U.S. Economic Benefits of LNG Exports

 


Angelique Mercurio

Director,

Energy Solutions Forum (New York, NY)

and

Abdiel Santiago

Senior Research Advisor,

Energy Solutions Forum (New York, NY)

 

 

Over the past decade, the global gas market has witnessed a dramatic transformation in the outlook for liquefied natural gas (LNG) markets.  North America’s shale formations have played a notable role, driving gas producers to seize profitable export opportunities.  With an estimated 100-year supply of natural gas and ongoing discovery of new shale resources, the U.S. is poised to supply clean-burning natural gas to global markets, apart from meeting domestic requirements. The dramatic growth in the U.S. natural gas industry and the prospects of LNG exports suggest a long-term economic stimulus to the country.

Setting the Stage for U.S. LNG Exports

The U.S. natural gas sector has witnessed a radical change since 2005, after innovative technologies allowed access to unconventional resources that were previously uneconomical to develop.

In 2010, the EIA’s estimates of proved oil and natural gas reserves showed the highest amount ever recorded.[1] The U.S. is already exporting gas to Mexico and Canada via pipeline (gross natural gas exports increased ~33% in 2011).

Cheniere’s milestone agreement for its Sabine Pass LNG export plant, the first of its kind, has moved North America to the forefront of the global trade in natural gas.  Though new policies may have an impact on the economics of natural gas production, the current scenario presents a technically feasible situation for growing LNG exports.

 

Surmountable Challenges

The critical issue surrounding the feasibility of US LNG supplies to enter the global market lies in its capability to compete with other sources in the market and the nature of potential markets for U.S. exports.  Factors related to oil-linked contracts and pricing structure, and investment returns relative to costs associated with liquefaction, transportation and re-gasification are also of importance.  Increased natural gas production impacts domestic sectors, implying that LNG exports will also have to vie with domestic consumption of natural gas.

The challenges can be broadly classified as:

  • Resource availability
  • Production sustainability
  • Domestic energy security
  • Volatility of domestic natural gas prices
  • Regulatory considerations
  • Domestic consumption
  • Feasibility


1. Resource Availability

LNG exports are subject to availability of resources for sustained production, apart from infrastructural and regulatory considerations.  According to EIA’s Annual Energy Outlook 2012, shale gas production is expected to increase to 13.6 trillion cubic feet (Tcf) in 2035 from 5.0 Tcf in 2010; the share of natural gas in the domestic energy mix rises to 27% in 2035 from 24% in 2010.[2] Production has witnessed a 17% annual increase during 2000-2006 and a 48% annual increase during 2006-2010. 3 EIA statistics also show shale gas accounting for 49% of the total U.S. natural gas production by 2035.  Therefore, possibilities of exports centers on the prospects of sustained shale gas production, a key to the future of U.S. gas.  Shale gas will have to make up for the fall in conventional production and attend to existing domestic uses.  Figure 2 demonstrates that shale gas production offsets the decline in other supplies, so as to meet the increasing consumption.  These volumes suggest that the U.S. shale reserves are sufficient to meet domestic demands for the next 25 to 80 years.  EIA’s projections also show that the U.S. may begin exporting LNG in 2016, starting with 1.1 billion cubic feet per day (Bcf/d) and increasing by 1.1 Bcf/d in 2019.

 

2. Production Sustainability

Natural gas exports rely heavily on sustained development of unconventional sources, which in turn depends of safe fracturing practices.  Sustained well-productivity is not a cause for concern as rapid technological advancements in the areas of hydraulic fracturing and horizontal drilling have improved the extent and economics of extraction.  Advanced technologies have enabled producers to drill longer horizontal wells or ‘laterals,’ thereby increasing well productivity and bringing down production costs (on a per cubic feet basis) in the process.


3. Domestic Energy Security

There have been concerns that exports may diminish the energy security of the U.S.  However, the quantity of LNG exports under consideration is not likely to affect the availability of gas for the domestic market.  In its January 2012 report titled “Effects of Increased Natural Gas Exports on Domestic Energy Markets,” the EIA presents four export scenarios to demonstrate the effect of increased natural gas exports on domestic energy markets and related natural gas prices.  The baseline scenario is where no LNG exports take place.  The low-export scenarios are based on exporting 6 Bcf of LNG per day, and the high export scenarios are based on exporting 12 Bcf of LNG per day (Figure 3).

