Ukraine and U.S. Natural Gas Exports: Right Policy, Right Now

Russian aggression has started a “do something” clamor on Capitol Hill. And this makes HR 6 different from the dozens of other energy bills that the House has considered, and seen die in the Senate, since 2011. This House bill expedites the export of liquefied natural gas – LNG.

By Richard Bornemann l April 17, 2014

Mary Landrieu Chairs Senate Energy & Natural Resources Committee Hearing on LNG Exports

For perhaps the first time since the 2010 election inaugurated divided control of Capitol Hill, there was actual excitement about energy legislation as the House took up a bill to expedite the export of liquefied natural gas (LNG). It’s not that the House hasn’t passed dozens of bills to encourage domestic oil and gas production, or discipline extralegal rulemakings by the EPA – it surely has. Rather, it’s been the automatic DOA status of these measures in the Senate that’s made the movie seem old and predictable. Well, that may be changing.

Remarkably, on Tuesday, March 25, Capitol Hill witnessed same-day hearings, one hearing in the Senate Energy and Natural Resources Committee chaired by Mary Landrieu and another hearing in the House chaired by Ed Whitfield of the Energy Power Subcommittee. Energy & Commerce Committee Chairman Fred Upton stated, “we begin debate on a bill that would help not only Ukraine, but every Eastern and Central European country, as well as other allies in Asia and around the world who are dependent upon Russian natural gas.” Admittedly, he added, while it certainly “won’t turn on the spigot of American gas to Ukrainian or Hungarian homes overnight, it will send a clear and powerful signal.” Whitfield spoke of removing a major obstacle to U.S. gas exports in order to accomplish this goal, “One recurring theme throughout our work is that federal policy has not yet adjusted to the new reality of American energy abundance, and, in fact, Obama administration red tape often stands in the way of the potential benefits of the energy boom.”

Landrieu addressed both the domestic and foreign policy side of the energy equation. “In America, LNG exports will not only drive continued investment in domestic production and create jobs, they are also a powerful geopolitical tool, particularly in light of Russia’s illegal aggression in Ukraine.” The Louisiana Senator emphasized, “The events in Ukraine have shown that Russia President Putin is intent on using his monopoly on energy supplies to pressure our allies.”

Some Background

We’ve known for several years – since the “fracking” revolution first took hold late in the last decade – that the U.S. was on course to become the world’s biggest natural gas producer, and we’ve seen wellhead prices drop from their 2008 peak of $14 per mcf – a thousand cubic feet, or roughly a million Btu (MMBtu) – to around $4.70 today. (Prices even plunged into the $2 range in 2012.)

It’s no wonder that producers want to earn more from their high-cost fracking operations by exporting some of America’s surplus gas to overseas markets where prices are much higher, having this winter reached almost $20 in Northeast Asia, and about $15 in Southwest Europe.

As of this writing, developers had proposed for U.S. Department of Energy (DOE) approval some 30 LNG export terminals (costing around $10 billion apiece, depending on location and the number of LNG “trains”) for both coasts and the Gulf of Mexico. Many will drop away in the competition for financing, and because of the DOE approval process.

Under the Natural Gas Act, DOE has two approval paths: one is for exports to the 20 countries with which the U.S. has a Free Trade Agreement (FTA) – few of which need U.S. LNG – and the other is for everybody else.

LNG exports to FTA countries are deemed to be in the “public interest,” while exports to non-FTA countries require a finding that a project “will not be inconsistent with the public interest.” The problem, of course, is that the term “public interest” is undefined, and DOE uses several standards, including security of domestic supply and “any other issue determined to be appropriate.”

It’s the vagueness of it all – exploited at first just by the green left – that’s led to the “slow walking” of LNG export applications at DOE. Only seven have been approved out of the 30 that are on a DOE “order of precedence” – defined according to when project developers filed their applications with the Federal Energy Regulatory Commission (FERC).

FERC matters because while it’s DOE that approves export of the gas, it’s FERC – at least for on and near-shore projects – that has to approve and monitor actual construction, and issue the appropriate environmental documents under the National Environmental Policy Act (NEPA). That’s still more years and money. (For off-shore projects, 2012 amendments to the Deepwater Port Act substituted the U.S. Maritime Administration for FERC. DOE was not aware of this, and so penalized – with a low place in its approval queue – off-shore projects that had nowhere to file when the FERC-based order of precedence was established by DOE.

Naturally, any pro-development policy is going to have opposition. We mentioned the green left, which used to like natural gas when it was supposed to remain a junior and demur partner – a “bridge fuel” – for heavily subsidized and intermittent solar and wind power. But the greens kicked gas out of the marriage when its cheapness and abundance became an embarrassment to high-priced “renewables.” Now, the greens, who used to team with segments of the gas industry to oppose coal on climate grounds, are invoking “fugitive methane” to attack gas for the same thing.

