SHOULD WE EXPORT HYDROCARBONS?

November 30, 2012 § 4 Comments

Two senators recently weighed in on this issue at a Hill Policy Breakfast, Natural Gas and Energy Issues in the New Congress, sponsored by the American Natural Gas Alliance.  This organization name, abbreviated to ANGA, unfortunately, or perhaps deliberately, sounds like anger.  Not surprisingly the senators selected to speak, each from one side of the aisle, were largely pro-industry and yet balanced.  It was personally gratifying that both were women, Lisa Murkowski of Alaska and Mary Landrieu of Louisiana.

Just about all of the discussion centered on the advisability of exporting liquefied natural gas (LNG).  Murkowski was more strongly in favor with a bit of a caution on what it could do to domestic prices.  Landrieu was openly conflicted because her constituents were major producers and users.  Both were looking forward to the long awaited decision from the administration.

A representative from Dominion Oil, an applicant for LNG export, asked Murkowski whether rules may get made allowing Alaskan gas export but not in the Lower 48.  She essentially said it would not go down that way, possibly in an effort to not sound partisan.  Both senators gave the distinct impression of serving the nation not just their constituency.  This was refreshing given the recent history of congressional behavior.

The senator’s response notwithstanding, the idea of permitting just Alaska export is not without merit.  There are two principal arguments against LNG export.  One is that it could raise the price of domestic gas and thus reduce the advantage US chemical manufacturers currently enjoy with respect to European and Asian competition.  The other is that it makes more sense to convert the gas into chemicals and fuels and export those items.  The spread between the raw material price and the finished goods is so great that it just makes economic sense to export the high value items not the raw commodity.  That also results in the manufacturing jobs being retained in this country.

On the first point, there is considerable head room in the competitive advantage for US chemical manufacturers.  Today European prices are up to three times those in the US and Far East prices are as much as five times.  So even if LNG exports raised prices the US advantage would remain, albeit less strikingly.  Modeling could identify the upper limits of LNG exports to minimize the effect.  Natural gas pricing in the vicinity of $5 per MM BTU would be good for consumers and producers.  One could also make the point that at prices today under $4, dry gas prospects (those without appreciable high value natural gas liquids) are essentially uneconomical.  LNG needs dry gas and would constitute a robust destination for the commodity especially from currently distressed areas such as the Haynesville.  The fly in that particular ointment is that LNG plants take up to four years to construct and commission.  By that time other factors may advantage dry gas, such as methanol production in expansions of current capacity, displacement of coal for electricity production, use in transportation and so on.

The case for Alaska is different.  This is a situation where the gas is stranded with no destination especially now that the long debated gas pipeline to the Lower 48 makes no sense at all.  Since it is not a part of the supply equation, export from that source ought to have zero impact on N American pricing.  So, while the likes of Dominion may consider it unfair to single out that source, purely on the basis of national economics it makes sense.  As mentioned in my book, the preferred solution is to convert it into liquids and slug it down the Trans-Alaska Pipeline, which is running dangerously low in capacity.  But the LNG solution could find support.  The logical destination would be the Far East where the landed price is the highest in the world and so margins for the producer may well be better than for the liquids solution.  High prices in Japan may be sustained if the opposition to nuclear energy remains strong.

With respect to the other argument against LNG export, the US manufacture of high value products, the factor in favor is that many of these products are currently imported.  Principal among them is ammonia fertilizer, with imports accounting for nearly half the consumption.  The spread is also large; at current gas prices, it can be produced for well under $100 per metric ton, with selling prices north of $600.  The prospect of the US becoming a net exporter is not at all farfetched.

Vikram Rao

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§ 4 Responses to SHOULD WE EXPORT HYDROCARBONS?

  • Mark Corigliano says:

    The US should absolutely never export natural gas from the lower 48 (Alaska is a different matter). If you think about the big picture of US energy consumption and natural gas abundance, it makes no economic or political sense. The only reason we’re even talking about it is because the auto, fuels, and chemicals industries are unwilling to make huge, long-term investments to utilize this resource without government assurance that fracking policy will not, at some future point, destroy the natural gas industry. If the government sets a long-term natural gas policy, the investments will be made and demand will be built domestically.

  • I sought out an example of the opposite position, and Geoffrey Styles make the case against restricting exports.
    http://energyoutlook.blogspot.com/2012/11/push-mepull-you-post-election-energy.html

    The arguments I found most compelling are:
    – restricting exports could decrease the total amount produced
    – the intent runs counter to the intent of production tax credits for wind
    – regulators could face unintended consequences

    Funny thing is, I don’t think there’s much disagreement on the price point needed. He thinks we need higher prices, at least, to make dry gas wells economic, which is the same argument as your post. So it seems like the real question is whether we need to export to get that price point, or if more exports could be bargaining for something higher. If you’ve already permitted and built the facility, it would be almost impossible to put the breaks on after the fact.

    Today, princes for Japan LNG imports are over $16 per MM BTU. That is a hefty premium. Either through manufacturing or exports, I’d expect the gap to close over time. Then again, it depends heavily on their policy decisions as well.

  • I do believe all of the concepts you have introduced on your post.
    They are really convincing and can definitely work.
    Nonetheless, the posts are very quick for newbies. May you please extend them a
    little from subsequent time? Thanks for the post.

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