 

According to the report, exports may result in a 9.6 - 32.5% price rise in domestic gas prices.  Exporting 6 Bcf/d of LNG over a period of 20 years will consume 2 - 5.5% of the total resources.[3] Another factor to be considered is that the U.S. is producing higher volumes of unconventional oil, which simultaneously produces huge volumes of natural gas.  EIA infers that 63% of exports will be met by new production and 17 - 38% of exports will be met by a decrease in demand, as higher prices may lead a few domestic consumers to reduce gas use.  According to a study by the Brookings Institution, exporting gas produced from unconventional oil extraction suggests that LNG export may be viewed as an outcome of increased energy security rather than a threat to energy security.[4]

 

 

 

4. Domestic Natural Gas Prices

There have been questions of whether natural gas supplies are sufficient to meet both domestic and foreign demands without inflating domestic gas prices.  The perceived risks of price impact have triggered opposition to the concept of exporting domestically produced shale gas.  Given that the price of any commodity is established by the supply-demand balance, LNG exports are likely to better this balance, where banning exports could slow down production and drive up prices.

The nature of the LNG market restricts price volatility, as it is subject to technical constraints, with respect to liquefaction, transportation and re-gasification facilities.  Liquefaction units have a fixed capacity to convert gas to liquid, meaning that the demand will be more or less constant.  Hence, price or supply jolts will have minimal impact on domestic prices.  Given that LNG demand is limited to the infrastructure facilities, which are underpinned by long-term contracts, demands can be predicted years ahead, minimizing the risks of price volatility.

5. Regulatory Considerations

The industry has viewed regulatory uncertainty as a major challenge for continued shale gas development as environmentalists have raised concerns about groundwater contamination and seismic hazards, with some calling for a ban on hydraulic fracturing.  While studies about environmental impacts have shown no convincing evidence connecting hydraulic fracturing to groundwater pollution or seismic risks, the industry continues to be impacted by headline risks in this regard.  Under the current regulatory environment, shale development is set to go on, producing enough quantities to render exports feasible.  The recent announcement of the administration to set up an inter-agency research program involving the Environmental Protection Agency, Department of Energy and Department of Interior to address the environmental issues related to shale gas production is a positive move towards a fact-based approach to addressing concerns.

6. Domestic Consumption

The domestic natural gas consumers can be grouped under five sectors: power, industrial, transportation, commercial and residential sectors.  Increased natural gas supply may not have a significant impact on the commercial and residential consumption.  Though the transportation sector can benefit much from the increased gas production, a large-scale switchover from oil to gas is not likely in the near future.  On the other hand, the bulk of domestic natural gas demand will be driven by the power sector and the industrial sector, implying that they are likely to be the major domestic beneficiaries of increased natural gas production.  The former looks at natural gas as the main replacement fuel to switch from carbon-intensive coal-fueled generation.  According to the EIA, natural gas-fueled power plants will make up 60% of new plants during 2010-2035.  The industrial sector, particularly the petrochemical sector, is already witnessing a substantial rise in manufacturing activities after the current shale boom.  While most of the gas for exports will be supplied by new production without displacing the consumption of domestic users, the domestic price rise triggered by LNG exports may not have a favorable impact on these key sectors.


7.
Feasibility

The key rationale for U.S natural gas exports pertains to the lower domestic prices in comparison to the prices prevailing in the market, where purchases are generally based on costlier long-term contracts indexed to oil prices.  The price difference is the basis for calculating the economics for feasible exports.  Exporters will have to compete with other gas sources, including LNG and pipeline supply, and other fuels, such as coal, oil and nuclear power.  The cost of liquefaction, transportation and re-gasification are also to be considered to assess the feasibility of LNG exports.  According to MIT estimates, one MMBtu (Million Metric British Thermal Units) of natural gas incurs about $2.15 for liquefaction, $1.25 for shipping depending on fuel requirements and distance and $0.70 for re-gasification. [5] In order to budget and plan ahead for construction of infrastructure facilities it is important to ensure that the price is distributed over a span of at least a decade. Under current circumstances, the difference between global LNG prices and U.S. natural gas prices should be around $3.40 to keep U.S. LNG exports competitive.

LNG is priced at over $17 per MMBtu in Asia, and around $13 per MMBtu in Europe.  Given the EIA estimates that long-term prices of North American natural gas will increase to $4 to $6 per MMBtu, and assuming that liquefaction and shipping costs add about $4 per MMBtu, the global market presents a favorable opportunity.  While shipping costs to Asia will be higher on account of the greater distance compared to Europe, the current $17 price for LNG in Asia still provides a favorable opportunity for U.S. exports.

