Brookings study urges no government action on LNG exports

US policymakers should not enact legislation or regulations that would either promote or limit additional exports of LNG from the US, a Brookings Institution study issued on May 2 concluded. Costs associated with producing, processing, and shipping the gas, and the global markets in which it will compete, will put upper limits on the amount of LNG it would be economic to export, it said.

Exports will naturally be capped because operators will need contracts to finance construction of liquefaction plants and terminals, noted Charles K. Ebinger, director of the Brookings Energy Study Initiative and the study’s primary author. “The government should do nothing beyond making certain the current application process is followed,” he said during a seminar on the study at the Washington think tank.

US price impacts of more LNG exports are the primary issue, the study said. “While it is clear that domestic gas prices will increase if gas is exported, most existing analyses indicate that the implications of this price increase are likely to be modest,” it reckoned.

Producers would likely increase their activity in anticipation of additional demand from exports; gas-consuming industries might pay higher prices, but would still have lower costs than their overseas competitors; and more production would potentially result in greater production of ethane and other gas liquids which are valuable for industrial consumers, according to the study.

It said US LNG exports’ potential benefits relate to trade, macroeconomics, and geopolitics. They would bring foreign revenue to the US and positively affect the nation’s balance of payments, although their impact there likely would be small, the study said. Construction, operation, and maintenance of LNG export facilities would also likely lead to limited additional jobs, it said. Jobs also would be added with more production, it added.

Oil-associated gas

“With some domestic production—mainly dry gas with little liquid content—being suspended due to gas prices being too low for continued economic extraction, exports may serve as an important source of incremental demand to support necessary volumes to stabilize gas prices,” the study said. “To the extent that gas for export is produced at zero or negative cost in association with unconventional oil, such gas can be seen as a consequence, rather than a detriment, to increased US energy security.”

Ebinger said US exports already have begun to reshape global LNG markets. Sales to Europe are putting pressure on Gazprom’s oil indexed prices and affecting Russia’s economy, and more exports from Alaska would be a significant Japanese market factor. “LNG exports will depend on an arbitrage opportunity for the life of a project,” he said.

“Recent events suggest we’re thinking more about a global gas market—from the Fukishima nuclear power plant accident to the Arab spring and Germany deciding to shut down its nuclear plants,” said Melanie A. Kenderdine, executive director of the MIT Energy Initiative and one of 17 experts assembled to discuss LNG export issues for the report. North American gas prices already are putting some pressure on European and Asian market gas prices, she and other experts from that panel indicated.

“We’re not talking about a common price with a global gas market because there still will be shipping costs,” said Michael A. Levi, director of the energy security and climate change program at the Council on Foreign Relations. “Prices still would be permanently lower in the US than in overseas consuming markets.”

Policy misfires

Policies to promote more LNG exports would be a mistake, they emphasized. “We seem to get it wrong investing in natural gas,” Kenderdine said. “We have a long history of misfires on gas policy.”

Kevin Book, managing director of research at ClearView Energy Partners LLC, noted, “If you’re putting up a multimillion-dollar facility and a couple of percentage points will break it, you shouldn’t do it.” The gas business “has broken more hearts than any Hollywood starlet,” he added.

Panelists acknowledged that environmental organizations have begun to oppose additional US LNG exports. The Sierra Club has formally protested LNG export applications at Lake Charles and Sabine Pass, La.; Cove Point, Md.; Coos Bay, Ore.; and Freeport, Tex. The US Department of Energy is studying effects of exports as much as 20% of the total US gas supply, and the environmental organization wants more studies of potential public health and environmental impacts from increased hydraulic fracturing to produce more gas from tight shale formations, it said in an Apr. 23 announcement.

Levi said he was surprised there have not been more efforts to link additional US LNG exports to local environmental concerns. “If someone hears that exporting US gas is going to poison his drinking water, it’s not going to sit very well with him,” he said, adding, “The industry should use this time to get its act together.”

Contact Nick Snow at nicks@pennwell.com.

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