The Battle Over Who Gets U.S. Natural Gas

Chemical companies want to limit exports and keep their costs down | “Why would you want to squander away that advantage?”

Matthew Philips

Liquefied Natural Gas Prices


In the summer of 2008, two natural gas import terminals opened along the U.S. Gulf Coast: one in Freeport, Tex., and the other about 140 miles northeast near the mouth of the Sabine River in Louisiana. The projects signaled America’s growing dependence on foreign energy. Prices had more than doubled over the previous year: More imports from places such as Qatar and Yemen seemed like the only option.

Within a year, the U.S. was swimming in abundant, cheap natural gas as horizontal drilling techniques and hydraulic fracturing unlocked a century’s worth of supply from shale formations in Texas, Pennsylvania, and North Dakota. Today, both terminals are being turned into export facilities. On May 17, the U.S. Department of Energy approved Freeport’s application to export liquefied natural gas (LNG) to countries without free-trade agreements with the U.S. — which account for about 90 percent of global gross domestic product. Two years ago it approved Cheniere Energy’s request to do the same thing at its Sabine Pass LNG project.

The facilities will spend a combined $22 billion building massive freezing tanks to liquefy the gas by chilling it down to –260F. Freeport’s LNG will then be shipped mostly to Japan, whose utilities have contracted for the gas. Sabine Pass will ship LNG to customers based in the U.K., Spain, Korea, and India. By the time they’re completed, Freeport and Sabine Pass will be able to export 3.6 billion cubic feet of LNG per day. Last year the U.S. exported 4.4 billion cubic feet of natural gas per day, almost all of it by pipeline to Mexico and Canada. Gas producers are eager to tap new markets overseas, where prices in some countries are triple what they are in the U.S. The Energy Department has weighed 20 applications for new export facilities in recent months.

Chemical companies, among the biggest industrial users of natural gas, would rather keep it at home. They argue that exporting natural gas as a raw material will raise its price in the U.S. and erode the advantage they enjoy over their foreign competition for products made with gas.

One of the most outspoken opponents of natural gas exports has been Dow Chemical Chief Executive Officer Andrew Liveris. “If we allow the world gas price to come to this country by exporting gas, then it will destroy the benefits of plentiful cheap gas,” Liveris said at an energy conference in March.

The chemical companies want to use the natural gas to make plastics and polymers for export. These two products have wider profit margins than natural gas yet are still cheaper to make in the U.S. In Europe, petrochemical plants use crude oil to derive ethylene, the building block of plastics. As a result, it costs them about 50¢ to produce a pound of ethylene. In the U.S. it costs 12¢ to 15¢. This advantage has led to a resurgence in the U.S. chemical industry. According to the American Chemical Council, more than $71 billion of capital investment planned over the next seven years will boost gas-based chemical exports by 66 percent, to $134 billion, in 2020.

That prediction assumes continual access to cheap natural gas. According to Hassan Ahmed, a chemical analyst and founder of Alembic Global Advisors, for every dollar the price of natural gas increases, U.S. chemical companies lose 7¢ to 8¢ of their pricing advantage. “Why would you want to squander away that advantage?” he says.

Most analysts, though, say exports of LNG won’t significantly raise the price of natural gas in the U.S. Anthony Yuen, an energy strategist at Citi Research, estimates that by 2020 the U.S. will be exporting as much as 8 billion cubic feet per day of natural gas. Even then he expects the price in the U.S. to be only slightly above where it is today. Once exports do start to rise, producers should be able to increase drilling activity. “You can add supply much quicker than you can expand your export capacity,” says Philip Verleger, a former director of the office of energy policy at the U.S. Department of the Treasury and founder of PKVerleger, a consulting firm in Colorado. “Our problem will be that prices are going to be too low. They’re not going to be too high.”

The bottom line With natural gas prices three times higher in Japan than stateside, pressure to export more gas from the U.S. is mounting.


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