LNG Exports, Markets and Building on America's Natural Gas Edge

Mark Green
Posted August 21, 2013

The Energy Security Initiative at Brookings has a new policy brief on liquefied natural gas (LNG) exports that makes some important points:

• Trying to set a volumetric cap on exported LNG is “economically inefficient and legally difficult to implement.”

• Market conditions will determine the outlook for U.S. LNG export projects that currently await approval from the Energy Department (DOE).

• There remains a distinct lack of clarity from DOE on what determines whether pending LNG export applications will be approved.

Unfortunately, Brookings’ proposal to reduce “risk and uncertainty that is hurting both producers and consumers,” would make government’s role more intrusive and disruptive, while also making it less likely that the marketplace will function efficiently – or take its proper place in determining which projects go forward.

Brookings’ main recommendation would require prospective LNG exporters to successfully complete the Federal Energy Regulatory Commission (FERC) pre-filing process and also have a portion of its supply contracts signed for DOE to consider its application to export LNG to non-Free Trade Agreement (FTA) nations. The idea simply heads in the wrong direction, increasing uncertainty instead of reducing it and slowing a process that shouldn’t be difficult – since, by law, LNG exports are deemed in the national interest unless demonstrated otherwise.

Think about it: Would you sign a contract to buy a car three years from today if the manufacturer couldn’t guarantee that they would be able to make that car? The best path is to let markets work. DOE should approve the remaining applications and let the individual applicants decide if the cost and time required to go through the FERC process and construct a liquefaction train is worth the potential LNG market three, five and 10 years into the future.

Yet, for some reason, the idea that the marketplace can and should determine outcomes is too easily sidelined in the discussion of LNG exports. Slate’s Matt Yglesias argues that restricting LNG exports is warranted because natural resources are different from manufactured goods, the free trade of which nearly everyone supports because they greatly benefit the U.S. – you know as would LNG exports, according to studies (see here and here). Yglesias suggests taxing natural gas production and letting producers sell the gas wherever “market conditions” allow.

Yglesias’ second point first. Increasing the cost of U.S. natural gas would make it less competitive globally, negating U.S. advantages in resource abundance and technological know-how. This approach can be described as snatching defeat from the jaws of victory.

As for natural resources vs. manufactured goods, it’s a mischaracterization – and a devaluing – of America’s natural gas wealth. Energy blogger Andrew Holland makes a compelling argument in the Christian Science Monitor about U.S. oil that also applies to U.S. natural gas:

… in the past, oil companies were valued by the amount of reserves they have available. However, with this new suite of technologies, oil production has become more akin to advanced manufacturing. The companies apply skilled labor, scientific know-how, and large amounts of capital to a resource area that doesn't looks like a traditional oil field - and you get a valuable product out. Because of this, the oil majors should be treated more like manufacturing companies than resource extraction firms.

America’s natural gas revolution has resulted from vast, game-changing reserves, development of cutting-edge technologies – including horizontal drilling and hydraulic fracturing – and the work of a highly skilled workforce. We have the natural gas to meet domestic demand and also supply friendly buyers abroad, with tremendous benefits accruing to our economy.

Last month, Sen. Ron Wyden, chairman of the Energy and Natural Resources Committee, said the U.S. enjoys a global economic edge because of natural gas. We shouldn’t fritter away that U.S. energy advantage through bad policy choices.