Natural Gas: Should It [All] Stay or Should It Go?

Several recent posts on this blog have discussed some of the legal and economic issues that have arisen since advanced extraction techniques like hydraulic fracturing have allowed U.S. natural gas production to rise to record levels.  The export of natural gas to foreign countries is one issue that has received increased attention in recent months.

The export of natural gas is regulated pursuant to the Natural Gas Act, 15 U.S.C. § 717b.  In very general terms, no person is allowed to export natural gas without first obtaining an order authorizing it to do so.  In the case of countries that have free trade agreements (FTAs) with the U.S. covering natural gas, applications are to be granted virtually automatically.  For other countries — most countries in the world, including key allies like Japan — approval comes only after a process whereby the Department of Energy and FERC determine whether the proposed export project would be consistent with the public interest.

In the not-so-distant past, exporting natural gas would have been virtually unthinkable.  Demand far outstripped domestic supply.  As recently as the mid-2000s, it appeared that the U.S. would become one of the largest natural gas importers in the world.  That changed with the revolution in production techniques.  Surging production caused the price of natural gas to drop in the U.S. from over $13.00 per million BTU in mid-2008 to less than $4.00 a year later.  The supply glut — and the corresponding price decline — caused producers to ease back on new drilling activity and seek new outlets for natural gas, including exportation.  Currently, almost 20 export applications are pending.

The fact that natural gas exports are even being considered owes largely to the extremely low domestic gas prices that have prevailed in the past few years.  In order to ship natural gas overseas, it is necessary to put the gas through a liquefication process.  That process, plus shipping costs, adds several dollars to the price of exported gas.  If the difference between natural gas prices in the U.S. and those in export destinations were to decrease, there would no longer be any incentive to export natural gas.

On May 17, 2013, the Department of Energy approved one application.  That application, by Freeport LNG Expansion and FLNG Liquefaction, contemplates a terminal on Quintana Island, Texas that would send up to 1.4 billion cubic feet per day of natural gas overseas for 25 years.  The Freeport project joins Cheniere Energy's Sabine Pass project (located in Cameron Parish, Louisiana) as just the second project to receive approval for export to countries with which the U.S. does not have an FTA.  The Sabine Pass facility is expected to begin exporting in 2015 or 2016.  To illustrate how quickly the natural gas supply situation in the U.S. has changed, the Sabine Pass facility was originally constructed in 2008 as an import terminal.

Export approval is a controversial subject.  An unlikely alliance between manufacturing concerns and environmental groups has formed to oppose natural gas exports.  Environmentalists are concerned that exports will lead to more production, which in turn will lead to increased use of fracking and other techniques that environmentalists oppose.  Manufacturers that use natural gas in their processes have benefitted from historically low natural gas prices.  Many have invested in new facilities or expansion projects.  They argue that exports will drive natural gas prices higher and deprive U.S. industry of a competitive advantage.

Natural gas producers counter that the market should dictate how natural gas supplies are allocated.  They see no compelling reason why the federal government should maintain restrictions on the energy sector simply to favor the manufacturing sector.  They also argue that any effect exports might have on domestic natural gas prices would be offset by increased production.  Increased production would also benefit the economy by adding exploration and production jobs.  These arguments find some support from a Department of Energy-commissioned study by NERA Economic Consulting, which found that natural gas exports would have an overall-positive impact on the U.S. economy.

The debate also has geo-political ramifications.  Some export proponents argue that exporting natural gas will strengthen U.S. relations with key gas-importing allies, including Japan and some European countries.  It could also help reduce the ability of countries like Russia to use their gas supplies as leverage against America's European allies.

With close to twenty export applications pending and well-funded interests advocating on both sides, natural gas exportation is an issue that is likely to continue to receive considerable attention for the foreseeable future.  The government can be expected to continue to tread carefully given the economic and geopolitical stakes.

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