The Editor's Monthly Memo: The Staggering Implications of the U.S. Natural Gas Market

U.S. exports of natural gas hold promise for an integrated global market, carbon emissions reduction, and increased international energy security. Regulators must not stand in the way of such positive developments.
On the shimmering Gulf coast of the United States, the scaffolding for an energy revolution takes form. The Sabine Pass liquefaction terminal is slowly being erected as the crown jewel of over $100 billion in gas infrastructure development. The facility, initially built as a regasification center for the expected increase in liquid natural gas (LNG) imports, is undergoing a $10 billion redesign to become the nation’s first gas export terminal. The federal government requires permits for the export of LNG to any country not currently covered by a free trade agreement with the United States. Cheniere Energy, which operates the Sabine Pass, is the only company to receive such a permit to date.The rapidity with which unconventional gas is changing the energy landscape in the United States has left regulators breathless and struggling to keep pace. Amidst little fanfare, the Department of Energy’s Office of Natural Gas Regulatory Activities is in the process of conducting a macroeconomic analysis on the impact of LNG exports. One aspect certain to appear in the report is the potential of the gas boom to transform the U.S. economy.Natural gas and natural gas liquids are an integral ingredient in the petrochemical industry, which itself provides essential raw materials for common manufacturing processes. The glut of gas is driving prices to historic lows in the United States and, as a result, incenting chemical manufacturers, such as Dow Chemical, to bring production back home. With various market outlooks postulating that gas prices will remain low for the foreseeable future, the potential impact of gas on the manufacturing sector could be enormous. To an economy suffering from torpid growth, this potential reinvigoration in American manufacturing comes as reassuring news.Such low prices, however, are also pushing drillers to look beyond the U.S. borders for market opportunity. The global gas market—or the lack thereof—is intensely regional as expensive and technologically complex transport systems have driven producers to look primarily to domestic and neighboring markets for distribution; the result has been huge divergences in prices. Consumers in Northeast Asia are likely to pay upwards of ten times the price per million BTU of gas than those in North America. Despite steep shipping costs, these disparities have American energy producers anxious to export and offer a major competitive advantage that U.S. companies should be free to exploit.Opponents worry that a dramatic shift to exports will cause prices to skyrocket domestically while also creating potential shortages, but given the cautious approach by the federal government to granting permits and the current backlog of applications, such scenarios are likely unfounded. The United States has established the ideal blend of muted acceptance of the controversial hydraulic fracturing process, pipeline infrastructure, and free market transport mechanisms to cash in on the bounty of unconventional gas. Meanwhile, other nations—namely Europe and China—lag behind both technologically and in regulatory structures and have been unable to tap their own substantial gas resources.This provides a valuable opportunity for the United States to mold the global marketplace for natural gas trade and to embed its own corporations as the giants of the industry. Beyond the associated balance of payments and tax revenue benefits, the United States would also be poised to positively contribute to global carbon emission reduction and energy security for its allies. In addition to the lucrative Asian markets, Europe is an obvious destination for substantial exports. Long subject to the predatory and geopolitically charged practices of Russia’s state gas company, Gazprom, Europe should welcome increased source diversity and flexibility in contract negotiation.An influx of American gas would provide Europe an attractive option that would not require the take-or-pay, long-term, and oil-indexed contracts that Gazprom is so keen on imposing on European markets. Additionally, in the short-term American gas exports could help develop Europe’s fledgling spot market and help the marketplace mature more generally.At home, a cautious, yet supportive approach to LNG exports would have ancillary benefits as well. With coal plants retiring every year and the declining economic viability of nuclear power, natural gas is well positioned to vastly expand its 30 percent share of electricity production. While this will translate into lower utility bills for U.S. consumers, it also raises the specter of overreliance.If natural gas exceeds a 50 percent share of power generation, any source disruptions or sudden price fluctuations would have a calamitous economic impact. Furthermore, such cheap gas could potentially crowd out other promising sources of energy, such as renewables. Though natural gas fired plants produce roughly half the carbon of a coal plant and have contributed to an overall reduction in emissions in the United States, a recent International Energy Administration report reveals that a shift to gas generated electricity will not prove sufficient to significantly alter current climate change scenarios.Allowing for a modest level of LNG exports would raise prices to a level that allowed other sources to remain commercially competitive and would improve the nation’s energy security. As it stands, current prices have restricted development to the drilling of “wet” gas—a reference for those projects which also produce natural gas liquids. Thus, an increase in exports would allow more full-scale development while also providing increased price stability through foreign production agreements.There are undoubtedly dangers to opening up the market for exports too quickly and the potential boon for manufacturing begs prudent regulatory management, but the potential benefits for American LNG exports are too great to ignore; hopefully, the Office of Natural Gas Regulatory Activities reaches a similar conclusion.

Photo courtesy of Lens Envy via Flickr.