This article is reprinted with permission from the May 21, 2014 issue of Oil & Gas Monitor. Copyright © 2014 Monitor Publishing Inc. Further duplication without permission is prohibited. All Rights Reserved.
The United States, once expected to be a major importer of liquefied natural gas (LNG), now has the potential to become a major exporter. The United States Energy Information Administration (EIA) determined in 2013 that the United States is expected to be the world’s top producer of petroleum and natural gas. As the development of shale formations continues, the capacity for U.S. natural gas production will increase. Increasing production, without increasing demand, can lead to lower prices, and since 2009 natural gas prices in the United States have trended downward. Natural gas prices in Asia and Europe, however, have trended in the opposite direction.
To access foreign markets that cannot be supplied by pipelines, natural gas produced in the United States must be liquefied – a process in which the gas is cooled to approximately -260 F and its volume shrinks almost 600 times – so that it can be efficiently transported.
The exportation of natural gas is highly regulated, including by the Department of Energy, which approves applications for the export (and import) of natural gas under Section 3 of the Natural Gas Act (15 U.S.C. §717b). Orders authorizing the export or import of natural gas are issued unless the exportation or importation is not consistent with the “public interest.” In this process, the Department of Energy considers a range of factors including economic impacts, international impacts, security of natural gas supply, and environmental impacts.
The authorization process differs depending on whether the country receiving LNG has entered a free trade agreement with the United States. If it has, exports are deemed to be in the public interest and applications are required to be granted without modification or delay. If the country is a non-free trade agreement country, there is still a presumption that the application is in the public interest but it is subject to a full agency review, an extensive and time consuming process.
LNG exports have two primary benefits. First, LNG exports allow for domestically produced natural gas to reach the best markets – those where demand is the highest. This increase in demand obviously benefits those involved in the exploration, production and exportation of natural gas but it also has a net benefit to the U.S. economy. As a study commissioned by the Department of Energy determined, LNG exports result in net economic benefits to the U.S. economy. This does not mean that some industries are not disproportionately affected, but, in the end, there is a net benefit to the economy. Second, energy is a foreign policy tool. Exporting energy allows our allies the opportunity to shift their energy dependence away from countries which they might otherwise have avoided. The recent crises in the Ukraine has highlighted energy’s political influence. Last month, the Lithuania Energy Minister told Congress that his country is “100 percent” dependent on Russia for natural gas.
Even when all regulatory approvals are granted, profitable LNG exports are not a sure thing. The demand for U.S. LNG will depend on the competiveness of LNG projects in the United States. Comparatively high natural gas prices in foreign markets will fluctuate. Continued technology development, and changes in cultural and political attitudes to natural gas production in Europe, could increase production in those markets and lower prices. In addition, production costs may increase in the United States as the most accessible and efficiently produced natural gas is extracted. Moreover, LNG supplied from locations closer to foreign markets will have less transportation costs, depressing the demand for LNG supplied from the United States. In addition, the United States is not the only country expanding the exportation of LNG. On April 16, 2014, the National Energy Board in Canada issued a license to Triton LNG Inc. to export LNG. However, from a policy perspective, these uncertainties should not affect whether approvals are granted. Increasing access to trade allows the market to regulate price – not some artificial restraint on trade.
As production of natural gas in the United States continues to increase, authorizing LNG exports allows greater access to foreign markets. This access provides the opportunity for economic benefit to those in the natural gas industry, but also a net benefit to the U.S. economy. And that sounds like a good change.
Justin G. Weber
The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.