Sunday, February 24, 2013

The questionable logic of U.S. natural gas exports

With U.S. natural gas production having risen more than 25 percent from its nadir in 2005, natural gas producers are pushing for an end to limits on U.S. natural gas exports. The growth in supplies comes primarily from previously inaccessible shale deposits deep in the Earth, a development that has convinced many people that the country is now entering a new era of natural gas abundance.

Trouble is, the United States remains an importer of natural gas. Through November 2012 the country imported 12.5 percent of its natural gas consumption for the year, mostly from Canada. That's down from an average of 15.7 percent for the previous 20-year period. But it's not exactly energy independence.

So worried are industrial consumers of natural gas about exports pushing up prices and thus their production costs that they've formed an alliance to fight the loosening of export restrictions. The alliance includes utilities dependent on natural gas to fuel electricity generation, chemical companies that use it as a feedstock for making myriad industrial chemicals, and heavy industrial users such Alcoa and Nucor who use natural gas to fire their metal-making operations. (Those who heat their homes and businesses with natural gas also stand to benefit if the alliance prevails.)

The members of the alliance have reason to worry since Europeans are paying close to $12 per thousand cubic feet for liquefied natural gas and the Japanese are paying more than $17. Compare that to the U.S. domestic pipeline price for natural gas of just $3.27 as of last Friday (Henry Hub spot price).

It's a classic case of those in an extractive industry seeking top dollar for their minerals, and those who buy the minerals to make other things seeking to keep a lid on the price of their inputs. Here in a nutshell is the logic on each side:

  • Natural gas producers believe they ought to have the right to sell production coming from under American soil to the highest bidder worldwide. They can't do that now because of U.S. export restrictions. Whether the United States produces enough natural gas for domestic consumption is actually irrelevant to this argument since it rests on the notion that the owners of the natural gas have the right in a free market to dispose of it as they wish. (For context, these same companies have been promoting the idea of American energy independence in the media in order gain public acquiescence to lax environmental regulation and support for opening public lands to more drilling. So much for energy independence!)

  • The industrial consumers believe that there is a broader good to be served by keeping the prices of energy and chemical feedstocks low for domestic industries, and thereby giving those industries an advantage over competitors abroad. This translates into higher employment and income across wide areas of the American economy since low natural gas prices benefit practically every business and homeowner—everyone, in fact, who pays a natural gas bill. High natural gas prices, on the other hand, only benefit those in the natural gas production business while dampening activity in natural gas consuming industries and the economy in general.

But what if U.S. natural gas production does ultimately exceed U.S. consumption? Won't that make both sides happy? Actually not necessarily, because in a worldwide market for natural gas, every consumer is bidding against every other consumer. Even if U.S. domestic gas production does rise significantly from here, exporting it would make everyone in the United States subject to worldwide pricing pressures. Right now the U.S. exports small amounts of natural gas to Mexico and Canada in places where it makes economic sense to do so because of the proximity of American supplies.

But, what the natural gas producers want is the development of a vast network of export terminals that cool natural gas to -260 degrees F where it becomes a liquid that can be shipped overseas by special liquefied natural gas carriers. If that expansion proceeds far enough, it might bring U.S. natural gas prices to parity with world prices. If it doesn't proceed very far at all—perhaps due to pressure from the alliance of natural gas users mentioned above—then the producers may only see a slight rise in domestic natural gas prices beyond what they would have seen without such export terminals.

All of this assumes that there will be plentiful supplies of natural gas in the United States. But, that might not be the case. U.S. natural gas production has been essentially flat for more than a year. Partly this is due to very low prices and subsequent cutbacks in drilling. But it belies the claim made in Congressional testimony by the industry's protagonist-in-chief, Chesapeake Energy CEO Aubrey McClendon, that supplies can grow 5 percent per year through 2018.

While the industry still clings to the now widely discredited notion that the United States has a 100-year supply of natural gas (at current rates of consumption), new assessments have suggested vastly reduced numbers for the amount of U.S. natural gas from shale—the main source of new supplies—that is technically recoverable. In 2011 the U.S. Energy Information Administration, the statistical arm of the U.S. Department of Energy, reported 862 trillion cubic feet (tcf) in shale gas resources. In 2012 the agency revised the number downward dramatically to 482 tcf based on new information from the U.S. Geological Survey. Keep in mind that this number says nothing about whether such resources will be economically recoverable. That number is bound to be much smaller.

Actual proven reserves of dry natural gas in the United States at the end of 2010 (the most recent date for which U.S. Department of Energy figures are available) amounted to about a 12-year supply at current rates of consumption. A reserve is something that can be produced profitably at today's prices with existing technology from known fields. As you will see, it is a much smaller amount when compared to "resources," a term in the oil and gas industry that really only refers to estimates based on sketchy evidence of what might be in the crust of the Earth under a country, state or field.

Resources are never exploited to 100 percent, and often only a small fraction ever become reserves. Keep in mind that only 35 percent of all the oil ever discovered has actually been produced. The rest is too expensive and sometimes even impossible to extract. That's in fields we have drilled extensively! The percentage of an estimated resource that is likely to be extracted is often less than that because resource estimates have almost never been tested with an actual drill.

Petroleum consultant Art Berman estimates that when all natural gas resources thought to be available under the United States are totaled, and an appropriate reduction is made based our experience with extraction, the actual economically recoverable resource of natural gas is likely to be closer to 23 years of supply at current rates of consumption, not exactly a figure that makes one confident about committing to send large quantities of natural gas abroad.

