Peter Kelly-Detwiler, Contributor
I cover the forces and innovations that shape our energy future.
The long-awaited (and twice delayed) report “Macroeconomic Impacts of LNG Exports from the United States” was released yesterday. This study was commissioned by the Obama Administration to look specifically at the economic impacts associated with potentially large-scale liquefied natural gas (LNG) exports. The key point of the study was to “estimate expected levels of U.S. LNG exports under several scenarios for global natural gas supply and demand” and to evaluate whether LNG exports would have net export benefits even if higher domestic gas prices resulted from this activity.
The study ran numerous scenarios, looking at costs of production and world prices, and found that there were net benefits to the US economy under all export scenarios, even where exports were modeled as unlimited. The study also found that there would be no ultimate linking of natural gas to world oil prices in any scenario examined (oil and gas prices are currently indexed in other markets, such as Asia).
As far as price impacts, the study found that “Natural gas price changes attributable to LNG exports remain in a relatively narrow range across the entire range of scenarios.” From the point where exports commence (initial prices could be up to $.33 higher), prices might increase as much as $1.11 five years out in a high export scenario. “The higher end of the range is reached only under conditions of ample U.S. supplies and low domestic natural gas prices, with smaller price increases when U.S. supplies are more costly and domestic prices higher.”
The economic losers are other gas-dependent industries, such as the chemical industry, where Dow and others are anticipating significant investments to take advantage of competitively priced gas. Dow, in particular, is investing $4 billion to build a 1.5 million tonne-per-year ethylene plant in Freeport, Texas LNG exports would also have a non-zero price impact on the electricity sector, which has increasingly turned to gas as the fuel on the margin.
The winners are the exporters and the large gas producers such as Range resources and Chesapeake Energy. Owners of nuclear fleets such as Exelon, Duke, and NRG will benefit as well. When the marginal price of electricity increases (driven by underlying gas prices), they derive more value from their existing nuclear assets (assuming they are unhedged).
The importance of the study findings is this: the would-be LNG exporters have filed permits equaling over 60% of today’s domestic consumption, and they are lined up to move forward with the permitting process. Most of these companies probably won’t make it through all the hurdles. The permitting process with the Federal Energy regulatory Commission can cost up to $100 million (that’s how much Cheniere indicates it will spend on approvals for its Corpus Christi facility).
The facilities themselves cost in the billions and take years to build. Cheniere will spend over $5 bn on its Sabine Pass facility – to be ready to export within the next 2 to 3 years. Another potential exporter, Exxon Mobil Corp., is partnering with Qatar Petroleum to build an installation near Port Arthur, Texas, involving some $10 billion to turn a gas-import terminal into one that capable of LNG exports.
The next steps will occur neither cheaply nor quickly. But the just-released study opens the starting gate for the next stage of the approval and development process.