Nod to Gas Exports in U.S. Study Seen Downplaying Consumer Cost

A U.S. Energy Department report that supports expanded exports of natural gas cheered drillers wanting to sell overseas while drawing warnings from opponents that it may have underestimated the potential costs to consumers.

The study, which was conducted by NERA Economic Consulting, is an almost unqualified endorsement of exports, a win for energy producers such as Sempra Energy (SRE) and Dominion Resources Inc. (D) looking to alleviate a domestic natural gas glut that earlier this year pushed prices down to a decade low. Energy stocks and gas prices rose yesterday, when the report was released.

The Energy Department asked for the analysis as it weighs at least 15 applications from energy companies looking to build terminals for export. Initial reactions show the analysis won’t end the debate in Washington over how to shape the U.S. energy mix as a drilling technique known as hydraulic fracturing, or fracking, unlocks once-inaccessible reserves in shale rock formations.

“Forecasts and scenarios are worthwhile, but the department has an obligation to consider the impacts of each of the actual applications before it,” Senator Ron Wyden’s office said in a statement.

Wyden, an Oregon Democrat and incoming chairman of the energy committee, has said he’s worried more exports could raise costs for U.S. consumers and trade away an economic advantage of cheap gas.

Costs Rise

Representative Edward Markey, a Massachusetts Democrat, said in a statement that the Obama administration “should not rush to export our natural gas abroad.” Markey had pushed the Energy Department to conduct the market analysis.

Both Wyden and Markey noted the study found that gas costs would go up. The report says the impact on the economy of those increases would be minimal.

Manufacturers also expressed skepticism and said they would push for closer congressional scrutiny of the analysis.

The report “doesn’t account for what we consider to be a massive increase in demand projected from growth in manufacturing,” Peter Molinaro, vice president for federal and state government affairs for Midland, Michigan-based Dow Chemical Co. (DOW), said in an interview. “Industrial demand for manufacturing is discounted in this report.”

Net Positive

“Once export applications are approved, there is no putting the genie back in the bottle,” said Paul Cicio, president of Industrial Energy Consumers of America, a Washington-based manufacturing group.

Representative Fred Upton, a Michigan Republican and chairman of the House Energy and Commerce Committee, said the report “should pave the way for the agency to move forward with the review process for approving export license applications.”

The report said even unfettered exports would likely be a net positive for the U.S., providing as much as $30 billion in trade revenue.

Across all scenarios examined, “the U.S. was projected to gain net economic benefits from allowing” exports of liquefied natural gas, or LNG, the study concluded. Natural gas is supercooled to a liquid for transport on tankers.

The market would determine the appropriate level of exports, according to the study.

Market’s Role

“If the promise of shale gas is not fulfilled and costs of producing gas in the U.S. rise substantially, or if there are ample supplies of LNG from other regions to satisfy world demand, the U.S. would not export LNG,” the report states.

Among the countries energy companies are eyeing as customers is Japan, which is looking for new sources of energy since the Fukushima nuclear crisis last year.

U.S. permits are required to sell gas to countries that aren’t free-trade partners with the U.S., a group that includes Japan and Spain.

The report “is a very positive sign” that the department will approve more export applications, Whitney Stanco, a senior policy analyst for Guggenheim Securities LLC, said in a note to investors.

The report gives natural gas producers, who struggled as natural prices hit a 10-year low in April, a positive sign that exports could lift and stabilize prices, Ed Hirs, a professor of energy economics at the University of Houston, said yesterday in an interview.

Help Producers

“This should help producers to plan,” he said. “One of the challenges is dealing with the volatility in natural gas prices. The addition of steady, predictable incremental demand has to be welcome news to any producer.”

Various companies building or seeking approval from the Energy Department for export facilities surged on news of the report’s findings.

Sempra Energy of San Diego, which has signed three commercial agreements to develop a liquefied natural gas facility in Louisiana, rose 3 percent to $70.30 at yesterday’s close in New York, the biggest gain in more than a year and the top performer in the Standard & Poor’s Utility Index. Dominion Resources of Richmond, Virginia, which is seeking approval for an export facility in Maryland, rose 2.6 percent to $51.73.

Dominion is negotiating terminal service agreements with four to five customers for its Cove Point terminal in Maryland, the only proposed facility in the shale-rich northeastern U.S., Dan Donovan, a Dominion spokesman, said in a phone interview.

Cove Point

Cove Point would cost $2.5 billion to $3.5 billion to convert into an export facility with a capacity of about 750 million cubic feet a day, Donovan said.

Sempra said it expects to get Energy Department authorization to export gas to non-free trade agreement countries by early next year.

“We commend the Department of Energy for releasing the assessment of LNG exports,” Paty Ortega Mitchell, a spokeswoman for Sempra Energy, said in an e-mail message. “This is an important step forward in bringing U.S. LNG to the global market and providing significant economic benefits to the U.S.”

Natural gas also rose after the report. Futures for January delivery gained 4.5 percent to $3.70 per million British thermal units on the New York Mercantile Exchange. The increase is the biggest since Nov. 13.

Comment Period

The Energy Department said it would begin deciding on a “case-by-case” basis whether to approve the export licenses after getting reaction to the NERA study. The comment period will last about 75 days.

Dow’s Molinaro said the company, which uses natural gas as a fuel and an ingredient in some of its products, planned to list what it considers to be weaknesses in the analysis.

He said Dow supports “prudent policy that is mindful of the need to make sure that domestic consumers are not put at a disadvantage.”

The issue of natural gas exports underscores the changing dynamics of U.S. energy policy brought about mainly from fracking.

The process is producing natural gas from the Marcellus Shale in the Northeast and crude oil in the Bakken formation in North Dakota and Eagle Ford in Texas, reducing imports and creating thousands of jobs.

In fracking, oil and gas companies shoot a mixture of water, sand and chemicals underground to crack shale rock formations and free fossil fuels trapped inside.

“We have an unhealthy market at this point in time where supply is in excess of demand,” Gordon Pickering, director of fuels in Navigant Consulting LLC’s energy practice. “The global market, not the regulators, will be the final arbitrator in terms of how much LNG is exported from North America.”

To contact the reporters on this story: Jim Snyder in Washington at jsnyder24@bloomberg.net; Bradley Olson in Houston at bradleyolson@bloomberg.net

To contact the editor responsible for this story: Jon Morgan at jmorgan97@bloomberg.net

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