The sheer amount of attention garnered by the Keystone project makes it all the more surprising that, by comparison, construction of Liquefied Natural Gas (LNG) export terminals in the United States are flying under the radar. With five applications in to the Federal Energy Regulatory Commission (FERC) and at least another six U.S. projects on the drawing board, the potential construction of export facilities will have a dramatic impact on the scale of natural gas drilling and the extent to which fracking operations are expanded in communities across the United States. The Obama administration has yet to comment on the applications, however, it is not known if this is because they will side with the naysayers or those in favor of development.

Roadblocks to construction
While economic considerations may impact the number of export terminals ultimately built in North America, the primary roadblock is political. The drastic imbalance in global natural gas prices will likely override other economic risks (i.e. construction risk and competitive risks from other natural gas exporters) if somehow political risks are removed. The chart below depicts LNG "landed prices," which are the prices received at the terminal where regasification occurs.

World LNG Est. 05/2012 Landed Prices

The critical link between export terminals and the future of the natural gas industry
With natural gas prices at record lows of less than $2.50 per Mcf (thousand cubic feet), producer economics are either supported by liquids or they could find themselves struggling to survive. Production from U.S. shale plays has increased supply by roughly 18 billion cubic feet per day (Bcf/d) during the last five years and is projected to increase supply by another 20 Bcf/d during the next 10 years. The only serious constraint to additional supply appears to be low prices (although resistance against fracking will likely be monitored).

While growth is projected in traditional demand segments, the mid- to long-term direction of natural gas prices is likely to be more profoundly impacted by the decisions surrounding LNG export terminals. No other demand segment has the same unpredictability or the potential to reach the same level of additional demand. By 2022, research and consulting firm Wood Mackenzie is forecasting more than nine Bcf/d in demand growth in traditional sectors while the capacity of currently proposed and potential export sites represents twice that amount in possible new demand. (See chart below)

Demand Growth (Bcf/d)³

Proposed and Potential North American Export Sites (Bcf/d)⁴

The politics of export facilities

U.S. export facilities require approval from the U.S. Department of Energy (DOE).  These approvals cover two categories:  1) terminals requesting export approval to Free-Trade Agreement (FTA) countries and 2) terminals requesting export approval to World Trade Organization (WTO) countries.  FTA country approvals should be granted much more expeditiously, but only one FTA country is a major LNG importer (South Korea). 

On Feb. 16^th, Energy Secretary Steven Chu stated that no new applications for LNG exports to non-FTA countries would be approved by the DOE until they had made a final determination as to whether exports were in the public interest.  In pursuit of this question, the DOE commissioned two studies.

• The EIA delivered the first study, “Effect of Increased Natural Gas Exports on Domestic Energy Markets,” in January.³  It concluded that “increased natural gas exports lead to higher domestic natural gas prices, increased domestic natural gas production, reduced domestic natural gas consumption and increased natural gas imports from Canada via pipeline.”⁵



• The second report is being completed by a third-party and will explore the “broader economic effects of increased natural gas exports.”⁶ The report was expected to be completed by April, but in March the DOE announced that it would not be available until the end of the summer.

Whether debate on this issue heats up before or after the election, it should prove interesting.  Advocates will argue that export capacity will improve our trade balance, create jobs and provide much needed revenue to states. Opponents will argue that selling energy resources does not align with our energy independence goals and will counter with the argument that exports will jeopardize our increased reliance on natural gas in the industrial and power sectors.   Fracking opponents may find alliances with other opponents of natural gas exports.

Wood Mackenzie and several other forecasters are calling for a modest recovery of prices during the next five years.  While it is doubtful export capacity will be built to the tune of 18 Bcf/d, Wood Mackenzie forecasted that nearly seven Bcf/d of North American export capacity be built by 2022⁷.  Yet forecasters always find political predictions to be problematic. If the actual over/under turns out to be wildly different from their forecasted seven Bcf/d, expect something other than a modest recovery of prices to occur.   

1 Garth Lenz:  The True Cost of Oil (Ted.com)
2 North American Gas Long-Term View: Spring 2012
3 North American Gas Long-Term View: Spring 2012
4 Department of Energy, Office of Energy Projects
5 http://www.eia.gov/analysis/requests/fe/pdf/fe_lng.pdf
6 SNL Energy: http://www1.snl.com/InteractiveX/article.aspx?ID=14510861
7 North American Gas Long-Term View: Spring 2012

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