NERA Report: U.S. LNG Exports Only Feasible Under Certain Conditions

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--The viability of U.S. exports of liquefied natural gas (LNG) may come down to whether Japan and Korea decide to close their nuclear power plants. So says a report on U.S. LNG exports prepared for the U.S. Department of Energy (DoE) (Washington, D.C.) by NERA Economic Consulting (New York, New York).

The report, "Macroeconomic Impacts of LNG Exports from the United States," follows a DoE analysis of how potential exports of LNG could affect domestic prices for natural gas, released this past January 2012. The NERA report assesses how potential LNG exports would affect different sectors of the U.S. economy. The two studies were prepared to help the DoE make decisions on applications to terminals to export LNG from the Lower 48 states to non-free trade agreement (FTA) countries.

Earlier this year, DoE granted its first-ever LNG export license to Cheniere Energy Incorporated (AMEX:LNG) (Houston, Texas). For more on the Cheniere permit decision, see May 4, 2012, article - FERC Grants LNG Export License to Cheniere--Who Will Win Next License? More than a dozen other applications await a DoE decision. For a complete list of U.S. LNG export applications and their status as of November 2012, click here.

Industrial Info is tracking 25 active LNG projects with a total investment value (TIV) exceeding $64 billion that are scheduled to kick off by 2018. Industrial Info doesn't expect more than a very few projects to move forward.

Following the Cheniere permit decision, several manufacturers, environmental organizations, and members of Congress expressed alarm that U.S. exports of gas in the form of LNG would drive up prices for natural gas domestically, hurting businesses, consumers and the environment.

The alarm is misplaced, according to NERA. Its report, released December 5, concludes that overall, LNG exports would create net benefits for the U.S. economy. Depending on the specifics of each scenario examined by the consulting firm, some sectors would gain significantly, while others would be modestly harmed. NERA assessed 63 different scenarios and found that in no case would LNG create a negative net impact on the U.S. economy.

NERA's five main conclusions are:

• LNG exports are only feasible under scenarios with high international demand and/or low U.S. costs of production
• U.S. natural gas prices do not rise to world prices
• Consumer well-being improves in all scenarios
• There are net benefits to the U.S.
• There is a shift in resource income between economic sectors

The DoE will take initial public comment on the report until January 24, 2013. Reply comments will be accepted between January 25 and February 25, 2013.

In assessing the potential for U.S. LNG exports, NERA looked at a variety of domestic and overseas factors, including:

• Cost to produce and transport gas to liquefaction facilities
• Cost to build liquefaction and export facilities
• Cost to liquefy and transport the gas
• Global supply and demand for gas
• The degree to which future demand growth overseas could be met by pipelines

The report found that Asian and European markets were likely to experience the greatest gap between supply and demand through 2035. It also said most incremental demand in Europe was likely to be met by pipeline exports from the former Soviet Union.

A more promising market exists in Asia, specifically Japan and Korea. That's why electricity decisions by those two countries will have a significant impact on whether U.S. LNG exports are viable. In NERA's "international reference case," which is based on DoE's 2011 International Energy Outlook, neither Japan nor Korea were assumed to have retired their nuclear generating plants. But two other international scenarios led to higher demand for LNG. In one of those scenarios, Japan closes its nuclear power plants. In another, both Korea and Japan close nuclear generators.

U.S. gas prices will rise with LNG exports, and the impact will create different effects--positive and negative--for different constituencies. On the positive side, LNG exports will cause new jobs to be created, capital projects to be built, additional natural gas to be produced, and increased tax and fee revenue to be paid.

On the negative side, LNG exports will increase domestic prices for natural gas, which will affect certain energy-intensive industries. But the effect is projected to be modest and concentrated in a few industries. The NERA report showed that consumers would benefit under all export scenarios, and that LNG exports created net macroeconomic benefits for the U.S. economy.

"We also see LNG exports as a positive for the U.S. economy, though the benefits will fall differently across industrial sectors," said Jesus Davis, Industrial Info's vice president of global research for the oil & gas industry. "Global demand for gas is expected to continue rising, but the LNG export business is not a 'gimmie' for U.S. companies. Other countries like Qatar have lower production costs, and Australia, which has large gas reserves, is located closer to the most attractive Asian markets. Whichever country can build new LNG export capacity faster will win the lion's share of the benefits."

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, and eight offices outside of North America, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.