RPT-INSIGHT-As Congress looks away, US tiptoes toward exporting a gas bounty

Wed Jun 27, 2012 4:29pm IST

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* U.S. gas exports: the elephant in the room
    * Eyeing elections, govt goes slow on approvals
    * Energy and manufacturers are at quiet loggerheads

    By Ayesha Rascoe and Emily Stephenson
    WASHINGTON, June 27 (Reuters) - In a bitterly divided U.S.
political environment, there's at least one thing Republicans
and Democrats can agree on: Avoid a public showdown on natural
gas exports, arguably the most important energy policy decision
in recent memory.
    While fluctuating gasoline prices, the Keystone pipeline and
the fight over fracking steal headlines, the question of how
much of the newfound U.S. shale gas bounty should be shared with
the rest of the world goes largely without comment or coverage
-- despite holding far wider and longer-lasting consequences.
    The reason is clear: unlike the relatively simple,
black-and-white issues that politicians often favor and voters
connect to, liquefied natural gas (LNG) is deep, deep gray. 
    It affects a tangled web of constituents, from Big Oil to
international allies such as Japan, pits free-trade orthodoxy
against the domestic economy, and requires an awkward
explanation of why allowing some exports -- inevitably raising
U.S. energy prices in the short term, even if at the margin --
may ultimately be better for the country in the long run.
    All the same, this U.S. president or the next will have to
make a tricky decision, and its consequences may only become
clear years from now: How much U.S. gas should be sold to other
countries if it means boosting prices for consumers at home?
    "Right now I don't think this issue is getting anywhere near
the attention it deserves," said Democratic congressman Edward
Markey, one of a small number of politicians actively seeking to
rein in energy exports.
    "Keystone and Solyndra are election-year political
sideshows," he said, referring to the bankruptcy of a
government-funded solar panel maker. "This is the main event."
    But lobbyists on both sides of the issue say it suits them
best to keep the subject out of the headlines. The gas producers
that stand to benefit from higher selling prices see no upside
from a public brawl, while many manufacturers who could benefit
from continuing low prices shy away from anti-export statements.
    With Congress unlikely to weigh in, the decision falls to a
small, obscure unit of the Energy Department, the Office of
Natural Gas Regulatory Activities.
    The department's statistical branch has been criticized for
failing to predict how new drilling techniques would
revolutionize the sector, and how quickly the vast stores of
unearthed gas would send domestic prices to unsustainable lows. 
    So the natural gas office is now awaiting advice from a
second and final report on the economic implications of exports
-- a report so sensitive that the government has kept it under
wraps, including the identity of the consultants preparing it.
    
    SHHHHHHHH, SOFTLY-SOFTLY
    Not since the liberalization of power markets in the 1980s
have politicians had more sway over future energy costs -- or
been less willing to grapple publicly with the issue.
    Only one hearing on LNG exports has been held to date in the
Senate, and in the House of Representatives, the Energy and
Commerce Committee has no plan to hold hearings at the moment.
    Markey has struggled to get traction behind legislation that
would block gas exports, a measure almost certain to fail to
pass through the divided Congress. Few lawmakers openly oppose
exports, though even fewer vocally advocate a fully open market
that would raise prices at home.
    The Obama administration has said it will wait until the gas
office releases the final economic analysis of LNG exports to
make any decision on eight pending applications to sell
liquefied natural gas to countries with which the United States
has no free-trade agreement -- the most political step of the
multiple state and federal approvals needed to send LNG abroad.
    The report was due out this spring, but in March the
administration pushed back the release until later in the year.
A White House official said on Mo nday the report could be
released in the next few weeks.
    Overall, the boom in the energy sector, coupled with a slow
recovery in domestic manufacturing, could raise gross domestic
product by 2 to 3.3 percent by 2020, according to a recent
analysis by Citigroup. But exports could force politicians to
play favorites, effectively choosing between energy companies
and industry.
    Democrats, often critical of the oil and gas sector, are
wary of getting out in front of an issue that divides even the
manufacturers benefitting from low gas prices. Republicans, who
favor free trade and support fossil fuel development, are leery
of being accused of raising costs for consumers and industry.
    "No politician wants to be accused of raising end-user
prices to add to oil companies' bottom lines," says Kevin Book,
an energy analyst at Clearview Energy Partners.
    So for most officials willing to take a stand, it is
inevitably one of moderation. Few are ready to weigh in on the
toughest question: How much is too much?
    Senator Ron Wyden, a Democrat who has backed the pause in
the permitting process, knows how quickly fortunes can change:
just a few years ago he witnessed the battle over the prospect
of a gas import terminal in his home state of Oregon at a time
when the industry was convinced of a growing U.S. gas deficit.
    Instead, the pioneering use of hydraulic fracturing and
horizontal drilling has lifted economically recoverable U.S.
reserves of natural gas to 500 trillion cubic feet, a previously
unimaginable level.
    "I've always supported market-expanding agreements, and I'm
trying to balance that with the fact that, with natural gas,
America now has a strategic advantage," Wyden said.
    "This is something where we now lead. I just want to make
sure we don't trade it away," said Wyden, who is in line to be
the top Democrat on the Senate energy committee next year.
Unlike Markey, he has no plans to push legislation that would 
prevent exports, an acknowledgement of the issue's complexity.
    Republicans in the House Energy and Commerce Committee
believe gas companies would likely export marginal amounts
compared to the current supply, and any price effects will be
minimal. 
    "If we don't have some sort of exports, it's not going to be
economic to produce as much gas here," a committee Republican
aide said.
        
