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Parsing A New Study On Natural Gas Exports

by Michael Levi
January 23, 2012

The EIA released a new study last week that attempts to quantify the market impacts of increased natural gas exports from the United States. It’s a useful and informative piece of work, but it also has some important limitations. I want to sort through a couple of those here.

The headline from the report is straightforward and in some ways troubling: exports could raise U.S. natural gas prices by as much as 36% over what they would otherwise be. This figure, which has naturally grabbed attention, is for a scenario where exports are ramped up quickly, starting in 2014, to high levels.

There are at least two problems, though, with this estimate. The first is practical: this scenario is unlikely to materialize. This is not a flaw in the analysis, since the EIA was studying different scenarios, but it is a problem when it comes to how the report has been received. The second problem, though, is deeper. If you look at the estimated price response that the EIA reports, you’ll notice that prices stay low until the day that exports begin, at which point they jump. This is a sign that the model is not allowing market players to anticipate the increase in exports. If they were able to do that, prices would start to rise before the exports began, as people put gas into storage in anticipation of future opportunities to make money selling it later. That same foresight would also deter early overinvestment in natural gas dependent infrastructure. Both of these dynamics would lessen the ultimate price impact of exports. How much is unclear, but the answer isn’t zero, contrary to the impression left by the study.

The other striking finding is that most exports will be balanced primarily by increased production rather than decreased domestic consumption, and that whatever decline in domestic gas consumption happens will come primarily at the expense of gas use in the power sector. This is, in one way, quite worrying, since coal will likely fill most of the gap; on the other hand, if the exported gas displaces coal use overseas, the net climate impact could be a wash. There’s also another dimension, which the report flags as a weakness, that’s understudied: we still don’t know the real impact of exports on availability of feedstock for the chemicals industry. It is actually plausible that ethane availability to domestic petrochemicals firms (ethane is a critical feedstock) could rise, as exports incentivized greater gas production, but some of the ethane was stripped out before the gas was exported. On the other hand, if enough of the ethane is left in the gas at the time of export, domestic manufacturers could suffer. I suspect the net effect either way is small, but it any case, it’s something we should be able to get better purchase on through further study.

Post a Comment 3 Comments

  • Posted by abarrelfull

    On the climate impact of LNG exports, I expect that most of the gas will replace fuel oil or coal in the power sector elsewhere. Unless it replaces renewables, there has to be a positive that will at least mitigate some of the negative.

    On the petrochemicals side, you are the first commentator I have seen to raise the question properly. I had assumed that the Ethane would be separated out and sold at a higher price, and therefore exports would actually increase availability. I put down most commentators as being ignorant.

    However, bearing in mind how cheap natural gas really is, would even a doubling of the price really have such a big effect?

  • Posted by Raskolnikov

    Ethane for plastics feedstock is usually separated from Natural Gas destined for domestic consumption as it doesn’t combust well in residential heaters. That aside, all of the major petrochemical companies planning to build Ethane crackers over the next 10 years in North America have gone to great lengths to establish contracts guaranteeing supply. From a technical perspective, shutting down an Ethane cracker due to an interruption of feedstock supply is extremely dangerous.

    Therefore, while I think that increased natural gas exports will have a negative impact on plastic manufacturers profits they are unlikely to hit serious feedstock supply issues in the near future.

  • Posted by willaim green

    I believe that the EIA study does pick up the issue of ethane — in several of the figures on energy expenditure impacts, although natural gas and electricity expenditures rise in the increased export scenarios, expenditures of liquids decrease. Presumably that reflects the increased availability of natural gas liquids, but to be sure one would need to review the detailed results which I have not done.

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