U.S. Natural gas is not a weapon to be wielded against Russia

All things considered, natural gas exports may not be a useful weapon in the United States’ quest to punish Russia after its annexation of Crimea. In fact, it may not even amount to a slap on the wrist.

With the approval this week of the export facility, Jordan Cove in Coos Bay, Ore., the thinking is that liquefied natural gas, or LNG, can be shipped around the world and compete head on with Russian natural gas that travels through international pipelines and into Europe. But that’s not likely to be the case: It will take billions of dollars to retrofit the U.S. infrastructure and to transport the resulting fuel, meaning the Europeans won’t get much of a deal.

In due time, a global natural gas foundation may be laid here — but the whole geo-political chessboard will have been reshuffled. The argument that the United States must show its strength and move forward is therefore a bit spurious, although the points about opening borders and allowing free trade remain formidable. 

English: A liquefied natural gas storage facility in Massachusetts. (Photo credit: Wikipedia) “U.S. Exports are unlikely to make much of a dent into European and Asian markets currently serviced by Russia within the next next decade,” says Hill Huntington, executive director, Energy Modeling Forum, at Stanford University, in an interview. “There are other sources in the Middle East and elsewhere that may be a lot more competitive with Russian supplies than U.S. exports.”

Conversion of an LNG import facility to one that can export the fuel is a multi-billion enterprise. The natural gas must first be processed and super-cooled before it would be sent on tankers to its ultimate destination, where a receiving facility on the opposite end re-gasifies the shipment.

As for Europe, it now gets about a quarter of its natural gas from Russia and it pays about $11 per million Btus. In this country, we’ve been paying $4 for the same unit, although this winter the price did spike in certain areas of the country. Asia pays about $18 per million Btus. Cheap U.S. gas seems like a solution — but not much of one after after all the costs are tacked on to its product.

Interestingly, 10 years ago no one thought this country would be an exporter of natural gas. But the newfound discoveries of shale gas through fracking technologies has changed all that. Now, the U.S.Energy Information Administration is projecting that the unconventional fuel will make up about 50 percent of all natural gas discoveries here by 2040.

Even before the whole Russia-Ukraine flare up, producers such as ExxonMobil have said that they should be able to ship their product to where they get the best prices. And they have friends in high places — the ones who control the committee process in the U.S. Congress and who want a faster permitting process.

But U.S. Energy Secretary Ernest Moniz says that the approach will continue to be methodical and that regulators will not cut any corners, although he has said that the Obama administration will consider the global political and economic context.

In 2012, Cheniere Energy LNG +1.37%, which owns the Sabine Pass that sits on the Texas and Louisiana border, became the first operator to get government permission to export LNG. Its unit is now under construction and it is expected to start shipping LNG by 2016. Among the others to have to also gotten approval: Freeport McMoRan Energy, Sempra U.S. Gas and Power and Dominion Resources D +0.2%.

Altogether, about 93 billion cubic feet of this country’s natural gas wealth could be shipped overseas. In a national economy that values the free flow of goods and services, should this not be acceptable?

The arguments against doing so are coming from environmentalists who are concerned about the added development and the increased air emissions as well as from heavy industry. Those companies have relied on cheap energy to fuel their expansions. Chemical makers, led by Dow Chemical, are arguing that if they are less competitive in today’s brutal international market, then jobs will be lost.

Projecting future exports and fuel prices is not a science but it stands to reason that if those sales are modest, price pressures would be minimal. Similarly, if that demand is great, then producers would work harder to keep up, thus curbing fuel costs. Research done by Stanford University says that the price increases as a result of U.S. exports could be as much as $1 per million Btus, although it would likely be in the area of 40 cents per million Btus.

“If the size of that additional export demand is modest relative to the scale of domestic supply—as most experts believe—then the impact on domestic energy prices will also be modest,” adds Richard Newell, who is the director of Duke University’s Energy Initiative and the former administrator of the Energy Information Administration, in an interview. “If U.S. gas prices were to increase substantially, U.S. LNG would become less competitive, decreasing its demand, and bringing prices back down.”

Fearing free trade is not the answer, insists Newell. The United States cannot chastise China for limiting exports for rare earth minerals, for example, while taking a similar approach with regard to natural gas exports. In a global marketplace that is committed to open borders, some players are bound to get hurt but the broader society should benefit.

Indeed, the United States is not the only country in the business of developing natural gas and potentially marketing it to other countries. Around the world, there are reported to be at least a dozen liquefaction plants under construction that would serve to increase supplies and to moderate prices. In all cases, regulatory approvals are required along with sizable investments and firm contracts that bind customers.

By the time the U.S. primes its LNG export business, the international picture will likely have changed. In the interim, other countries may tap their own shale gas resources while Russia will probably have re-ingratiated itself with the world community. American natural gas may be a prized domestic asset — but it’s not a silver bullet in the global effort to neuter Russia.

http://www.forbes.com/sites/kensilverstein/2014/03/27/u-s-natural-gas-is-not-a-weapon-to-be-wielded-against-russia/?ss=business:energy