The foreign policy case for U.S. energy exports.
Apr 29, 2013, Vol. 18, No. 31 • By GARY SCHMITT
The liquid natural gas facility at Cove Point, Maryland—a seven-tank complex on the shores of the Chesapeake Bay—has borne witness to the up and downs, the good times and the bad, of the American natural gas market. Built in the 1970s to handle liquid natural gas (LNG) imports from abroad, the plant was mothballed within two years as deregulation of the domestic gas market boosted supplies and lowered gas prices at home.
That’s where things stood for much of the next 20 years. Supplies of natural gas more than kept up with demand, and gas prices in the 1990s bounced around between $1.60 and $2.30 per million British thermal units (Btu).
But at the turn of the century, as ready supplies of natural gas peaked and demand grew, natural gas prices climbed appreciably higher, reaching $10 per million Btu over the winter of 2000–2001, and spiking to well over $14 in 2005 in the aftermath of Hurricanes Katrina and Rita. Reflecting the conventional wisdom of the day, Federal Reserve chairman Alan Greenspan testified before the Senate’s Energy Committee in the summer of 2003 that “tight natural gas markets have been a long time in coming, and distant futures prices suggest that we are not apt to return to earlier periods of relative abundance and low prices anytime soon.” Around the same time, a new energy company bought the Cove Point plant and spent over a billion dollars to upgrade the facility in the expectation that LNG imports would start flowing from abroad to address the supply shortage in the United States.
Today, the plant stands largely idle once again. As a result of the revolution in tapping into unconventional natural gas reserves through “hydrofracking,” the United States is now afloat on a sea of natural gas. Last year, American gas production reached a record high of nearly 30 trillion cubic feet, with U.S. natural gas prices dropping to around a quarter of what they were just four years ago. The International Energy Agency estimates that the United States will shortly pass Russia as the world’s largest producer of natural gas. If there is a problem now, it’s a gas glut, with low prices threatening to make it uneconomical to bring new supplies to market.
The logical solution is to export natural gas in the form of LNG to countries whose domestic resources are short or nonexistent and who are paying premium prices for new, dependable supplies. Or at least one would think so.
But even though study after study—including one sponsored by the Department of Energy and released after November’s election—has concluded that exporting natural gas would help reduce the trade deficit and create jobs at home without appreciably raising prices domestically or undermining the competitive edge in manufacturing the United States gains by having cheaper energy, the Obama administration has been sitting on more than 20 applications and, to date, has approved only one new export site at Sabine Pass in Louisiana.
Fearing apparently the blowback both from environmentalists (who have been on a green jihad against fracking for the past several years) and members of Congress (who want to keep the cost of heating fuel and power as low as possible for their constituents), the White House has slow-walked initiatives to export LNG. And of course the administration is also worried that the success of the revolution in natural gas production will undermine the Obama agenda of propping up solar and wind energy.
What’s all the more remarkable about the administration’s position is the degree to which it ignores the strategic benefits that would accrue to the United States if it became a reliable supplier of energy to allies and partner states.
Note, for example, that in 2011 more than half of the globe’s LNG exports went to frontline Asian allies and security partners: South Korea, Taiwan, and Japan. Each country is importing more natural gas and, at the same time, attempting to diversify its supply chain to enhance its energy security. The United States ought to be a player in addressing their need for secure supplies of more gas.
Japan’s natural gas needs have skyrocketed since the Fukushima nuclear crisis and its shutting down of the island’s nuclear power plants. And as demand has increased, so has the price Japan pays, reaching over $17 per million cubic feet versus $2.60 in the United States. Japan is interested in acquiring supplies not only at a lower price but also from a dependable supplier. An obvious source is Alaska, whose North Slope fields hold enough conventional natural gas to feed Japan’s utilities for eight to nine decades at current rates of consumption. The spread between what it would cost to get Alaska’s gas on line, liquefied, and shipped, and the current prices being paid by Japan is such that Tokyo would garner significant savings, while Alaska would once again strike it rich.
Prime Minister Shinzo Abe made it clear when he visited Washington in February that he was hoping the administration would lean forward in providing Japan with a stable supply of natural gas. What he got from the administration was “we’re still looking into it.” Rather than go against the environmentalist wing of his party, President Obama would evidently forsake the obvious advantages to America of a Japan that doesn’t have to worry about taking policy positions that would be helpful to the United States but might anger a gas supplier such as Russia or, someday, Iran.
