Since about the middle of the Obama Administration, with the Shale Revolution driving down natural gas prices, natural gas exports via liquid natural gas (LNG) facilities have been ‘hot and heavy.’ The Russian seizure of Crimea and invasion of eastern Ukraine along with use of gas as pressure on the Ukraine (and others around Europe) made international security an ever-stronger portion of the discussion. Discussions of LNG exports, including those around the world advocating for significant U.S. LNG exports as insurance and balancing against Russia, seem to miss some significant issues.
After the fold, see some thoughts on this …
The Ukrainian/Crimea situation truly put a spotlight onto the issue of fossil fuel exports – specifically the issue of LNG exports.
Proponents of exports assert that LNG exports will,
- Improve the US balance of payments,
- Improve profitability of gas producers, and
- Provide the United States with an important foreign policy and security tool against Russia.
Opponents to export raise environmental, consumer, and industrial competitiveness issues. Within policy and media circles, proponents have seemed to garner much greater attention.
The powerful push to promote exports masks many issues, as LNG exports could,
- Drive up US natural gas prices and cause disruption in the US economy.
- Face significant financial challenges … and risk collapse.
- Be vulnerable to technological and markets developments.
Exports and US natural gas prices … and economic impacts
There is that pesky little issue of ‘supply and demand’. Writ large, a seemingly reasonable assumption: a drive for enabling more demand for a specific supply likely will drive up the price (even if that price increase could boost supply … somewhat).
To take a specific example, as a part of its supporting documentation for the Maryland Cove Point LNG export facility, Dominion Resources paid for analysis concluded that the Cove Point facility would drive up Henry Hub (e.g., US natural gas) prices up by 5 percent. Analysis paid for by export opponents projected a tripling of US natural gas prices by 2030 with increased exports.
A priori, unless there are other benefit streams to offset this, increased prices will have economic impacts domestically. Staying within Maryland, it is clear that the Cove Point project in Maryland would both create local jobs and tax revenue while, as per above, fostering higher natural gas prices. A back-of-the-envelope assessment: The economic impacts across Maryland due to higher gas prices could more than double the projected tax revenue (both local and state) and associated job losses could (far?) exceed the 75 jobs created on the ground.
LNG exports could face challenging economic conditions
LNG exports are, in essence, an arbitrage game – to take low priced natural gas from one market to sell in another higher priced market (and to benefit from energy price differences between natural gas and oil/other energy products). There is significant cost to execute this arbitrage.
For oil, there is not just a well-established international transportation system in place but it is, relatively, of low cost. Think about the energy demand: moving oil in supertankers requires relatively small amounts of energy per gallon transported. E.g., the parasitic loss for transporting oil from Saudi Arabia to Japan or Europe is a small fraction of the total delivered energy. The LNG process, on the other hand, is very energy intensive (due to the need to liquify the natural gas) – requiring in the range of as much energy to cool and transport the natural gas as is available after transport.
This make the exports highly sensitive – on an economic basis – to price fluctuations. Increased US prices (due to increased demand or supply challenges) or depressed foreign prices (due to increased supply or Russia (or others) cutting prices) could drive an export-market collapse.
In other words, LNG truly is a high-risk venture. An example of the ‘risk’ is that facilities (such as Cove Point) built to import LNG into the United States are now proposed — after being idled economic albatrosses — for conversion/converted to exports.
Now, risk is being controlled, in part, through long-term contracts on both the supply and sale side.
Long-Term Contracts could pose risks for U.S. Energy Security and Economic Health
U.S. natural gas prices have been low for an extended period even as there is some level of debate between experts as to just where the prices where/could be. Think about this: where might the natural gas market be in a decade? Remembering that natural gas prices have, over time, been prone to significant fluctuation, 2007 monthly prices ($6-8) were somewhat more than twice 2017’s ($2.88-$3.10 so far).
As firm contract arrangements, long-term LNG export deals would have priority over spot/short-term market calls on natural gas supplies. Natural gas supplies/demand can fluctuate for a variety of reasons.