    
    
    CONFLICT ON CONFLICT
    Congressman Gene Green, a Democrat on the House energy
committee who represents the greater part of eastern Houston, 
said he supports LNG export projects -- on a case-by-case basis.
His district includes a chemical complex, and such plants tend
to be large consumers of natural gas. Several companies plan to
build new U.S. facilities to take advantage of now-low prices.
    "We can simultaneously have reasonable natural gas prices
that foster chemical industry expansion while we export natural
gas," Green said.
    Energy-intensive manufacturers are keen to use cheap gas to
boost domestic production, but many companies also have plants
overseas that could benefit from U.S. gas exports. Others are
wary of advocating any measures that would impinge on free
trade. They too are taking a quiet, moderate stance.
    Although Dow Chemical is a major consumer of natural
gas, it supports a limited amount of exports, controlled perhaps
by some kind of quota based on total gas production.
    "As a proponent of fair and free trade, (Dow) opposes
policies that arbitrarily limit reasonable exports of natural
gas to free-trade agreement countries or that provide for
unlimited global exports," the company said in a statement.
    
    BIG STAKES
    The surge in gas output has made companies such as
Chesapeake and Exxon Mobil's XTO victims of
their own success, unleashing a surplus of supply that could
keep prices -- and therefore profits -- depressed for decades.
    For them, selling gas to Japan or Europe -- which buys
imported LNG at five or six times the domestic price of $2.50
per million British thermal units -- is essential to continue
expanding their U.S. business, creating jobs in the process. 
    The shale gas boom is on track to support 1.5 million jobs
across the United States by 2015, according to an
industry-funded study by IHS Global Insight.
    Export licenses will make big winners out of some firms such
as Cheniere, which last year secured the first and, so
far, only export permit from the Energy Department. 
    For those that get the green light, the multibillion-dollar
terminals are likely to be buzzing for decades, freezing and
compressing the gas at a temperature of -260 degrees Fahrenheit
(-1 62 Celsius) for seaborne shipment on special tankers.
    But others in the queue -- which includes firms from utility
Southern Co to gas giant BG Group and Australian
bank Macquarie -- could come out disappointed, as few
analysts expect all the projects to be approved. 
    "I don't think they are going to give blanket approval to
all takers, but on a case-by-case basis, I think they would be
favorably disposed if the supply is there," said Frank
Verrastro, director of the energy and national security program
at the Center for Strategic and International Studies. 
    The eight projects pending review span from Maryland to
Oregon. Including Cheniere's Sabine Pass in Louisiana, these
sites could export more than 12 billion cubic feet per day of
gas -- equivalent to about one-sixth of current U.S. demand.
    
    TAPPING THE BOUNTY
    If the gap between global and domestic prices remains wide,
as many analysts expect, more export projects are certain to be
brought forward and the government may draw a line in the sand. 
    A ban on energy exports is not without precedent. The
Mineral Leasing Act of 1920 and the Outer Continental Shelf
Lands Act require a presidential waiver for the sale of most
unrefined crude oil abroad, essentially blocking exports.
    Even with a boom in domestic oil output, the United States
is in little danger of becoming an oil exporter. But gas is far
less fraught with geopolitical significance.
    "Oil has been a political issue. Natural gas has never been
that," said David Wochner, an attorney for the Sutherland law
firm that represents natural gas producers.
    Heather Zichal, a White House energy adviser, told a recent
conference that the administration was not opposed to exports
and that it wanted "analysis to drive the decisions".
    That puts the burden squarely on the Energy Department's
natural gas regulatory office and its coming report.   
    It remains to be seen whether the prognosis from the
department's commissioned study is more prescient than previous
examinations of the shale gas surge, which has proven
extraordinarily hard to predict.
    A much-critiqued, department-commissioned analysis earlier
from the Energy Information Administration found that approving
all pending export applications could add as much as 9 percent a
year to prices of the fuel in the next two decades.
    A more recent report from the Brookings Institution
moderated the EIA finding, predicting that sending U.S. gas
abroad would have only a "modest" upward impact on prices and
that U.S. manufacturers would stay competitive despite exports.
    The department has declined to commit publicly to any
timeline for evaluating the export applications. Facing no
legislative deadline to act, it can essentially stretch out or
speed up the process to its liking.
    It is already honing its rationale, including the benefit of
using exports as a "balancing" mechanism for the market, one
that has been so volatile over past decades that drillers and
users have struggled to make long-term plans.
    "One of the potential impacts that you might have from LNG
exports would be creating a stable block of demand, which helps
the market get to a stable sustainable price," Christopher
Smith, deputy assistant secretary in the department's office of
fossil energy, told Reuters in February. 
    
    APPROVALS: WAIT AND SEE
    The American Public Gas Association, a lobby group
representing publicly owned gas distributors, has been one of
the few groups to press lawmakers against exports and supports
Markey's legislation.
    On the other side of the debate, the Center for Liquefied
Natural Gas, a trade group that represents LNG companies, has
been reaching out to lawmakers in Congress to "educate" on the
process for approving exports.  
    It spent $40,000 on lobbying last year and about $10,000 in
the first quarter of 2012, according to data from the Center for
Responsive Politics. Cheniere spent $520,000 on lobbying last
year, and $80,000 so far this year.
    The LNG group does not want hearings or legislation. It
wants Congress to step back and let the Department of Energy
decide.
    "There's nothing we want done other than letting DOE do its
job," said Bill Cooper, the center's president. "We want people
to know about the process and that it does work when it's
allowed to."
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