The Real Fight

But it’s really all about price, and who gets to claim the most advantage from the present abundance. Petrochemical companies that make fertilizers, plastics, and everyday-use synthetics of all sorts are highly dependent on natural gas as a feedstock. Metals production requires a great deal of gas, too.

These producers and their high wage employees suffered terribly when gas prices were high. In many cases, their high-value exports became imported products when production was shifted overseas. Higher fertilizer prices meant higher food prices, as the “scarcity” of natural gas was felt throughout the economy. Industrial users are finally getting their biggest break in decades. And, their fresh memories of the bad days have made them export opponents.

But what do we really know about the effects on domestic prices of LNG exports? Naturally, every stakeholder has numbers and models, beginning with DOE, which commissioned NERA Economic Consulting to do a comprehensive study.

NERA’s December 2012 report (updated last month) concluded that LNG exports would produce “net economic benefits” for the American economy. As for price, NERA ran a 63 export scenarios to determine that price increases at the time exports begin would range from zero to $.33. And, said NERA, “The largest price increases that would be observed after five more years of potentially growing exports could range from $.22 to $1.11 mcf.”

That didn’t satisfy industrial consumers, which have formed their own coalition to block LNG exports. Called America’s Energy Advantage or AEA, the coalition includes such powerhouses as Dow, Celanese, Alcoa and Nucor. And, Dow retained its own consulting firm, Charles River Associates, to make dire predictions about the effect of exports on domestic gas prices.

HR 6: Domestic Prosperity and Global Freedom Act

Both sides faced off at the hearing held by Chairman Ed Whitfield’s (R-KY) Energy and Commerce Subcommittee on Energy and Power. The hearing took testimony on HR 6, legislation introduced by Rep. Cory Gardner (R-CO), that would grant to all WTO member countries the same public interest presumption for LNG exports that are enjoyed today only by FTA countries. DOE would have to approve all 23 pending applications. HR 6 will surely pass the House.

What makes HR 6 different from all the other energy bills passed by the House since 2011 can be summed up in one word: Ukraine. Ukraine relies on Russia for 60 percent of its natural gas, and other former Soviet-dominated states are even more dependent. The three Baltic countries, Estonia, Latvia and Lithuania, as well as Finland and Bulgaria rely 100 percent on Russia. Other parts of Europe aren’t insulated either: Austria, Poland and Greece are 50 percent dependent on the Russians. Even Germany, the anchor of the EU, gets 30 percent of its gas from Russia.

So, Russian aggression has started a “do something” clamor on Capitol Hill. And this makes HR 6 different from the dozens of other energy bills that the House has considered, and seen die in the Senate, since 2011. At the House Ways and Means Committee on April 9, Rep. Devin Nunes (R-CA), Chairman of the Subcommittee on Trade, praised Gardner’s bill saying it “would create U.S. jobs, promote our geostrategic interests, and allow the United States to compete in this lucrative market, all without negatively impacting prices or the environment.” Nunes was critical of “Russia’s energy dominance” urging “competition against major state-owned enterprises like Russia’s Gazprom.” Rep. Tom McClintock a conservative stalwart from California told Newsmax’s John Gizzi, “we need to replace Russia as the top source of natural gas for Europe.”

To be sure, HR 6 is not a short-term panacea for Russia’s actions in Europe. Even the first LNG projects already approved won’t be able to start exporting until 2015-16, and we have to keep in mind that project finance for LNG export terminals is largely secured by offtake agreements with foreign buyers in countries that already have the highest prices. That means that countries like Turkey and our Asian trading partners are likely to be willing to pay the most and get the gas – at least at first.

But that’s no reason for a go-slow approach at DOE, which needs to allow the U.S. to build its export infrastructure. And, it could be that Ukraine and other vulnerable countries in Europe are willing to pay U.S. exporters a premium for supply security. Faster action by DOE expands everybody’s options.

In fact, the mere announcement of pending application approvals will result in massive market shifts for LNG futures and thus begin to recalibrate the Russia-Ukraine/Russia-EU energy marketplace and geopolitical landscape.

And, faster DOE action need not harm industrial gas consumers. They have a right to be concerned about new sources of demand that might raise the prices they pay, but their real villain is domestic regulation, not foreign consumption.

EPA regulation has already shuttered dozens of coal-fired electricity plants all over the country. Carbon restrictions on new and existing facilities will shutter many, many more – tens of thousands of megawatts worth of coal-fired capacity over the next few years, according to the Institute for Energy Research.

Almost all of this will be replaced with natural gas, a forced shift in resource use that Americans have never seen before. Companies in the AEA certainly need to defend their customers, employees and shareowners – defend them from EPA, not LNG.

Richard Bornemann has provided strategic legislative and regulatory counsel to American energy and surface transportation companies of all sizes for more than 20 years. He is an energy and environment analyst for the Selous Foundation for Public Policy Research, and author of American Energy Independence: A Policy Review 1973-2012. Mr. Bornemann is also a contributor to SFPPR News & Analysis.