- Extreme cold (as occurred in early 2014) can lead to significant price spiking and supply shortages.
- New demands can emerge – electricity generation, manufacturing, natural gas for transportation (whether CNG, LNG, GTL).
And, on the supply side, there are analysts who question the long-term viability of natural gas supplies from fracking – which creates a risk of diminished supplies against projections.
Ever-increased LNG exports likely would exacerbate these issue and foster greater volatility (with higher price spiking with resultant economic disruption) in spiking demand periods (such as, again, during extreme cold weather events or with supply (such as pipeline) disruptions).
Undiscussed “alternatives” could devastate LNG market viability & prove better policy option
Putting aside the very real potential for, such as in Europe, a major producer (Russia) slashing prices to destroy LNG market viability, it seems that options are notably absent from market examinations of LNG exporting. For example,
- Renewable and waste-to-energy synthetic gas options, and
- Energy efficiency.
A working hypothesis: Promoting energy efficiency and synthetic natural gas production in the Ukraine is a better US policy (security, international relations, energy security/dominance, economics, …) than promoting LNG exports:
Energy efficiency would be more cost effective per energy unit equivalent and have a faster impact for improving the Ukrainian energy situation. Energy efficiency options could include building & industrial energy efficiency and Combined heat & power (CHP) (such as in industrial facilities and in coal-burning electricity generation plants).
Renewable Synthetic Natural Gas is an emergent option.
Multiple firms are emerging with biomass (think waste (such as corn stalks or saw dust rather than biomass grown for biofuel) to natural gas technology options. These technologies do not seem, at this time, cost-competitive with (the extremely low) U.S. natural gas prices. Exported LNG prices are, however, several times higher than US prices and these technologies might have greater cost-competitiveness in the Ukraine than the US. Thus, while perhaps not competitive against $3-$4 US natural gas, these technologies could be cash cows in the face of >$10 LNG natural gas.
Promoting synthetic natural gas could create markets for innovative US manufacturers just entering the commercial market space with synthetic gas production options that operate from industrial plant emissions, waste-to-energy, biomass, etc …
A hypothesis: These technologies will — in the coming decade — produce synthetic gas at prices competitive or (likely far) lower than the cost of LNG .
Synthetic natural gas is an ‘in kind’ replacement, using the ‘same’ infrastructure of energy use (leveraging heating either directly or to produce energy). Around the world, there is a drive for electrification of economies. As electrification expands, the door is open to other alternatives to traditional natural gas uses (from heating buildings to manufacturing ammonia fertilizer to …). Plummeting solar prices and impressively significant declines in wind prices, with ever-expanding penetration of the market with ever-more frequently the ‘cheapest’ electricity option available, are changing the ‘power’ equation across the world. In the face of this change, again the question: where will ‘we’ be in a decade?
And that pesky Climate Change (& environmental) ‘thing’
Natural gas promoters and much of the public discussion as to the use of natural gas focuses on “actual use” pollution implications – that, when burned, natural gas has roughly 50% of the GHG implications of coal. There is analysis out there that challenges whether gas from natural fracking is even at all better than coal in climate terms and, when you consider the high-energy intensity of the LNG process, fully-burdened life-cycle analysis of LNG likely would show that it is worse than burning coal in GHG/climate terms (due to methane leakage) and the additional energy use for the LNG export process (liquefying the NG; transport). Obviously, climate (and other environmental damage from natural gas projects) is not high on the agenda for the Federal government (and many states) but LNG is a long-term play. Yet again, think a decade out … will climate policy put a price on activities damaging to the climate?
Thinking a decade out … emphasizing LNG exports is high-risk
LNG facilities are very high-capital, long-term assets … considering the ‘long-term’ suggests serious risks to those investing in these projects and relying on the long-term to provide them profit.
Image courtesy of Flickr. Originally published by S&S on June 23, 2017.