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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