 

Major Demand Centers in the Global Market

The demand characteristics of the global gas market, particularly the Pacific and Atlantic Basins will influence the competence of the U.S. exports.  Central and Latin America also present export opportunities, as Caribbean nations are looking to replace expensive oil-fueled power and diversify their energy mix.  The Pacific Basin has been the core of the international LNG market, with South Korea and Japan accounting for nearly 70% of imports.  Though Indonesia and Malaysia were the key suppliers in the 1990s, they have been pushed behind by Qatar, Nigeria and Australia (Figure 6).[6]

 

 

 

Japan, the world’s largest LNG importer, has witnessed a rise in projected gas demand owing to the shutdown of most of its nuclear reactors in the wake of the 2011 Fukushima nuclear plant disaster.  If Japan decides to turn away from atomic power, then much of its power production will have to be met by additional LNG imports.  According to estimates, Japan’s additional LNG requirement in 2012 would be 975 Bcf.[7] The estimated cost of delivering LNG to Japan in 2020 is shown in Figure 4.  The scenario is likely to be more attractive for U.S. LNG exports, given that liquefaction costs pose a major challenge and Japan remains the highest cost region.  Further, China and India, where power supply is predominantly met by coal, are likely to turn to natural gas.  According to the projections of the IEA, the demand in China and India can increase at an annual rate of 7.7% and 6.5% respectively by 2035.  According to EIA’s global estimates, either country has huge reserves of coal bed methane, but development of unconventional resources is likely to take several years, given the limitations in infrastructure and technical resources.  Hence, Asia is likely to be a buyer of U.S. LNG for the foreseeable future.

The Atlantic Basin consists of the gas markets in Europe, where most countries rely on pipeline gas from Russia, Norway and Algeria.  Europe has a share of 27.2% in world LNG imports.[8] Germany, Switzerland and France, which have decided to phase out their nuclear reactors, are likely to buy U.S. LNG. Italy has decided to abstain from building new nuclear reactors and may turn to natural gas to meet much of its demand.  The development of gas transportation infrastructure within the European continent will also impact the U.S. LNG exports.  The Atlantic Basin offers better prospects for U.S. LNG exports due to the provision for periodic revisions in the pricing structure.



Notable Benefits for the U.S.

Efforts to further natural gas development will create jobs in the energy sector and other related services.  The industrial sector will be a major beneficiary as increased natural gas production results in new investments and jobs.

Under the current scenario, the U.S. is poised to reap notable economic benefits from LNG exports.  The benefits are related to:

  • Growth in the industrial sector
  • Macroeconomics
  • Implications on the global gas market

1. Growth in the Industrial Sector

The U.S. industrial sector, which is a significant consumer of the total natural gas use, will benefit much from increased natural gas production.  EIA projections show that the industrial sector’s current consumption of about 32% will increase by 27% during 2009-2035.[9] As natural gas by-products serve as the main feedstock for several industrial consumers, such as petrochemical manufacturers, the shale gas boom has led them to expect a more competitive atmosphere in industrial production.  For instance, ethylene, which is primarily derived from oil-based naphtha, can now be obtained from cheaper natural gas.

According to a study by the American Chemistry Council, a 25% rise in ethane supply could create 17,000 direct jobs and 395,000 indirect jobs, and generate about $44 billion in tax revenue over a span of 10 years.  It also states that the increased supply can result in a $32.8 billion rise in U.S. chemical production. Currently, ethane production has exceeded one million barrels per day, an all-time high, allowing the petrochemical industry to reap the economic benefits.[10] A study by PricewaterhouseCoopers and National Association of Manufacturers states that shale gas development can boost manufacturing activities capable of creating a million manufacturing jobs based on the higher side of the EIA’s gas recovery scenarios.  It also shows that manufacturers can save up to $11.6 billion per year on feedstock by 2025.[11] Lower cost natural gas has spurred several new investments in petrochemical plants, such as propane dehydrogenation units.  U.S. industrial producers have a stronger competitive edge from cost-advantaged feedstock when compared to those in Europe and Asia, implying that they are not likely to suffer from projected price rises caused by LNG exports.