Yet another thing to keep in mind is that none of the estimates discussed above contemplate increases in the rate of U.S. natural gas consumption, increases that natural gas producers have been promoting. The producers have suggested that there is enough natural gas to justify building a fleet of natural gas powered vehicles and increasing considerably electricity generation from natural gas (something that is already happening). If the rate of consumption were to increase each year, the time to the exhaustion of the presumed natural gas resource would shorten dramatically and the time to a peak in output followed by an irreversible decline would happen much, much sooner as well. Exactly what will we do with our new natural gas powered generating plants and vehicles if we experience a continuous decline in natural gas supplies, say, starting in 2025?

Given all this it's surprising that industrial natural gas users are even considering accepting a compromise to allow a limited, but considerably higher volume of exports. U.S. shale gas resources—the biggest source of new supplies—continue to be a moving target, and their estimated size is moving swiftly downward. Possibly for that reason, the alliance of natural gas users mentioned above is suggesting that a decision about U.S. exports be delayed until a clearer picture of the country's natural gas endowment emerges. A Dow Chemical Company spokesman opined that if there really is a 100-year supply of natural gas under the United States, then we need not be in any rush to make a decision about exporting U.S.-produced gas.

Kinda makes you wonder why all the natural gas producers are in such a hurry.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he writes columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin, The Oil Drum,, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at


Unknown said...


An intriguing and informative read - thank you for writing this article.

As you rightly mention, we all need to "wait and see" the real size of the natural gas pie before deciding if and how to export

Obiocha A. Ikezogwo

fietster said...

What a bunch of .... stuff. If you let the price go up, any supply whether recoverable or non-recoverable will last longer. Let the prices go where markets take them.
2nd-ly, there are so many loose-ends in this 'story', it's impossible to argue them here.

Bonanza959 said...

Kurt: Your article simply puts lipstick on a pig of a case. For instance, on 1 hand you say we export from Canada and Mexico and that's bad. On the other you say we export to the Canada, and that's good. You know the reason is due to pipeline location and little else. You also should know that gas is not being drilled now because there is a 100 year glut. Way too much gas is being flared (burned) at the well site because all our storages are full. Do you believe it's better to waste a resource than find a profitable market for it that reduces our balance of trade and increases income for federal and state taxation? Also, you mention a "fleet" of export terminals. You should know only one (Cheniere) has been approved and it seems unlikely more will be so until the first one proves out. Since only Cheniere is under construction, and all the rest of the "fleet" are mired in the regulatory and political approval process, and they would take decades to build out if ever approved, the scenario you predict is way into the future, if ever. I think it's "never." Basically, you underlying motive in this argument is that gas is an ethane and even though it creates less carbon when burned, it's still carbon and therefore should be burned...period. While the Left in this country has fooled themselves into believing this, I don't recall that China, India, Japan, and Europe have signed on to that belief. It's really better to tell the truth than twist facts to suit your purpose.

Bonanza959 said...

Embarrassed: I must correct my post. In the first line, "export" should have been "import" and in the 3rd line from the end, "should" ought to have been "shouldn't". Apologies.

Kurt Cobb said...

What the first commenter understands that the next two do not is that the federal government is going to make a policy decision about exports soon, probably a legislative decision. My argument is not that exports shouldn't be allowed, but that any decision about exports should be based on accurate information.

Right now that decision is being made in the context of a claim that cannot possibly be verified, namely that we have a 100-year supply of natural gas--at current rates of consumption.

As I've pointed out in my piece, the evidence that we have suggests that this claim is entirely without foundation and that, in fact, natural gas supplies are likely to be much smaller. Moreover, since, as I point out, the natural gas producers are suggesting that we vastly increase the rate of consumption, even their 100-year claim wouldn't hold up under their own assumption since that number is premised on absolutely no increase in the rate of consumption. (For a sense of how quickly that number shrinks in the face of just a 2 percent per year growth in consumption, the claimed supply would only last 56 years and assuming a peak when 50 percent of the resource has been consumed, the decline in the rate production would begin 35 from now.)

But, of course, the evidence suggests that we have far less natural gas than that and so even those numbers would shrink quickly if we considered only a possible 23 years of supply.

My point is that the uncertainties about supply are vast. We simply don't know how big our future supply will be. To make a decision about exports pretending we do know the future when clearly we don't and can't would be sheer folly.

Now if the policy decision is based on the drillers' logic that they should be allowed to sell natural gas to the highest bidder no matter what amount is available for domestic consumption, then at least that decision will be above board and accept that we can't know what future supplies will be.

Anonymous said...

Why do we have a "Strategic Petroleum
Reserve" but not not a "Strategic Natural Gas Reserve" abet LNG. This would promote price stability and lower energy prices for the USA.

One benefit of LNG export would be to help the balance of trade. The downside would be we are exporting our cleanest fuel taking out nuclear, hydroelectric, wind and solar.

We can and must move the USA back to the forefront of world wide manufacturing technology. We have been down the globalization cheap labor road. This is manipulated by currency trading. We now have a viable offset to the "cheap" labor globalization approach. We now have a opportunity to bring real jobs back to the USA with lower energy costs. This would support virtually every manufacturing and transportation industry.

Let's support both the export of LNG but do so on a WIN-WIN for our manufacturing, utility and transportation industries. This means many more jobs for middle class Americans. With our technology advantage and 'reasonable energy' costs we can regain our status as a world class manufacturing leader.