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Export Natural Gas to Accelerate Our Clean Energy Future

Advances in drilling and fracturing underground rock (a.k.a. “fracking”) have unlocked massive supplies of natural gas previously trapped deep under the United States, positioning the U.S. to become the world’s largest producer of natural gas by 2015. Ironically, this gas is now trapped within the geographic boundaries of North America because we don’t have the facilities to export gas to markets in Europe and Asia.

The oversupply trapped in the U.S. has caused the domestic price to collapse to by more than 50% to $2-$3 per thousand-cubic-feet (Mcf). That’s a fraction of prices in Europe where gas goes for $10-$11 per Mcf or those in post-Fukushima Japan which are over $17 per Mcf.

The severity of oversupply in the U.S. relative to global markets offers an opportunity for the United States to achieve something it has never had: a comprehensive energy plan that makes sense in terms of our economy, national security and public health. Better yet, it could rally support from interest groups previously at odds. How? By embracing natural gas exports. This would not only  take the slack out of the natural gas market , but by doing so enable renewable energy to become the backbone of our power generation infrastructure.

In today’s energy conversation, much has been made of the benefits cheap natural gas confers on Americans. Today’s cheap gas can be burned to generate electricity at a cost of about $30-$50/MWh (3¢ – 5¢ per kWh). Compare that to utility solar power at $70-$80/MWh and wind power at $40-$60/MWh, both of which are cheap by historical standards but higher than the apparent price of gas-fired power. For consumers and businesses, that looks like a windfall (at least for now) in the form of lower electricity rates. However it’s increasingly apparent that cheap gas has some downsides because it is actually distorting power markets.

The siren song of cheap gas is tempting regulators and utilities to pursue a disproportionate build out of gas-fired power plants. The danger with this trend is that a gas-dependent infrastructure is vulnerable to future gas price shocks. Whereas stability can be found in a portfolio of both renewables and gas offering more predictable prices and greater energy security. The bottom line is that artificially low gas prices are distorting energy markets and complicating our nation’s progress towards a truly secure, clean and affordable energy future.

Promoting a gas export policy will provide an important shift in our national energy debate. This as an opportunity for groups that typically find themselves on opposite sides of energy issues to come together. There is clear alignment between climate advocates and renewable energy industry with the oil and gas industry based on a shared interest in seeing natural gas prices rise a notch or two.

Gas producers clearly stand to benefit from export. One of the lesser known realities of the gas fields is that today’s prices are not sustainable as they don’t offer producers enough value to drill profitably. Even accounting for the cost of gas liquifaction and shipment, the spread between U.S. prices and global prices ensures them a better profit from export than they currently get at home.

Gas power plant developers also stand to benefit from higher prices. Another hidden effect of low gas prices is that it inhibits development of new gas-fired power plants, because the spread between the cost of gas and the price of electricity is tight when gas prices are low. And few developers want to build a plant today that locks in at today’s low electricity prices. Rising gas prices would increase spreads and make new-build gas plants more attractive.

The renewable energy industry should absolutely get behind the idea of exporting natural gas. If gas prices were still at the levels they were three years ago, wind and solar would be solidly competitive with fossil-fired power. And the utility-scale renewable industry wouldn’t be fighting the headwinds it is today. Exporting gas would increase demand and raise gas-fired power prices to a level that would help wind and solar by improving their competitiveness.

But why should climate advocates get behind exporting natural gas? Wouldn’t that just increase the amount of carbon we’re putting into the atmosphere? One of the big downsides of our gas glut in the U.S. is that we’re now exporting our coal to Europe. Cheap domestic gas is replacing coal at home but that coal is simply being burned elsewhere. Thus the result of low gas prices is to increase global carbon emissions because total fossil fuel consumption is exploding.

Exporting natural gas would be more likely to displace coal both at home and abroad, resulting in a lower net carbon emissions overall. This alone gives climate advocates a reason to support the export of natural gas. Beyond that, any economist will tell you that raising the price of a commodity should increase rationing of that product. In other words, raising the price of gas should result in burning less of it and lead to more selective consumption.

The biggest objection to gas export is likely to come from domestic industries and utilities that expect to benefit from cheap gas. Chemical and fertilizer companies that use gas as a feedstock benefit from today’s gas prices, as do industries that use gas for industrial heating. Utilities and ratepayer advocates are also likely to clamor against export in order to keep cheap gas to generate electricity.

It’s important to see these arguments for what they are: industries clamoring for the government to assign them a share of the windfall from our nation’s gas glut. Cheap gas means higher profits for them, but those excess profits simply come out of the pockets of producers who can’t get their product to global markets. These claims are increasingly being cloaked in the political kryptonite known as “saving jobs.”

