SHOULD THE U.S. EXPORT LNG?

January 11, 2012 § 6 Comments

An interesting post in the New Republic discusses the merits of a policy permitting export of natural gas in the form of liquefied natural gas (LNG).  The author Mark Muro of the Brookings Institution also cites a letter written by US Rep. Ed Markey to Energy Secretary Chu arguing against approval of export.  As it stands export of natural gas requires an explicit approval, as is currently granted to ConocoPhillips for the limited export of LNG from the Cook Inlet in Alaska.

They both make the same principal arguments.  One is that even with shale gas resources the supply is limited and so massive exports will increase the price for the consumer and industry.  Markey is quoted as being particularly concerned regarding the possible deleterious effect on replacing coal in power plants.  Here we shall address these concerns and then end on the note of the policy actions most beneficial for the nation.

A report on January 7, 2011 indicates that the DOE has made the decision to grant Cheniere Energy a permit to export up to 803 billion cubic feet (bcf) per annum sourced from domestic gas.  They already were permitted to re-export LNG from other countries.  This is a company that got caught flat footed by the emergence of shale gas.  Their business premise had been imported LNG for a gas deficient country.  Having competency in the arena they decided to liquefy and export.  Now they appear permitted to do that.

Effect on price and coal substitution:  The latest annual figures available on natural gas production are from 2010.  The U.S. marketed production was 22.6 trillion cubic feet (tcf) net of imports of 2200 bcf.  In other words, we were importing 10% of our needs just a year ago.  The 2011 figures are almost certainly in the direction of higher net marketed production.  But even with using 2010 figures one sees that the Cheniere permit is for 3.5% of the net production.  Four units will be added sequentially starting in 2015, ending in the 803 bcf figure in about two years.  The economists amongst you be the judges, but it seems to me this tail is not wagging the pricing dog.  Besides, all the projected growth in shale gas production dwarfs these figures.

Just for the sake of argument, let us say the price did go up due to the exports, and examine Rep. Markey’s quoted concern regarding affecting coal substitution.  We have reported earlier our model showing that the breakeven price of natural gas versus coal is $8 per million BTU (MMBTU) against the backdrop of price today (January 11, 2012) of $3.  This is for newer design efficient supercritical combustion coal plants meeting emissions specifications.  Also, this breakeven does not take into account any price on carbon.  If coal plant carbon dioxide was reduced to natural gas plant levels, this would add at least $3 to the above figure. 

LNG export is not in the national interest: The foregoing notwithstanding, we must not export natural gas in any form in favor of producing and exporting a higher value product.  The single most valuable such high volume product is ammonia based fertilizer.  (Carbon black would be higher value but is a smaller market) Until recently, the U.S. imported half the fertilizer consumed.  This is because variable and high prices in the early part of the century caused many manufacturers to relocate abroad to areas of cheap gas such as the Middle East.  Now with the prospect of cheap and stable shale gas, many of these are returning.  No doubt the chemical industry is skittish about LNG export concepts because it could vitiate the business assumptions of low cost, were the prices to rise due to massive export of gas.  We have discussed that the one Cheniere permit is unlikely to have a big effect, but many such could.

Aside from the pricing issue, another reason to export product rather than gas is simple economics.  Take the example of anhydrous ammonia, the basic building block for nitrogen fertilizer manufacture.  About 33.3 mcf gas converts to 1 ton of anhydrous ammonia.  The gas value, using $4 per mcf is $134.  The value of the anhydrous ammonia is in the vicinity of $800.  Also, domestic labor was used to get it to that state.  Sure the landed price of the gas as LNG is higher; about double that of the gas, but all that value add does not contribute to the domestic economy.  Even the ship was probably made in Korea.

Cheap and plentiful shale gas has transformed the US chemical industry.  They are in a position to go from a major importer to exporter of essential chemicals such as fertilizer and ethylene and derivative products.  Limiting that potential would be a mistake.  Exports should comprise high value processed products rather than the raw gas, retaining the value created and the jobs in this country.

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§ 6 Responses to SHOULD THE U.S. EXPORT LNG?

  • John Mattox says:

    Excellent analysis and policy suggestion: LNG export is not in the national interest.

