President Barack Obama has made middle-class jobs and natural gas two of his top second-term policy objectives. Both could be undermined if his Department of Energy (DOE) continues to approve gas industry applications for exporting American gas.
There is already a move in Congress to remove DOE’s authority, so approvals can move even faster, and the oil and gas industry has thrown all its lobbying muscle behind this effort to steamroll through the permission process.
Natural gas, the cleanest of the hydrocarbon-based fuels, has long been a primary choice for heating and power generation, as well as an essential raw material, or “feedstock,” for a vast range of chemistry-based products, including every kind of plastic, synthetic cloth and high-tech composite materials. When gas supplies came under pressure in the late 1990s, the chemical industry — and most other energy-dependent US heavy manufacturers — were hard hit.
Just within the last few years, however, the shale gas revolution has turned the economics of the natural gas industry upside down. Hundreds of small entrepreneurial companies rushed into production, outstripping pipeline capacity or the ability of customers to refit their fuel operations. For the last few years, the industry has been drowning in unsellable gas. Many wells were mothballed — they can be easily restarted — and producers shifted their attention to shale “liquids” that replicate most of the lighter derivatives of crude oil, including gasoline, which commands far higher prices.
The spot price of gas is set in the New York futures market, based on trades at a major Louisiana collection center called the Henry Hub. During the worst of the glut, the Henry Hub price dropped below $2 per thousand cubic feet (Mcf), well under the cost of production. But now new pipeline construction has broken the worst pipeline bottlenecks, and customer demand is rising, so prices have been hovering near $4 per Mcf for some time.
The industry is generally profitable when gas sells in the $4 to $6 range, and most forecasts expect US prices to settle at around $5 per Mcf for the foreseeable future.
As an energy bargain, $5 gas is equivalent to $25 to $30 per barrel of crude oil — so the United States is suddenly extremely attractive to energy-intensive industries. Hydrocarbons account for about half the cost of production of organic chemicals for example, and BusinessWeek recently headlined the industry’s “Rush to the US, Thanks to Cheap Natural Gas.”
An industry trade group has identified 97 new chemical manufacturing projects underway, with some $72 billion in new investment, about half of it from overseas. And they come from far and wide: the big Dutch conglomerate, LyondellBasell, Taiwan’s Formosa Plastics, Russia’s EuroChem. In the steel industry, Nucor is converting to a new energy-intensive high-efficiency method of iron production that had previously been uneconomic. Austria’s Voestalpine, a Nucor rival, is building an American clone of the Nucor plant; half of its product will be exported back to Europe.
These are all billion-dollar, long lead-time investments, so major job impacts won’t start being felt until about 2015. But they will have long-term staying power. The job implications, taking into account supply chain, spending multipliers and other spinoff effects, are in the millions.
That is the backdrop for the lobbying confrontation now taking place in Washington. Overseas, prices for natural gas are far higher than here because they are almost always “oil-linked” — tied to the per-unit energy cost of crude oil. Prices in the energy-thirsty manufacturing districts of east Asia is four times as high as in the United States. The gas industry suffered financially during the glut, and producers are casting envious eyes at the vast profits waiting for them overseas.
To be exported, gas must be liquefied at cryogenic temperatures to achieve an energy density that justifies processing and shipping costs. That requires building liquefaction installations, which must be approved by the DOE. Three projects have already been approved, and 25 more are in the queue, with perhaps half at fairly advanced stages.
But the industry’s clamor for expedited approvals is opposed by an alliance of large manufacturing companies, led by Nucor and Dow Chemical, and including Huntsman Chemical, Celanese, Alcoa and the American Public Gas Association. They warn that large-scale exporting at international prices will inevitably push American prices up to international levels and risk smothering a US manufacturing revival.
Both sides in the debate have produced a battery of studies supporting their positions. The oil majors are leading the export drive, since most of them have acquired large positions in American gas. They argue that free market forces will protect against price increases, because burgeoning world gas supplies and a rapid build-out of liquefaction plants will create a buyers’ market in global gas. Opponents argue powerfully that the export lobby is wildly overestimating future supplies and processing capacity. Debates that turn on warring forecasts, like this one, quickly devolve into shouting matches.
When the data can’t be trusted, principles should rule. And the oil industry invokes one of the most strongly held American values: Let the free market decide. Governments should step aside, the big oil companies are insisting, and let the market work out the allocations — that’s what markets do best.
Right. This just highlights the hypocrisy in the pro-liquefaction argument. Global oil and gas are not traded in free markets.
World oil prices are carefully managed by the Organization of Petroleum Exporting Countries (OPEC) cartel. Knowing a good deal when they see it, the world’s largest gas producers, Russia and Qatar, both of whom produce gas more cheaply than the American shale industry can, keep gas prices resolutely oil-linked. It’s raining money for all of them.
A recent study by London’s Centre for Global Energy Supplies made detailed estimates of the actual wellhead cost of the world’s oil. At classic free-market, marginal-cost pricing, 90 per cent of it would be cost-competitive with American natural gas. So why is it three or four times as expensive? Because if there were a true free market in oil, the Saudis, Qataris and all the other oil kingdoms would be insolvent — just as they were when their pricing discipline broke down in the mid-1980s. After all, those palaces and the blackmail payoffs to terrorists cost a lot of money.
Cartel discipline has been maintained for many years now. So production is controlled to keep oil prices at the highest level the world can pay without slipping into recession. And the oil majors, of course, share in the windfall.
The oil industry, which has waxed fat within one of history’s most successful price-fixing regimes, now pretends to welcome the development of a global buyers’ market in natural gas. But if a world of nearly unlimited gas supplies and gas liquefaction capacity ever came to pass, the oil cartel would collapse because natural gas can be a petroleum substitute across such a broad range of petroleum-derived products.
Oil prices would plummet to marginal-cost levels, and the desert kingdoms, as in the 1980s, would again be strewn with rusting Mercedes limousines. ExxonMobil, now the largest US gas producer, wants us to believe that this is the future it is hoping for.
There are multiple clues to the industry’s real position. One is from Exxon’s second quarter financial review for stock analysts. The company has been on a global investment binge, and was asked, specifically with regard to south Pacific investments, when shareholders would start to see the benefits. Pointing to projects coming on stream next year, the company spokesman stressed that they were “either oil-based or oil-linked gas” — so profits would be very high.
Or consider how the oil majors are positioning themselves in the liquefaction market. One project high in the DOE approval queue is a 70 per cent/30 per cent partnership between Qatar and Exxon. Doubtless Exxon will supply the gas at cost and Exxon and Qatar will sell it — at oil-linked prices. About 25 per cent of the approved liquefaction project capacity has already been contracted for by BP. Which will behave in exactly the same way.
Fortunately, we don’t have to rely on forecasts. There is a real-life experiment underway in Australia. They have been exporting natural gas for some time in modest amounts. But a number of big projects will start coming on line next year, and local gas prices have already tripled — though there is ample supply and there has been little change in production costs. Suppliers apparently “prefer to sell the LNG to the likes of Japan and South Korea who will pay a premium for it.”
One major Australian fertilizer and ammonia producer that had been planning a new billion-dollar plant at home, has cancelled it to relocate in Louisiana. The chief executive officer, in an interview, said he was confident that the United States would carefully limit exports.
One can only hope.
Charles R. Morris, a former banker and lawyer, is the author of “Comeback: America’s New Economic Boom”. This post originally appeared here.
