Natural gas glut a dilemma for Obama

WASHINGTON – The drilling boom that has led to a glut of natural gas and sent prices to 10-year lows is causing a quandary for the Obama administration, which is struggling to decide whether – and how much – the U.S. should share the bounty with foreign countries.

Although the Energy Department recently approved Houston-based Cheniere Energy’s plans to begin exporting liquefied natural gas from its Sabine Pass terminal in southwest Louisiana, the government has put off verdicts on similar applications from at least seven other companies.

Administration officials say they’ll make those decisions after they get the results of a study commissioned by the Energy Department on how allowing companies to sell U.S.-produced natural gas overseas would affect prices for American consumers. The study is due out this summer.

“We want analysis to drive decisions,” White House energy adviser Heather Zichal said at a recent forum. The administration supports domestic natural gas and isn’t opposed to exports, she said, but also is committed to “protecting American consumers and making sure we’re sending the right signal to industry and the manufacturing sector.”

The dilemma is politically treacherous in an election year and struggling economy. Although the United States already exports some natural gas – mostly by pipelines to Mexico and Canada – the flurry of proposals to liquefy natural gas for tanker shipment and sell it to foreign consumers would mean a big jump in exports.

Applications filed with the Energy Department could put the United States on track to export about 16 billion cubic feet of liquefied natural gas each day – nearly a quarter of U.S. daily production in 2011.

But few expect all of those proposals to win federal approval, and it could be years before construction is finished on even those projects that win the green light. Experts at IHS CERA say the realistic potential market for exports from the U.S. and Canada is 4 billion to 5 billion cubic feet per day by 2020.

An Energy Information Administration report released in January concluded that exporting natural gas would cause prices to climb in the U.S. According to the agency, consumers’ electricity bills would increase by 1 percent to 3 percent from 2015 to 2035 and industrial prices would climb 9 percent to 28 percent.

Unlike crude, which is a globally traded commodity, natural gas is traded on non-integrated markets, resulting in huge price variations in different places.

The prospect of selling natural gas in Asian and European markets at five times its price in the U.S. is enough to make most domestic producers giddy.

Energy companies and analysts have argued that current U.S. natural gas prices are unsustainable. It closed Friday at $2.874 per million British thermal units in trading on the New York Mercantile Exchange.

The opposing argument is that exports could cause prices to spike, sending electricity bills upward and jeopardizing a resurgence in domestic manufacturing tied to abundant, cheap natural gas. Manufacturers that use natural gas to fuel their plants and as a building block to make other products were hit hard over the past two decades by volatile swings in prices, which last peaked over $15 in 2005.

Because any position risks alienating important constituencies – energy producers and manufacturers as well as voters – few elected officials are pushing the issue.

‘Safer for politicians’

“It’s a lot safer for politicians who don’t want to be on the wrong side to defer it,” said Kevin Book, an analyst with ClearView Energy Partners.

Even key stakeholders in the debate are keeping low profiles. Several major energy industry groups have kept mostly quiet, possibly for fear of advocating an export strategy linked to higher prices.

Many manufacturers, meanwhile, are wary of visibly opposing energy exports and being painted as free trade foes. Some companies also are torn because their foreign operations could benefit from an influx of cheaper U.S. natural gas.

President Barack Obama and Republican challenger Mitt Romney also have avoided making big pronouncements.

Democratic U.S. Rep. Gene Green, whose east Houston district includes several chemical plants, says the key is finding a threshold that keeps prices low enough for manufacturers and high enough to sustain production levels.

“I don’t want our gas prices to get so outrageous as seven years ago, when the chemical industry was transferring jobs to other places,” said Green, who backs case-by-case approvals. “I don’t want to kill the good things we’re doing, but I also know we want to keep those drillers working.”

Advances in drilling technology have allowed energy companies to extract natural gas from dense rock formations coast to coast and tap what analysts widely describe as a 100-year supply of the fossil fuel.

A few congressional critics are pushing for a timeout. Rep. Ed Markey, D-Mass., has introduced legislation that would halt new natural gas exports until 2025.

Markey argues that the domestic natural gas explosion gives the U.S. a major global advantage that would be squandered by exports. “This is our biggest game-changing moment in a generation,” he said. “Low-priced natural gas is driving an American manufacturing renaissance.”

Linking U.S. natural gas production with global markets would hamper moves to power more cars and produce more electricity with the gas, Markey said.

“Natural gas producers do not want low prices. They want a global natural gas market that maximizes consumer pain domestically in the same way the global oil market does,” Markey added. “That would be painful for American consumers and catastrophic for the fertilizer manufacturers, the chemical and plastic makers, and the steel manufacturers who are relying on low-priced natural gas.”

Prices to rise?

Many analysts contend natural gas prices are destined to rise even without more exports, as companies scale back production.

Bob Ineson, the head of North American natural gas research for IHS CERA, said he anticipates U.S. natural gas prices will rise without exports and stabilize around $3.50 to $4. “The current price environment is unsustainably low,” he said, because in some areas, gas costs more to produce than its price.

A bipartisan group of lawmakers from areas rich in natural gas drilling warned the Energy Department in a letter earlier this month that if prices don’t rise, it could jeopardize domestic natural gas production and all of the jobs and economic activity tied to it.

U.S. companies looking to export natural gas include Dominion and Southern Co. Texas-based Freeport LNG has begun an application to build a liquefaction facility that could export 1.4 billion cubic feet per day. Exxon Mobil Corp. CEO Rex Tillerson recently said his company is considering exports too.

Several companies pursuing export licenses want to convert existing terminals for receiving natural gas imports that were built before today’s drilling boom.

The liquefaction process involves cooling natural gas to 256 degrees below zero, transforming it into a liquid that can be transported by tanker ships. The liquefied natural gas can be converted back into gas at its destination.;