The fallacy of the jobs argument is made clear in a recent report on the macroeconomics of gas export from NERA Economic Research. A key finding of their report was that “the U.S. was projected to gain net economic benefits from allowing LNG exports.” And “LNG exports [would] have net economic benefits in spite of higher domestic natural gas prices.” Furthermore, the study points out that the industries likely to be impacted by export are extremely narrow and represent only “about one-half of one percent of total U.S. employment.” And as the report states clearly, “LNG exports are not likely to affect the overall level of employment in the U.S.”

The NERA study also addresses alarmist projections that export would result in disastrous price increases for natural gas at home. The report puts this fallacy to bed quickly by pointing out export would only occur when the foreign price was greater than the cost of extracting, liquefying, and shipping gas overseas. That means domestic prices will always be significantly lower than prices in either Europe or Asia–and thus domestic industries would still retain a competitively priced gas supply in the U.S. relative to their global rivals.

A gas export initiative is clearly the best policy for dealing with the current gas glut and provides the least offensive role for government to play in restoring balance to power markets. This initiative has significant potential to garner broad political support by aligning the interest of historical adversaries on energy issues. This latter point is exciting. It suggests a potential political opening for the kind of comprehensive energy plan our nation needs to move forward.

Image: Oil & Gas Tanker via Shutterstock

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Discussions

Ron Wagner's picture
Ron Wagner on Dec 18, 2012 4:04 pm GMT

It is important to export because our economy needs the stimulus, and the improvements in balance of trade. It is even better to use natural gas here at home to create products, and to lower the cost of energy and transportation fuel here at home. Our own energy, environment, and costs here at home should be our primary concern. We are behind other nations in using natural gas LNG and CNG in transportation. Natural gas can be used in any engine. Engines, of all kinds, can be converted to natural gas fuel. Doing this will lower fuel costs, increase profits, and lower pollution. Diesel is a known carcinogen, and gasoline is also dirtier than natural gas. Engines last much longer when they run on natural gas.

The window for high export profits will be ten to twenty years. By then the whole world will have low cost natural gas. It is important that we export quickly to make the best profits. In twenty years we can consider cutting exports. 

Offshore finds, and shale finds are everywhere. They will all be developed, the easiest first. Many nations, including the USA are still flaring natural gas. There are ways to use that stranded gas. Flaring is a sin against nature and economies of nations. 

Ten years ago we were talking about peak oil, and paying  three times as much for natural gas.

We have a few real leaders in utilizing this great resource, but need a lot more. It is crucial that we do not waste this opportunity to benefit from low priced, clean, and abundant energy. 

Guy Dauncey's picture
Guy Dauncey on Dec 18, 2012 6:26 pm GMT

Quite the reverse. When you examine the full climate impact of natural gas obtained by fracking - which is where all the growth is coming from - the fugitive methane emissions make its climate impact as bad or worse than coal.

Ignorance of the role of methane as an agent of global warming is inexcusable among serious energy thinkers. Over 20 years, molecule for molecule, methane is trapping 100 times more heat than carbon dioxide, and we can NOT simply ignore this fact because it is inconvenient to the gas industry. 

The core work on this is being done by Professor Rob Howarth, at Cornell, backed up by the EPA; many of the studies which suggest there's no problem are funded or supported by the gas industry. 

See http://www.sustainablefuture.cornell.edu/news/attachments/Howarth-EtAl-2011.pdfand  http://www.eeb.cornell.edu/howarth/Howarthetal2012_Final.pdf

 

Erim Foster's picture
Erim Foster on Dec 18, 2012 6:38 pm GMT

Interesting article. But, how solid is this "glut" of natural gas? Are you familiar with Arthur Berman's work? He has a much more pessimistic view of the oversupply, and thinks it's much more temporary than we're often led to believe.

Ronald Weedbaum's picture
Ronald Weedbaum on Dec 21, 2012 3:06 pm GMT

Howarth et al's study is deeply dishonest and flawed and it was not backed up by the EPA. They knew nothing about the oil and gas industry and made several flawed assumptions. Among them:

1. They stopped the "life cycle" analysis prior to combustion. But combustion is where most of the difference between gas and coal occurs! You get about twice as much energy per unit of carbon emissions from gas that you do from coal. They make no mention of this in the paper. It was the only way they could get coal to be as bad or worse than gas.

2. They assumed all gas that was emitted during drilling and completion was vented as methane. It isn't. It's flared and therefore emitted as CO2 not methane. In his study he made methane 100 times more powerful than CO2 as a greenhouse gas so cut those numbers by 99%.

3. They assumed all gas lost while it is in the pipleine was lost as methane when the vast majority of it is removed from the pipleline and used to power compressors where it is again emitted as CO2 not methane.

Howarth's study is a true lowpoint for science and anyone who cites it doesn't know what they are talking about.

 

 

 

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