2. Macro-economics

The macro-economic implications of U.S. LNG exports pertains to the profits acquired from trading in the global market, job implications, increased domestic gas production and higher domestic gas prices.  LNG exports are expected to provide a net benefit to the economy, as they will utilize the advantages of the current surplus rendered by the pricing difference between natural gas markets in the U.S., Europe and Asia.  The benefits are expected to outweigh the cost impact on domestic consumers, as much of the export demands will be supplied by new production and not by existing production that meets domestic demands.  The nation will benefit from more tax revenues due to increased production and foreign exchange revenues from exports.  Moreover, LNG exports are likely to make a modest positive contribution to the U.S. GDP and trade balance, while supporting U.S. foreign trade policy.


Key implications to global gas markets

The abundance of LNG driven by the growth in shale affects pipeline gas supplies, thereby increasing the competition in Europe and Asia.  Increase in North American shale has impacted traditional pricing methods in the global arena.  The consequent implications on pricing structure in the global market may cause oil-indexed pricing to lose prominence.[12] Europe has announced changes in its contractual terms several times, showing a tendency to index a part of its sales to spot prices.  Expanding U.S. LNG exports will serve to connect global markets to U.S. storage facilities, which are among most well-developed in the world.  This connection is considered a vital factor that adds to market liquidity.  The role of the U.S. in the global gas market can also have a positive impact on foreign policies, as importers can benefit from supply diversity.


Conclusion

Overall, U.S. LNG exports could be a positive development for international natural gas markets.  When the market is faced with surplus supply, access to huge export markets will provide the necessary supply-demand balance, curtail price volatility and result in moderate domestic price rises.  In the long term, LNG exports serve to provide a sustainable market in North America, providing supply and price stability.  Asia and Europe, the prime target markets for U.S. LNG exports, is expected to benefit from a competitive supply option.

 

 

References

American Chemistry Council, March 2011. "Shale Gas and New Petrochemicals Investment: Benefits for the Economy, Jobs, and US Manufacturing".

Brookings Institution, May 2012. "Liquid Markets: Assessing the Case for U.S. Exports of Liquefied Natural Gas".

EIA, April 11, 2012. "U.S. natural gas imports fall for third year in a row".

EIA, August 1, 2012. "U.S. Crude Oil, Natural Gas, and NG Liquids Proved Reserves".

EIA, June 2012. "Annual Energy Outlook".

Gas LNG Europe, May 2012. " LNG A major contribution to a sustainable, competitive and secure European gas market".

Institute of Energy Economics, Japan, February 23, 2012. "Challenges for Energy Policy in Japan after the Great Earthquake".

International Gas Union, 2010. "World LNG Report.”

Kenneth B. Medlock III, PhD, Baker Institute, August 10, 2012. "LNG:Truth and Consequence".

Massachusetts Institute of Technology, June 6, 2011. The Future of Natural Gas.

Pricewaterhouse Coopers, December 2011. "Shale Gas: A Renaissance in US MReferences

American Chemistry Council, March 2011. "Shale Gas and New Petrochemicals Investment: Benefits for the Economy, Jobs, and US Manufacturing".

Brookings Institution, May 2012. "Liquid Markets: Assessing the Case for U.S. Exports of Liquefied Natural Gas".

EIA, April 11, 2012. "U.S. natural gas imports fall for third year in a row".

EIA, August 1, 2012. "U.S. Crude Oil, Natural Gas, and NG Liquids Proved Reserves".

EIA, June 2012. "Annual Energy Outlook".

Gas LNG Europe, May 2012. " LNG A major contribution to a sustainable, competitive and secure European gas market".

Institute of Energy Economics, Japan, February 23, 2012. "Challenges for Energy Policy in Japan after the Great Earthquake".

International Gas Union, 2010. "World LNG Report".

Kenneth B. Medlock III, PhD, Baker Institute, August 10, 2012. "LNG:Truth and Consequence".

Massachusetts Institute of Technology, June 6, 2011. The Future of Natural Gas.

Pricewaterhouse Coopers, December 2011. "Shale Gas: A Renaissance in US Manufacturing?".

 

 


[1] (EIA, August 1, 2012)

[2] (EIA, June 2012)

[3] (EIA, April 11, 2012)

[4] (Brookings Institution, May 2012)

[5] (Massachusetts Institute of Technology, June 6, 2011)

[6] (International Gas Union, 2010)

[7] (Institute of Energy Economics, Japan, February 23, 2012)

[8] (Gas LNG Europe, May 2012)

[9] (EIA, June 2012)

[10] (American Chemistry Council, March 2011)

[11] (Pricewaterhouse Coopers, December 2011)

[12] (Kenneth B. Medlock III, August 10, 2012)

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