Manufacturers are Blocking the Free Flow of LNG

Ken Silverstein | Jan 23, 2013


Capitalism’s invisible hand has some interference when it comes to exporting liquefied natural gas. The producers of that super-cooled fuel want to ship their product overseas but manufacturers remain defiant and are blocking their path.

The America’s Energy Advantage is trying to either prevent or to limit the flow of such fuel to Asia and Europe where it could fetch much higher prices. That’s because those energy intensive businesses say that the increased demand will put upward pressure on natural gas prices -- all at a time when they are trying to regain their economic footing and put people back to work.

“We think it very short-sighted and bad public policy to allow our nation’s natural gas advantage to be stripped and sent overseas to build a new manufacturing base that would otherwise be built here in the U.S.,” says Peter Huntsman, chief executive of Huntsman Corp., also with the energy group.

He goes on to say that “unfettered” U.S. exports may enrich a few LNG exporters. But that such a strategy would undermine the resurrection of the American manufacturing sector. Instead, he is urging a “balanced” export policy. U.S. natural gas prices are about $2.77 per million Btus while they are $10 and $15 for the same unit in Asia and Europe, respectively.

The U.S. Department of Energy found in December that prices could rise as much as $1.11 over five years. But it still concluded that the overall benefits to the U.S. economy would outweigh that potential price increase. The losers, it adds, would be the chemical makers like Dow while the winners would be the domestic natural gas producers such as Chesapeake Energy and ExxonMobil.

Altogether, 11 LNG receiving facilities exist here and 9 of those are asking U.S. regulators if they can be converted to export terminals. Most of the applications are coming from the Gulf States, which have already been receptive to their LNG import facilities and which would likely support any changes to their operations. In April 2012, federal energy regulators voted to allow Cheniere Energy to retrofit its Sabine Pass, and it should begin shipping operations 2014.

“Natural gas producers will likely anticipate future demand from LNG exports and will increase production accordingly, limiting price spikes,” says the Brookings Institution.

Expert Testimony

In the 1990s, LNG was golden — the fuel that would be imported from elsewhere to help the United States meet its voracious energy appetite. That thinking then led to the development of receiving terminals that would take the LNG and re-gasify it before it would be piped out to the utilities that burn it.

Companies like Sempra Energy and Dominion Resources invested untold sums into those terminals, only to see America’s energy picture radically change in the last five years. Now those facilities could sit relatively idle unless regulators allow them to be converted into export facilities where this country’s newfound and abundant shale gas could be shipped around the world.

In an open market, it would seem only logical to allow the “unrestricted” flow of goods and services. If natural gas producers are awash in cheap shale gas here and they would then like to sell that product internationally, then what is to stop them? It’s not just manufacturers that want cheap fuel. It’s also environmentalists who say that the increased drilling -- ‘fracking’ -- is detrimental.

U.S. producers are sitting on a ton of shale gas right now — fuel that they can either dig out and sell here extremely cheap or that they can leave in the ground and wait for a more opportune time; U.S. producers maintain that at $4 per million BTUs, they could eke out a profit.

By trying to prevent the export of that LNG, chemical makers and manufacturers may only be spiting themselves, advocates of LNG exports say. Allowing exporters to retool their receiving facilities so that they become bidirectional would be a win-win: Developers would make investments in production that put people, ensuring both reasonable profits and steady deliveries to businesses.

“(E)xpert after expert has shown that the economic benefits to the country from LNG exports are significant and outweigh any potential domestic natural gas price increases,” says Ken Cohen, a vice president at Exxon, in his blog. 

America’s manufacturers are now going up against this country’s oil and gas producers. It’s a fight that bucks the whole concept of free enterprise and one that manufacturers are unlikely to win. 

EnergyBiz Insider has been awarded the Gold for Original Web Commentary presented by the American Society of Business Press Editors. The column is also the Winner of the 2011 Online Column category awarded by Media Industry News, MIN. Ken Silverstein has been honored as one of MIN’s Most Intriguing People in Media.

Twitter: @Ken_Silverstein

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I read this article with interest as I work for a small E&P sitting on huge natural gas reserves.  This article pitts manufacturers against producers and completely overlooks a very significant stakeholder, the mineral owner.  Those people who have given a lease to the producer also have a dog in this fight.  If the manufactures win and gas prices remain so low the mineral owners will be forced to sell some of their gas at reduced value while sitting on the rest.  If the prices go up like the producers want then the mineral owners will see much better returns on the minerals they are selling.  It is this reason so many companies are just sitting on their reserves only producing enough to maintain their leases in effect.  Once the price increases enough there will be more drilling and less shut-in wells.  After all, who wants to sell their property at $2.00 when they could get 2,3, 4 times as much for it if they just wait a while?  So higher natural gas prices are good for more than just producers, it also benefits all those millions of mineral owners who directly impact their local economies as well.

Interesting conundrum, isn't it?

One needs to take a wider view of the picture than strictly energy.  Natural gas and natural gas liquids not only fuel manufacturing but also provides feedstock.  If the LNG is being used to fuel competing industries in competing countries, one must look beyond the value as energy to the value of product manufactured and the value that having those jobs here rather than in some other country.

As an example, I used to work for a major chemical manufacturer in a large multi-production block complex.  One of the facilities made vinyl chloride monomer.  It was a small facility, old and there were some hazards involved such as the chemical hazards and explosive hazards.  Being old and small, it pulled a low priority for maintenance services and capital improvements.  However, once the company started looking at value-of-product-manufactured (VPM) and recognized the large margin, it became one of the top priority units for services.

The other thing about free trade is it depends on everyone playing fair in the market.  The very existance of OPEC means the energy market is not a bastion of fair play.  The reason the price of oil is so high is that OPEC manipulates output to maintain prices at a high level.  The OPEC countries get the oil out of the ground relatively cheaply, particularly compared to deep-water drilling but they control the quantity of oil on the market thus artificially raising prices.  China has virtual slave labor in their factories and their government engages in currency manipulation.

So there are very valid arguments pro and con over LNG exports.  I can pretty well guarantee that other countries look out for their national interests first rather than fair trading practices.