has experienced somewhat of a comeback due to low natural gas prices. A quick look at the historical record doesn’t bear that out though – the EIA shows that while fossil fuel use in the industrial sector has recovered from their 2009 nadir, they are still well below pre-recession levels. In fact fossil fuel consumption in the electric sector haven’t been this low since 1985, so I find it hard to believe that low natural gas prices are leading to an increase in manufacturing in the U.S.

    Digging deeper into the natural gas usage, it’s hard to see a direct link between natural gas prices and industrial sector natural gas consumption. Consumption dips slightly in 2005-2006, as natural gas prices began to spike pre-recession but again the correlation doesn’t seem particularly strong.

    http://www.eia.gov/totalenergy/data/annual/pdf/sec2_9.pdf

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