Geopolitics Likely to Trump Economics In US LNG Export Question

Last week, U.S. Gulf of Mexico natural gas exports took a step closer to reality with the release of NERA Economic Consulting’s study for the U.S. Department of Energy concluding that the economic benefits (including wealth transfer affects) from liquefied natural gas (LNG) exports from the U.S. Gulf coast will outweigh the losses from “reduced capital and wage income to U.S. consumers.” According to NERA, middle class Americans (or in NERA-speak, “households with income solely from wages and transfers”) may pay more for residential natural gas use and as will probably certain energy intensive industry/manufacturing industries. But U.S. GDP would also increase as a result of LNG exports, especially from added activity related to investment in export facilities and tolling charges, according to NERA. The report calculates that initial exports of U.S. LNG exports will be between zero to 33 cents per 2010$mcf and rise to as much as 22 cents to $1.11 2010$mcf in five years, depending on varying assumptions about the U.S. supply curve for future natural gas production. NERA places its analysis in the context of positive economic theories about the benefits of removing barriers to trade and suggests that the effects of LNG exports on particular businesses or consumers will not lead to a net loss of jobs.

The question of the price impacts of U.S. LNG exports is highly dependent on the ultimate size and cost of U.S. shale resources. Some alternative studies to NERA suggest that the U.S. supply curve will be relatively flat, leaving little impact to U.S. domestic prices but possibly putting so much pressure on international LNG prices that the U.S. export trade will not be profitable.

It is probably too early to know for sure what the exact scale and costs of U.S. shale resource development will be in the coming five years. Uncertainties abound on many levels, and not just of a geological nature where the size of the resource does seem to imply a relatively flat supply curve at fairly low prices. There will also be environmental and social barriers to shale development in certain parts of the United States and those will almost certainly affect the pace of development. Moreover, a burgeoning trade in natural gas for transportation, including a nascent LNG trucking network that is already absorbing imported Trinidadian LNG, could also influence the trend line for U.S. domestic demand and prices. Similarly, one cannot rule out a producer price war scenario might emerge, should global gas markets get overly saturated.

The bottom line is that U.S. LNG exports are more of a political decision than an economic one. This is especially relevant given the U.S. Department of Energy’s long standing difficulty of accurately forecasting energy pricing (and for that matter, many other organizations as well). In fact, I might argue that the decision is ultimately geopolitical.

When push comes to shove, the United States is not going to refuse to sell natural gas to important allies and trading partners who hold free trade agreements with America, barring some domestic or international catastrophe that is not currently on the horizon.

As a practical matter, the United States is already an exporter of domestic natural gas. The U.S. exported a total of 402.1 bcf of natural gas in the first quarter of 2012, mainly to Canada and Mexico. U.S. pipeline gas exports to Mexico are important to Mexico’s economic health and to border relations and therefore it is unlikely the United States would ever consider cutting Mexican natural gas trade off. Enter South Korea. South Korea now holds a Free Trade Agreement (FTA) with the United States and it has expressed its desire to import U.S. Gulf coast produced LNG. Would the U.S. White House and State Department be prepared to tell South Korea that it is a less important trading partner than Mexico and that we are less concerned about its energy security? …chances not unless there was a really pressing domestic political reason to do so. If the United States would feel compelled to keep exporting gas to Mexico and to add South Korea, what are the chances that the United States would turn down Japan, which has expressed an ardent interest in importing U.S. natural gas and currently faces a fuel crisis in the aftermath of the Fukushima nuclear disaster?

Chances are geopolitical forces will continue to propel U.S. LNG exports from the U.S. Gulf coast. Asian buyers have made clear that they would prefer the security (and possibly the pricing) of this multi-producer, liquid market. U.S. LNG exporter groups are hoping this will translate into reap-able premiums but this could prove short lived. Competing exporters from Alaska and British Columbia will have to consider the pricing formula that would outweigh the pro-U.S. inclination. And Qatar, Argentina, Russia and Australia will all be watching.