LNG Exports: To Cap or Not to Cap?
Original Article: http://www.downstreamtoday.com/news/article.aspx?a_id=36247
The drive to export liquefied natural gas (LNG) exports from the U.S. has raised concerns from the petrochemicals industry, which plans to invest more than $16 billion in new domestic manufacturing capacity based on abundant, cheap feedstocks from natural gas. The American Chemistry Council has predicted these investments could create more than 200,000 new U.S. jobs. However, the petrochemicals sector fears that LNG exports would mean higher natural gas prices and diminish the global competitiveness of manufacturing ethylene and other derivatives in the U.S.
A high-profile chemicals industry leader who has urged caution on LNG exports is Dow Chemicals’ CEO Andrew Liveris. Liveris has publicly argued in favor of keeping domestically produced natural gas largely stateside for purposes such as power generation and manufacturing higher-value products. The latter approach, he said at the IHS CERAWeek conference in Houston in March, would still amount to exporting natural gas — but as “solids”. At the same event, Liveris said the U.S. could export 5 percent of its natural gas without affecting the price of the commodity.
An April 26 Bloomberg article quotes Liveris as saying that capping U.S. natural gas exports to 10 percent of production would be “‘smart.'”
Placing such a cap on LNG exports has been on the minds of some policymakers as well as industry executives. Two executives from the E&P and midstream communities interviewed by Rigzone consider export caps a bad idea.
“I think artificial caps are as antithetical to a free market as any other ‘unnatural’ interference in competitive markets,” said John Hopper, President and CEO of Houston-based Peregrine Midstream Partners LLC.
“Andrew Liveris should be ashamed of himself. Let the market decide how much LNG export capacity should be built and how much LNG should be exported. I didn’t see him asking for a cap on LNG imports — or anyone else asking for a cap on petrochemical exports to keep petrochemical prices lower here.”
Chris Faulkner, CEO of Dallas-based Breitling Oil and Gas, shares Hopper’s view but acknowledges the political attractiveness to some of such a policy measure.
“I do not think there needs to be a cap on LNG exports but I am not sure if our current President will agree with me,” Faulkner said.
“The LNG market is growing, and its future looks bright,” Faulkner said. “I predict demand for LNG globally will increase 40 percent in the five-year period beginning now. This would make the annual market for LNG roughly 300 million tons.”
Faulkner added that the U.S. LNG export sector is still a work in progress.
“The largest obstacle the U.S. faces in the LNG market is its lack of export/liquefaction terminals,” Faulkner said. “The Sabine Pass terminal is the only facility in America even close to being able to regularly send LNG overseas. And even that could still be a few years away but I remain very optimistic we are on our way to becoming world energy exporters.”
Hopper and Faulkner’s position against federal LNG export curbs recently gained an influential voice: the esteemed Washington, D.C., think tank The Brookings Institution.
The product of a year-long study, the Brookings report “Assessing the Case for U.S. Exports of Liquefied Natural Gas” advises U.S. policymakers against enacting legislation or regulations that would promote or limit LNG exports. Rather, the report posits that LNG production, processing and shipping costs as well as global market forces would determine what LNG export volumes are appropriate. Attempts to intervene in the burgeoning LNG export market likely would “result in subsidies to consumers at the expense of producers, and to lead to unintended consequences,” the Brookings report found.
“The ‘lemonade from lemons’ scenario here in the U.S. is that cheap NatGas and the abundance of supply is leading to a manufacturing renaissance that we have not seen here in decades,” said Faulkner. “The U.S. has a competitive advantage when oil is seven times as expensive as natural gas, but now we have more like a 50-to-1 advantage. The ‘shale gale’ is really driving this.”
Faulkner explained that 1 million B.T.U.s of natural gas that might cost $11 in Europe and $14 in South Korea is $2 in the U.S. Such compelling economics are driving chemical producers’ plans to expand ethylene capacity in the U.S. by more than 25 percent between now and 2017, he added.
The push to add capacity to produce more ethylene, a key petrochemicals building block, is only one manifestation of a resurgent U.S. manufacturing base. Faulkner cites steelmaker Nucor’s plan to build a $750 million direct-reduced iron plant in Louisiana as another example of cheap natural gas’ positive effect on manufacturing. Also, the Canadian firm Methanex is relocating a plant to make methanol from natural gas from Chile to Louisiana.
“Shale gas has the potential to make the US energy independent,” noted Hopper. “The US energy industry — and every US industry that relies on the US energy industry — should embrace this incredible opportunity with every fiber of their beings. It is an opportunity that is truly a once-in-a-lifetime opportunity that can literally benefit every living American in a profound way.”
For Faulkner, the prospect of supplying global LNG markets, petrochemical producers and other gas users makes it an exciting time to be in the U.S. E&P industry.
“As the old adage goes, ‘there is plenty more where that came from!’ Faulkner concluded. “We will keep drilling and I have a hunch we can find a heck of a lot more NatGas.”