Why the U.S. Government Should Allow LNG Exports

Shale Gas

The shale gas revolution in the U.S. has been well documented.  From a standing start 10 years or so ago, shale gas now accounts for approximately 25% of U.S. gas supplies.  However, gas producers have been victims of their own success and falling gas prices mean they now seek government approval to export gas as LNG.

Shale GasSuch has been the increase in domestic gas production that expensive Liquefied Natural Gas (LNG) import facilities now stand idle and the gas price collapsed to under $2/MMBtu, recovering to around $3.50/MMBtu today.  Thousands of gas wells remain shut-in, and rigs have moved on to liquids operations.

Unconventional Oil

Further pressure has been put on gas prices by the success of unconventional oil efforts.  Sometimes such oil production is accompanied by associated gas.  The economics of such developments are driven by liquids production and high oil prices – any gas production can be “given away”, or even just flared.

The U.S. gas market is essentially a captive market which is not well connected to other gas markets (at least as far as exports go) around the world, so the increased supplies of shale gas had an inevitably negative impact on prices.

LNG Exports 3The Rising Cost of Gas Supply

With the marginal volume of gas to the U.S. likely to be LNG imports at a cost of supply of $4-5/MMBtu (lower than required to divert cargoes from other LNG markets) or newly developed shale gas which starts at around $5/MMBtu, the current low price environment is not seen as sustainable.  Once the previous “over drilling” situation for gas unwinds, prices will inevitably rise.

LNG Exports and Politics

This creates a difficult situation for politicians who have benefited from a period of gas low prices.  Rising energy prices are never popular with consumers.  This problem has become particularly acute as many gas producers are now seeking to export production from the U.S., in the form of LNG, to justify costly investments.  These producers have noticed that global gas prices in the range $8-20/MMBtu are more than sufficient to justify expensive LNG export facilities.

LNG exports may put further upward pressure on domestic prices and so politicians are wary.  And it’s not just consumers that are demanding politicians’ attention.  Gas hungry industrials such as power generators and chemical companies are also lobbying fiercely against LNG exports.  The anti-fracking community is no less loud in their condemnation of shale gas exploitation.

The U.S. Government Should Allow LNG Exports

The temptation to bow to these various demands must be great, but politicians should resist.  LNG exports would be good for the U.S. and the world, for the following reasons:

1)  HigheLNG Exports 1r gas prices will lead to winners and losers, but the net benefit to the U.S. of LNG exports at the macro-economy level is positive, whatever the gas price.  This is due to the positive balance of trade effect.

2)  Stronger prices will support exploitation of shale gas.  This will allow the industry to develop efficiencies in its extraction and to ensure the extraction of a valuable resource.

3)  It is wrong to support one industry or industries (power generators and chemical manufacturers, in this case) at the expense of others (gas producers).  This would be like forcing steel producers to lower prices for auto manufacturers.

4)  Increased U.S. gas production would put further pressure on coal demand, either in the U.S or elsewhere, giving environmental benefits.

5)  By allowing producers to export gas, the U.S government would enhance its already good reputation for free trade.  As a founder member and global advocate of the WTO, it is inconceivable that the U.S. would apply protectionism at home, while arguing for open markets for rare earth metals with China, for example.  Preventing exports is not that much different to slapping tariffs on imports.

Comments

  1. Other benefits for allowing LNG exports:

    – USA Domestic prices would rise on a first step but will then stabilize. It will allow gaz producers a reasonnable profit to continue gaz production and it will allow other industries stable supply prices in gaz.

    – Reasonable gaz prices will oblige the other industries to make efforts on cost savings and productivity. Low gaz prices make them comfortable and not feeling the necessity of modernizing and optimizing their prodution processes and tools for being competitive.

  2. Hi Angus – pertinent post ….. as ever. Coupling the above with a recent authoritative US academic report stating that USA is now an “oligopoly” (of business interests) running the country rather than a true democracy, we can easily see a political battle between those business interests fighting for protectionism of the US shale for domestic use to reduce domestic natural gas prices and stimulate petro-chemical industries, and those companies actually developing the shale gas reserves looking for broader and higher price market opportunities. It, however, becomes a non-argument if we consider (or believe) the huge reserve numbers being quoted for US shale gas which would allow both domestic use and exports to happen. In a new world looking to natural gas rather than oil, natural gas exports also give the US a lever for world politics.

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