Manufacturers pushing hard against LNG exports

Manufacturers terrified that rising natural gas prices threaten their bottom lines are stepping up pressure on the Obama administration to limit exports of the fossil fuel in the wake of a study that said selling more overseas would broadly benefit the United States.

The government-backed report released Wednesday will be a major factor as the Energy Department weighs whether to grant applications from 15 companies to export a total of 21.5 billion cubic feet of natural gas daily to countries that don’t have free trade agreements with the United States.

But chemical and manufacturing industry leaders insist if the Energy Department approves too many export licenses, natural gas prices would be pushed skyward, jeopardizing some $90 billion in planned capital spending.

Dow Chemical’s vice president of climate change and energy, George Biltz, said the move also would threaten $4 billion in that company’s planned capital spending. Dow projects linked to abundant, inexpensive natural gas supplies include ethylene, propylene and herbicide facilities planned for St. Charles, La., and Freeport, Texas.

Planned domestic manufacturing facilities were announced “with the assumption we would have available competitive and affordable natural gas,” Biltz said in an interview. “Our view is that too many exports would change that profile and would reduce the amount of investments that would be made.”

It’s not clear where that magic number lies. Biltz didn’t offer one, and neither did the new study by NERA Economic Consulting, which concluded that even unlimited exports would benefit the country with up to $47 billion added to the gross domestic product — though not without some casualties.

Most of the damage would be in the form of price increases for companies that have high demands for energy produced by burning natural gas or rely on the fossil fuel as a building block to produce chemicals, fertilizers and other products.

Manufacturers say the study used outdated 2011 projections of demand for natural gas and that the report dismissed the effects on their sector while ignoring the positive contribution they have on the U.S. economy.

“The report does not compare the economic benefits of exporting natural gas versus using it as a domestic jobs creator,” said Paul Cicio, president of the Industrial Energy Consumers of America. “If we use these resources domestically, it will maximize economic growth and job creation for this country.”

Because natural gas prices aren’t set on a global market — and the cost in some Asian and European markets can be three to five times higher than in the U.S. — American manufacturers have competitive cost advantage when it comes to the fossil fuel and producing energy-intensive goods.

Biltz stressed that if a single cubic foot of natural gas is exported, it gives the U.S. a one-time impact on the GDP. But, he added:

“If you take that same cubic foot and you roll it through manufacturing, whether it’s steel or chemicals or pulp and paper or rubber, this has as much as a 20x impact when you roll it through the whole GDP of the country,” Biltz said. “And you get export products at the end of that value chain too.”

Dow’s chairman and CEO, Andrew Liveris, said in a statement late Thursday that the report ignores that “manufacturing is the largest user of natural gas in the U.S. and creates more jobs and more value to the U.S. economy from natural gas than any other sector.” He added:

“Policymakers have been given a flawed report that overlooks vital dynamics, including a manufacturing renaissance that is already underway and much needed by this country.”

Manufacturers aren’t universally opposed to exports. And any rise in natural gas prices from exporting the commodity could be within the bounds of what the sector believes it can absorb.

In testimony before Congress four years ago, a Dow executive noted that petrochemical production “landed in the U.S. at the natural gas equivalent price of $4 to $4.50/MMBtu.”)

The government-backed report predicted that natural gas prices could jump as much as 33 cents per thousand cubic feet initially and up to $1.11 per thousand cubic feet after five years of gradually increasing exports.

Some manufacturers whose products are used in drilling and processing also stand to take in some benefit from expanded natural gas development that could be spurred by exports that modestly bump up prices.

A Dow Chemical subsidiary, Texas LNG Holdings, has a stake in the Freeport LNG project planned for Texas, among those awaiting the Energy Department’s export approval.

The new report doesn’t guarantee the Energy Department will green light new natural gas exports, beyond the license it already gave to Houston-based Cheniere Energy to sell liquefied natural gas from its Sabine Pass terminal in southwest Louisiana. The Obama administration has promised to carefully weigh the impact of allowing more exports on domestic consumers and the manufacturing sector.

The Energy Department stressed that it would be conducting its own review of the NERA study and accepting public comments through Jan. 24 before making any decisions on export licenses on a case-by-case basis. And the department is expected to devise some kind of roadmap for its decisionmaking — probably an internal guidance or regulatory plan that sets factors that will be considered when it reviews applications.

Otherwise, there are few real options in current law and regulation for the Energy Department to approve some of the permit applications and reject others. Current law presumes that exports of natural gas are in the public interest, so rejecting them requires a demonstration that the foreign sales would harm the public.

The flood of applications now pending before the Energy Department “creates a challenge for the administration in calculating the cumulative economic impact of projects, potentially limiting and rationing approvals to prevent adverse impacts,” FBR Capital Markets said in a research note to clients. But “without a rationing mechanism, operators would risk having export licenses reconsidered in the future if economic consequences materialize.”

None of this is going to move quickly, suggests Kevin Book, managing director of ClearView Energy Partners. He predicts the first approval of a new license to export natural gas to a non-free trade country will late in the third quarter of 2013. According to Book’s ClearView Energy, in a research note to clients:

“The DOE website says it will ‘begin to act’ at the close of the comment period, but it doesn’t establish any finite end-point for
action, nor does DOE identify when its own review of the NERA study will conclude. Similarly, DOE does not mention plans to propose any formal rule or guidance, but we would be surprised if none were offered.”

The fights will be bigger this time around. While Cheniere’s project garnered relatively muted opposition, the company’s export approval was a wake-up call to environmental opponents of the hydraulic fracturing process instrumental in unlocking natural gas reserves.

Ever since, FBR Capital Markets analysts note, industrial and environmental groups have filed to intervene in pending applications, with the Sierra Club insisting that the Energy Department is required under existing federal laws to conduct environmental impact analyses of the proposed export projects and the extent to which they would expand hydraulic fracturing and domestic drilling.

Critics also will be able to press their case before the Federal Energy Regulatory Commission, which takes the lead in vetting the siting of LNG facilities, even new export and liquefaction operations at existing sites.

There may be more legal challenges, including petitions asking FERC to rehear cases it has already decided. And Book notes it’s possible public comments challenging the new government-backed study could be submitted as part of each application reviewed by the Energy Department, “conceivably (slowing) approvals down even more.”

Dow’s Biltz did not rule out Dow pushing its argument before FERC.

“It’s not going to surprise me to see more action on the FERC permits up front,” he said. “It’s certainly something Dow will have to look at.”

Critical manufacturers also may have a chance to air their concerns early in the new year, if the House and Senate energy committees move quickly to schedule hearings on the issue. The incoming chairman of the Senate Energy and Natural Resources Committee has been critical of exporting natural gas and has called for a “time out” on foreign sales.

Industrial investments tied to surge in domestic natural gas production