  • Firstly, regarding the production of high-value ethylene do you mean a process like this:

    http://siluria.com/

    This a company trying to commercialize a certain catalytic process for production of ethylene from natural gas. However, my confusion is in their introductory video when they say ethylene is currently produced in the cracking of oil. This is vaguely familiar from my Oil 101 reading.

    How can you be offering ethylene as a reason to not export natural gas when we don’t make ethylene from natural gas? Is it currently produced (or producible) from NG to a lesser extent? And while we’re at it, why don’t we compare the sizes of these markets mentioned in the article. Correct my numbers if needed, I’m going to multiply worldwide production by price.

    Ethylene
    (107 M tonnes) x ($1,356 / tonne) = $145 B market

    Ammonia
    (109 M tonnes) x ($350 / ton) = $40 B market

    Natural Gas
    (100 tcf) x ($3.62 / kcf) = $362 B market

    For the United States specifically, replace that 100 tcf with the 23 tcf mentioned in this article to get a $90 B domestic market by the wellhead price. Now the price of natural gas is volatile – it could quite possibly double, and if it did so, that’s a $90 B cost to our domestic economy, but also an increase in profits of petroleum companies by almost that same amount. I agree, that would be damaging to the economy, but are LNG exports fungible enough to play a role in price spikes in the first place? These are not like oil tankers, and the conversion facilities on both sides of the sea route are extremely costly and I would assume run at close to capacity.

    Natural gas is a key commodity for many high value added industries we want, but I can’t seem to justify the arguments against blocking exports to myself. The EIA has a good graph of imports and exports:
    http://www.eia.gov/naturalgas/importsexport/annual/index.cfm

    It’s true that exports are creeping up slowly, but as noted, the Cheniere permit is only for 3.5% of the net production, and exports will only continue this slow creep up. I could agree with the arguments presented here if there was a clear plan to divert natural gas to a more productive use like transportation, but as I understand it, it would be displacing coal in electricity generation for the most part. Exports would likely displace coal use by even less efficient coal plant abroad.

    • rtecrtp says:

      That may be the most detailed comment we have ever received!

      Yes, ethylene is mostly currently an oil derivative; it is produced from naphtha, a refinery fraction.
      Yes, a Siluria method would convert methane to ethylene. But also, ethane is an associated product of wet gas production, and converts very easily to ethylene. So expect the US to be a major producer of ethylene at very competitive prices to much of the rest of the world doing it from naphtha, which is expensive because oil is expensive; four times gas at todays prices.
      I mentioned ethylene but precisely speaking LNG can only be juxtaposed to a direct methane derivative such as anhydrous ammonia. The Siluria method is still not fully commercial. So you have me there. I made a leap because expect largely only wet gas to be produced for a while due to depressed natural gas prices. And the ethane, at half the cost of oil, leads to low cost ethylene that eventually will be exported.

      Yes the tonnage for gas is more overall. But exporting a high value product that got that value while employing US workers is preferable to exporting the raw commodity methane.

    • I spotted a related link on a Japan econ blog.

      http://japanjapan.blogspot.com/2012/03/re-thinking-trade-policy-in-era-of.html

      This part, in particular, sticks out at me, “One million British thermal units of LNG costs $17 in Japan and $2.62 on the U.S. Gulf Coast”. Although this is cherry-picked, this is the underlying reason for exporting NG – to profit from the arbitrage. As for a social justice argument, other nations (like Japan) might desperately need more NG imports. I suppose that might be more or less convincing depending on the person.

      • rtecrtp says:

        Yes, Japan and other countries in east Asia have prices over $10 and so there would be profit from sending LNG there using cheap US gas. My main point was that we would be better off exporting a value added product such as ammonia fertilizer than the commodity. As to social justice, an article in the most recent issue of the Economist (link below) suggests that Japan has at least 20 gigawatts of geothermal power available but that their systems militate against exploitation.

        http://www.economist.com/node/21552207

        Vikram Rao

  • […] conversion of methane argues against exporting LNG.  Exporting ammonia makes more economic sense as we noted earlier in a post.  As to odor, obviously fugitive emissions of ammonia could be an issue.  But this […]

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