The enthusiasm around the Shale Gale, unleashed by technological breakthroughs in horizontal drilling and hydraulic fracturing, has also led to a discussion of the United States potential to become a net-exporter of natural gas for the first time ever.
This has opened up several levels of debate. How would high volumes of exports effect domestic prices? What happens if domestic production of natural gas levels off? Does the environmental benefit of exporting liquefied natural gas to countries like India actually offset emissions? What about Japan, where it justifies keeping nuclear reactors offline? What about the geopolitical implications of exporting LNG through someplace not called the Strait of Hormuz?
These are great topics for debate, and I have an opinion on all of them. But what I’ve noticed has been missing from this discussion is a simple, handy guide to understanding what the heck the process is around LNG exports to begin with. So instead of weighing in on these questions, I put together a short introduction to the issue at hand.
Sizing up LNG Exports
Traditionally, U.S. consumption of natural gas has outstripped production pretty significantly. This has meant that we have relied to some degree on imports from other countries. This means natural gas has had to go across sovereign borders.
To that end, Section II of the Natural Gas Act of 1938 laid out a few ground rules. The Department of Energy has purview over import and export licenses. License applications are filed by companies who want to import or export LNG, and the DOE basically approves a daily volumetric cap on how much that company can trade. This saves the DOE from overseeing every single transaction, and allows companies to sign contracts that can fluctuate with daily prices and demand.
But the natural gas needs to go through a venue, or a terminal, to be processed. Siting and construction of these terminals fall under the authority of the Federal Energy Regulatory Commission, under Section III of the Natural Gas Act.
So up until very recently, we were talking only about importing natural gas. Right now, we have 12 import terminals in the United States. The licenses to import at these terminals, which the Department of Energy oversees, have traditionally been approved. There are two reasons for this. First, we needed to import natural gas, and so the DOE had a “presumption to approve” policy. Second, the criteria the DOE uses when looking at approving licenses is whether or not they are in the “national interest.” The Energy Policy Act of 1992 dictated that all licenses that stipulated transactions with countries the U.S. had a Free-Trade Agreement (FTA) with were automatically in the national interest. Because a lot of our imports were coming from these countries, that expedited a lot of volume.
That brings us to today. The new domestic natural gas production picture is quite different than in years past. We now produce almost exactly as much natural gas as we consume, thanks to the ol’ Shale Gale. One implication is that we could basically be self-sufficient with natural gas, consuming what we produce. “Energy independence” in this context isn’t quite as absurd as it is for oil, since there isn’t a global natural gas market the same way there’s a global oil market.
But this lack of a global market is precisely why people have gotten excited about exports. Companies look at $2-4 natural gas in the United States, and $14-16 natural gas in Japan and have to wonder… isn’t there a market opportunity here?
So what we’ve seen is a host of new export license applications in the hopper at DOE. If approved, these licenses add up to about 28 bcf/day, or almost exactly the amount of new natural gas production extracted from shale gas. The applications to export to exclusively to FTA countries have already been approved, but these only amount to 1.5 bcf/day. The rest either don’t specify the amount going to FTA countries (so the whole application is held up) or are licenses to export to non-FTA countries.
The other problem is, we currently only have 1 export terminal—in Sabine Pass, Louisiana—and the remaining 18 have either been proposed and are waiting for approval from FERC, or identified by sponsors but not yet proposed. Seven of these export terminals, representing 21.4 bcf/day of export capacity, are actually import terminals pending FERC approval to become export terminals, and 4 (representing 6.9 bcf/day) require entirely new terminals.
It is likely that when the export licenses get approved, so will the terminals (as happened with Sabine Pass). So the real sticking point is how the Department of Energy deals with the question of whether or not exports to non-FTA countries are in the national interest. A wrinkle in this is that if Japan, who represents 30 percent of import capacity, signs the Trans-Pacific Partnership—then the DOE will have even less purview over licenses.
There are obviously a lot of nuances to this whole thing that I didn’t have room to cover, but that’s a little context. And, I’ll throw in my two-cents here at the end with a few things to consider:
- The Heritage Foundation may be totally right on this one, and market forces could make this whole debate a wash. It costs money to liquefy and transport natural gas (putting the price at about $9 in Japan, for example) so as domestic prices rise, so does the marginal competitiveness of U.S. LNG fall. Competitors, like Qatar and Russia, may be willing to drop prices a bit to cut out U.S. LNG’s advantage.
- There are variables here that are not immediately obvious, meaning the market forces may NOT make this whole thing a wash. Some countries, like Japan, want to diversify their imports away from Qatari natural gas (which is transported through the Strait of Hormuz, cannot be sold through, and is pegged to the price of oil). They may be willing to pay a premium for U.S. LNG if it has preferential contract terms.
- The emissions question depends on where LNG is going, but more importantly, on what lifecycle fugitive emissions are. LNG exports to Japan help them keep nukes offline, which is bad since they are lower carbon than LNG (although both are better than coal). Exports to India offset new coal, which is good (but worse than if they built new renewable energy capacity). Rising domestic prices of natural gas from exports also may discourage fuel switching, which could be bad for the domestic emissions picture. Exports anywhere are probably a wash with coal if fugitive lifecycle emissions are high. In sum? This one is pretty complicated, but would be much simpler if conclusive lifecycle emissions numbers were available.