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Is It Unpatriotic to Export US Natural Gas Overseas?

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Opponents argue that exporting natural gas puts the manufacturing renaissance at risk.

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The main battle within the US natural gas industry has long focused on the dangers of fracking, with environmentalists arguing that the process of extracting natural gas from the ground is environmentally destructive in myriad ways, while those in favor say that natural gas development will be a great job creation force for the US.

However, a new debate has arisen – with the abundance of natural gas in the country pushing down prices to record lows, the energy industry is pushing for restrictions on natural gas exports to be lifted, while domestic manufacturing companies argue that selling the US' supply of natural gas to markets overseas is detrimental to the interests of the US.

Oil and gas giants like Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) assert that allowing them to export liquefied natural gas (LNG) would boost the US economy. Their claims were boosted by a Department of Energy study released last December, which found that even with the consequence of increase domestic natural gas prices, LNG exports will still provide net benefits to the economy.

On the other side of the divide stand industrial firms like Dow Chemical (NYSE:DOW), Alcoa (NYSE:AA), Celanese (NYSE:CE), and Nucor (NYSE:NUE). All four have joined the lobby group America's Energy Advantage, which says that it is in effect unpatriotic to allow unlimited LNG exports. The group highlights that by limiting LNG exports and keeping gas prices low domestically, the US is able to make use of this competitive advantage to drive a manufacturing renaissance, since companies that use natural gas as a raw material can produce goods at relatively lower prices.

(See also: Nucor Offers Intriguing Opportunity for Swing Traders)

"Thanks to the competitive advantage of affordable natural gas, the US has added 530,000 manufacturing jobs since 2010. If gas prices stay at the same level, analysts predict that 5 million more manufacturing jobs will be added by 2020," argues the organization on its site.

An infographic extolling the virtues of limiting natural gas exports. Source: America's Energy Advantage
Three oil and gas experts Minyanville spoke to were all in favor of lifting LNG export restrictions. Chris Faulkner, founding CEO of Dallas-based Breitling Oil and Gas, an independent oil and natural gas company, said that high domestic prices were actually necessary for the oil and gas industry to thrive.

"At first blush, it might seem like a good idea to limit natural gas exports to keep prices down, but artificially low prices will only kill additional exploration and production. With no incentive to continue pouring money into exploration and production, you'll see American oil and gas companies seeking investments in other countries while production here at home dries up," Faulkner argued.

"As an energy executive, I can tell you the industry is not making much money on natural gas production right now. In fact, many operators have had no choice but to flare their natural gas because there's no way to make a profit at [current] prices. But we have a fantastic opportunity to turn these lemons into lemonade and create an incredible boom for the American economy," continued Faulkner.

Similarly, Jason Stverak, president of the conservative-leaning think tank, Franklin Center, said that claiming that exporting natural gas is unpatriotic is a straw-man argument. "I think that with greater economic development and greater utilization of our natural gas resources, you're seeing more and more companies being started up, more and more manufacturing jobs being created and more and more incredible opportunities being made available for middle-class families," Stverak told Minyanville.

As for the question of whether selling gas abroad would increase domestic prices, Alan Herbst, a principal at New York-based energy consultancy Utilis Advisory Group, said that the increase would not hurt domestic demand. According to Herbst, "the current belief is that only 5-6 billion cubic feet (bcf) of LNG a day will be exported from the US. With US natural gas production approaching 30 trillion cubic feet a year, 5-6 bcf per day won't have that much of a market impact."

At most, the exports would cause domestic natural gas prices to rise by $0.25-$0.50 per million British thermal unit (Btu), a slight increase that not only would not destroy domestic demand, but would allow smaller producers to stay in business to compete against giant companies like Chesapeake Energy (NYSE:CHK) and Hess (NYSE:HES).

Herbst emphasized that limiting exports would not necessarily mean lower prices at home. "It is a fallacy to say that restricting exports will keep natural gas prices below the cost of production. We will either export the massive production surplus of natural gas or producers will reduce production to made the reduced domestic market with massive layoffs," said Herbst.

Under current laws, the Department of Energy (DOE) has to grant quick approval to LNG export projects to countries that have free-trade agreements (FTA) with the US. However, for non-FTA countries like energy-hungry countries Japan and China, the DOE decides on a case-by-case basis whether or not to reject or impose limits on exports.

One non-FTA project, Cheniere Energy's (NYSE:LNG) $5 billion Sabine Pass facility in Louisiana, has been given the green light so far, with 16 more still in the DOE queue awaiting approval.

However, US lawmakers are now planning a new bill that could possibly impose sharp restrictions on natural gas exports. The bill "could propose a specific limit on exports -- equal to 10% of daily production, for example -- or create a new legal definition for when exports should be blocked because they are no longer in the best interests of the US," noted the Wall Street Journal. Sen. Ron Wyden (D-OR), chair of the Energy and Natural Resources Committee, is looking to introduce the bill after consulting with other senators and various interest groups in May.

Wyden has said that he isn't entirely opposed to natural gas exports. Instead, he wants to find a "sweet spot" on exports where producers could be profitable while domestic prices remained low.

Twitter: @sterlingwong
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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