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Global Risk Insights

Global Risk Insights

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Debate Over US Natural Gas Exports Heats Up

The consequences of the shale gas and oil energy revolution in the United States have had a great impact on the U.S. industry and economy. The benefits are by now widely visible. The price of natural gas has decreased to its lowest level in decades, which hugely benefited the energy demanding sectors of U.S. industry.

The U.S. is reducing its imports of oil and gas from abroad, and by 2016, when the first export liquid natural gas (LNG) terminal becomes operable, the country will actually become an overall exporter of natural gas. America’s carbon footprint has been reduced as a consequence of replacing coal with natural gas, and low energy prices are bringing foreign investments and improving the country’s global competitiveness.

But there is another side of the coin. The sudden influx of natural gas from shale resources in 2010 and 2011 created a supply glut causing the Henry Hub (the U.S. pricing point for natural gas future contracts in the New York futures market) to plummet in 2012 to its lowest levels historically of less than $2 per million British thermal units (mmBtu).  Although the prices have gone up since, the price is still hovering around the relatively low $4/mmBtu, and the U.S. Energy Information Agency estimates that the , and should hit $8/mmBtu by 2040.

Related article: Chesapeake Hints at Big Natural Gas Layoffs

This is bad news for the gas industry, which is already struggling to justify their future investments in shale gas explorations. Even with the EIA’s estimated increases in the U.S. natural gas prices, this will still be substantially lower compared to the rest of the world. Japan switched off its last operating nuclear reactor on the 14th of September and is currently free of nuclear energy. As a consequence, it is paying $15/mmBtu. Other emerging Asian nations are facing similar prices. Even in Europe the lowest price of LNG is around $10/mmBtu.

This has caused the oil and gas industry in the U.S. to start pushing for greater exports of natural gas. The key question is whether price export can be beneficial for the producers of natural gas or whether it will be damaging to the U.S. industry. A study done for the U.S. Department of Energy by the economic consultancy NERA argues that higher LNG exports will actually benefit the U.S. economy in every potential scenario, and it will not influence the low price of natural gas in the domestic U.S. market. The Department of Energy has already given its approval for four LNG export terminals, and more than twenty applications are still awaiting a decision.

Related article: Shale Gas is Not a Saviour, it is a Thorn in Renewable Energy’s Side

The opponents are claiming that the U.S. is wasting the fruits of a newly found source of cheap energy and energy independency. The anti-export movement is primarily led by energy-consuming industries, such as the chemical and metal industries, which are also among the greatest beneficiaries of the U.S. cheap energy boom. Both camps are carefully following the debate. The excessive rise in natural gas prices could not only have a damaging effect on the U.S. economy but could also increase the U.S. carbon footprint, as a consequence of the return to cheaper coal.

But it is unlikely that this scenario will occur. U.S. shale gas resources are large enough to satisfy both domestic and export needs. Moreover, administrative limits to exports could keep the prices at unrealistically low levels, and thus disincentivize the industry to further invest in new shale oil fields, which would be equally damaging for the economy. It seems that, for the moment, the Obama administration will opt for more exports, and give way to the basic market rule of supply and demand.

By. Ante  Batovic

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  • Josh on October 14 2013 said:
    Henry Hub physical location is in Louisiana

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