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September 15, 2014

New DOE Study Fuels Debate Over LNG Exports

The U.S. Department of Energy (DOE) engaged the controversy over exporting liquefied natural gas (LNG) with its December 5 publication of Macroeconomic Impacts of LNG Exports from the United States. Prepared for DOE by NERA Economic Consulting, the report concludes the domestic economy will benefit from LNG exports and thereby paves the way for approval of LNG export applications pending DOE approval. But, given the lead times for building export terminals and that only four of the 15 pending applications are expected to be approved in 2013, significant exports are unlikely in the near term. To be considered, initial public comments on the report must be submitted to the Department by January 24, 2013, reply comments by February 25, 2013.

The report evaluated economic impacts “under a wide range of different assumptions about levels of exports, global market conditions, and the cost of producing natural gas in the U.S.” NERA modeled impacts using its Global Natural Gas Model and its general equilibrium model of the domestic economy. NERA considered the 16 economic scenarios addressed in DOE’s first study, issued in January 2012, as well as 47 global scenarios NERA developed.

The report concludes that in all 63 scenarios evaluated, increased LNG exports produced net domestic economic benefits. Even scenarios of unlimited export of LNG consistently produced higher net economic benefits than scenarios involving limited LNG exports. The report projects some negative effects of increased LNG exports on the U.S. economy, noting that large amounts of exports would slightly raise natural gas prices (e.g., with significant increases in LNG exports, prices could jump by more than $1 per thousand cubic feet over five years, an increase of more than 25 percent) and negatively affect utilities and “energy-intensive” manufacturers (i.e., manufacturers with energy expenditures exceeding 5 percent of output and significant exposure to foreign competition).

Rising domestic natural gas prices would have a ceiling, the report observes, since “importers will not purchase U.S. exports if U.S. wellhead price rises above the cost of competing supplies.” Energy-intensive industries are not projected to lose employment or output exceeding one percent per year. Additionally, the report projects that LNG exports will positively affect some segments of the domestic economy and improve consumer welfare, outcomes that, the report concludes, outweigh the losses associated with increased natural gas prices. The report estimates that LNG exports could produce between $10 and $30 billion in annual export revenues.

The report is certain to fuel already hot contention over whether DOE should authorize LNG exports. Dow Chemical has already decried the report’s conclusions, warning that increased domestic natural gas prices would impede energy-intensive manufacturers’ ability to keep up with their foreign counterparts. As mentioned in last month’s update, Senator Ron Wyden (D-OR) and Congressman Edward Markey (D-MA) are also critics of increased LNG exports, noting that a rise in LNG exports would essentially constitute a transfer of wealth from consumers to oil and gas companies. Environmental groups, who oppose the practice of hydraulic fracturing, which has contributed to the current abundance of natural gas in the U.S., oppose LNG exports as well. On the other side, Senator Lisa Murkowski (R-AK) and Representative Cory Gardner (R-CO) have expressed support for increased LNG exports. Unsurprisingly, natural gas producers, oil companies and Asian LNG importers are also supportive of NERA’s report, noting the opportunities increased LNG exports present for domestic economic growth and reduced natural gas costs.

© 2014 McDermott Will & Emery

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