(John Kemp is a Reuters market analyst. The views expressed are his own)
By John Kemp
LONDON Jan 28 (Reuters) - The U.S. Department of Energy must make a historic decision in the next few months: whether to allow large-scale natural gas exports from the United States.
The issue is as much about philosophy and foreign relations as the practical impact on gas prices and big energy users such as the chemical, fertiliser and steel industries.
Both sides in the debate have intensified their lobbying to influence a decision that will in theory be taken by the assistant secretary for fossil fuels but will in practice involve substantial input from political advisers in the White House.
During an initial comment period, the Department received more than 370 responses ranging from Alcoa to Japan's Keidanren business association, local communities in gas-producing areas to the Sierra Club. Petitioners now have a further 30 days to submit replies before the Department moves toward making a final decision.
PUBLIC INTEREST TEST
The law states that the burden of proof lies with anyone who opposes exports to prove that they are inconsistent with the public interest. However, the public interest test remains undefined.
Some export supporters suggest the Department should permit free trade in gas and allow the market to allocate it between domestic and overseas customers based on who is prepared to pay the highest price. The problem with making the "public interest" identical with market pricing is that it would make the test redundant. It seems unlikely Congress intended the statute to be read in that way when it wrote the law.
The Department cannot resolve the question on its own. The issues are too complicated. It cannot balance the competing interests of potential gas exporters against the dozens of energy-intensive businesses that could expand if domestic gas remained walled off from world markets, not to mention the impact on U.S. foreign relations. It is essentially a political decision, rather than an economic one.
Only the president can make this sort of choice.
U.S. gas exports would contribute significantly to a more stable energy world and are overwhelmingly in the national interest of the United States. The president should direct the Energy Department to approve them.
Under current law, the Department has no real power to block gas exports to the 20 countries with which the United States has a free trade agreement (FTA) including Mexico, Canada and Korea. For all other countries, the Department must approve requests for exports, unless they are "not consistent with the public interest" (15 USC 717b(a)).
The Department has already received and in most cases granted automatic approval for projects to export up to 31.4 billion cubic feet per day (bcf/d) to FTA countries. In practice, FTA countries are not likely to absorb this amount.
The real prize is to export to much larger, non-FTA markets. The department has already granted one request to export up to 2.2 bcf/d to non-FTA countries, but requests for another 22.6 bcf/d have been put on hold while the Department studies the impact on domestic prices and the economy.
To put these numbers in context, the U.S. gas industry delivered 61 bcf/d to residential and business customers, as well as electric power utilities, in 2011. If all the proposed projects are given the go-ahead, exports could reach 50 percent or more of domestic gas consumption.
Export supporters like to claim the impact would be modest. Price rises would be small. Natural gas would not become (fully) linked to oil prices as it is in other parts of the world. The actual volume of exports would remain low and there would be more than enough gas to maintain adequate supplies for domestic customers.
"To the extent that allowing exports leads to potentially worrisome rises in domestic natural gas prices, exports are likely to be self-limiting ... Strong increases in domestic prices will make exports less attractive overseas. Large export volumes would most likely close off additional exports before U.S. prices could rise too far," according to Michael Levi of the Council on Foreign Relations ("A Strategy for Natural Gas Exports" June 2012).
But that understates the true impact that allowing all these projects would have. Approving one project might not have much effect on the availability of gas and its pricing. Approving them all would inevitably create much closer integration between the American and international markets.
Like any other commodity, gas prices are set at the margin. Even if the volume of gas that actually leaves the country stays comparatively low, the existence of a network of LNG terminals with permission to export large volumes will tend to force substantial price convergence. That is what makes them so attractive to gas marketing companies.
The power of LNG imports and exports to force convergence has already been visible in the U.S. Northeast this winter. Since November, average prices in New England ($6.40 per million British thermal units) have been almost double the level at Louisiana's Henry Hub ($3.43) as a result of local shortages, according to the Energy Information Administration (EIA).
But deliveries of spot gas cargoes at the region's four LNG receiving terminals have fallen, because prices are still below levels prevailing in Europe. Prices must rise until they attract cargoes from the European Union. ("Constraints in New England likely to affect regional energy prices this winter" Jan 2013)
Export supporters insist any rise in prices will be limited. But no one can know for sure the impact over the 25 years that many projects have applied for permission to export.
Supporters insist there will be "net benefits" even if prices do rise: higher export earnings would offset losses from higher domestic prices for households and businesses. Harmful effects would be limited to a relatively narrow range of energy-intensive, trade-exposed (EITE) industries such as steel that account for less than one-half of one percent of all jobs in the United States. ("Macroeconomic Impacts of LNG Exports from the United States" Dec 2012)
But the Energy Department's consultancy study failed to examine the extra factories and jobs that would be created if exports were restricted and domestic gas prices remained low. Industrial Energy Consumers of America, the lobbying organisation for many EITE firms, lists more than $95 billion worth of new capital projects such as chemical and fertiliser plants that have been announced because of low gas prices.
THE CASE FOR FREE TRADE
By attempting to minimise the impact on domestic gas markets, supporters have botched the case for allowing gas exports.
There is no question the United States could derive significant advantages by keeping its gas at home and using it to build a comparative advantage for American manufacturers. But the United States has always strongly criticised such resource protectionism by other countries.
For the last four decades, the United States has depended heavily on oil exports from Saudi Arabia and other nations. If Saudi Arabia had banned exports and insisted on building up its own manufacturing industry, the United States would have been plunged into crisis.
The United States has already opened a case against China at the WTO for trying to restrict rare earth exports to confer a competitive advantage on China's own technology manufacturers. It has accused China of giving its domestic steelmakers unfair subsidies through access to cheap loans and electricity. It cannot ban natural gas exports without inviting a charge of rank hypocrisy.
More importantly, the United States cannot achieve energy security in isolation while its allies and trading partners remain exposed to volatile prices and depend on unstable and unreliable sources of gas and oil from other parts of the globe. The world is far too interconnected for the United States to declare energy independence and retreat into autarky.
Security is actually the most important reason for the United States to approve exports. By expanding the volume of competitively priced gas from a stable country, U.S. exports would help lessen the world's dependence on gas from far less stable sources. Exports of cheap U.S. gas (and ultimately oil) would reduce the power of monopoly suppliers and curb some of the volatility that has plagued the market over the last 40 years. (editing by Jane Baird)
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