Although not a formal ally, India too has made clear its interest in obtaining LNG from the United States. Some analysts expect India’s gas demands to grow at 5.4 percent annually over the next several decades, and it is looking to meet that demand with foreign supplies, including possibly by pipeline from Iran. Far better to have New Delhi buying at least some of its energy from the United States. If the administration thought seriously about natural gas exports, it would make exports a key component in its “pivot” to Asia.
And LNG exports to Europe have strategic importance. Indeed, precisely because gas once destined for the United States is now having to find other buyers, the positive impact is already being felt in Europe. This extra gas is helping Europe in its efforts to move away from heavy dependence on Russia’s Gazprom and, in some cases, has forced the once-monopolizing Gazprom to renegotiate its prices to be more in line with market forces.
Moscow isn’t oblivious to this threat. With almost half the state’s budget coming from oil and gas revenues, Putin can ill afford to see Gazprom lose its preferred position supplying Europe’s gas. Not surprisingly, Russian “businessmen” have been busy trying to frustrate alternative pipelines from the Caucasus, offering sweetheart deals for local energy companies to sweep them into the Gazprom system, spreading cash around as needed, and—most laughably, given Russia’s own environmental sins—reportedly funding efforts within Europe to hype green concerns associated with hydrofracking.
Moscow’s sway during the Cold War was largely a product of its massive arsenal of men, tanks, and missiles, but today its influence is tied to what comes out of pipelines. While exporting LNG from the United States is not the only way, or even the main one, to wean Europe off Russian gas, it can be an important step in that direction.
There is also much to be said about the relative security of U.S. energy supplies as opposed to gas exports to Europe from Nigeria, North Africa, and Qatar. Political stability is hardly the calling card of the first two, while Qatar—which now controls roughly one-third of the world’s natural gas export market—resides in a nasty neighborhood. LNG from Qatar is vulnerable to the Strait of Hormuz closing or a conflict in the Gulf. And its massive LNG facilities are well within the reach of Iranian missiles.
There is no shortage of advantageous geopolitical reasons for moving forward with LNG exports from the United States. But given the fact that every few months there seems to be a new find of shale gas in South America, Africa, the Mediterranean, and elsewhere, the laxity with which the administration is approaching this matter has real opportunity costs. Billions are required in upfront infrastructure investments to drill, liquefy, and ship. Companies are not sitting on their hands waiting for the Obama administration to get its act together when they can find other gas reserves to tap into just as readily. Once major investments are made elsewhere, one has to wonder if those same companies will have the same interest in pursuing projects here, if doing so lessens the potential profits from existing plays or creates too much LNG capacity for the existing market.
It doesn’t help that, under U.S. law, there are multiple layers of state and federal regulatory bodies that can stop, or slow down, exploration or the construction of the infrastructure necessary for exporting. Nor is it helpful that, when it comes to determining the American strategic interest in exporting gas, the final decision currently resides with the Department of Energy. Indeed, under the original governing statute, the Natural Gas Act of 1938, exports are only allowed if the DOE determines those exports would be in the “public interest”—with the only modification coming in 1992 when the Energy Policy Act stipulated that exports to countries with which Washington has a free-trade agreement would prima facie be considered in the public interest. This means that export requests to key allies, such as Japan and the United Kingdom, with no trade agreement on the books, face greater scrutiny.
Efforts have been made to change this system. Former senator Richard Lugar had proposed to put NATO allies on equal footing with free-trade states when it comes to LNG export licenses. More recently, Senators John Barrasso (R-Wyo.) and Mark Begich (D-Alaska) have sponsored a bill that would expand the NATO exception to Japan and, no less important, would require DOE to approve exports if the State Department, in conjunction with the Defense Department, determines that they would “promote the national security interests of the United States.” So far, the bill hasn’t made much headway in the Democrat-controlled Senate, but there is recognition at last that gas exports not only are an economic issue but also have potentially significant strategic implications.
For now, the Energy Department, the Federal Energy Regulatory Commission, and the Environmental Protection Agency will continue to rule the roost when it comes to gas exports—with no doubt a hidden hand from the White House. Meanwhile, the owners of Cove Point—in yet another twist in the plant’s history—have recently submitted a 12,000-page application to the government to reconfigure the plant’s terminal from an import facility to an export facility. Approval of their application will depend on whether the energy secretary agrees that the planned LNG exports to Japan and India are in the “public interest”—no matter the undeniable and obvious fact that they are.
Gary Schmitt is director of the Marilyn Ware Center for Security Studies at the American Enterprise Institute.
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