Michael Giberson
Congressman Ed Markey recently sent a letter to Energy Secretary Steven Chu inquiring into the possibility that natural gas exports may be harmful to the public interest (see press release, copy of letter). Markey’s concern is that exports will tend to push U.S. gas prices (currently around $3 or $4 per mmbtu) to international levels (in the $10 to $12 range), and higher prices would be harmful to industrial, commercial, and residential consumers of gas in the United States. The direction of his thinking is that, perhaps, the Department of Energy may want to deny LNG export licenses in an effort to keep natural gas resources in the U.S. economy.
Markey’s inquiry demonstrates a firm grasp on the basics of supply and demand, but is weaker on the economics of comparative advantage. In addition, his interest in potential LNG exports seems a bit selective, because the U.S. exports a lot of other things as well.
In 2010, Massachusetts exported over $26 billion worth of goods including optics, industrial machinery, electric machinery and pharmaceutical products. I wonder whether Congressman Markey is similarly concerned about how these exports are raising costs for U.S. producers and consumers? Alternatively, I’d like to hear his explanation of why these exports are okay, but other exports are not in the public interest.
Aren’t European natural gas prices in the $8 range, not $10 to $12?
Today’s day-ahead Dutch spot price (http://www.bloomberg.com/quote/TTFGDAHD:IND) is €21.5 / MWh (divided by 3.413 to convert to mmbtu, times 1.3 $/€ = $8.19 / mmbtu).
Second thought: if we export gas, renewable generators will gain a leg up when gas prices increase. I wonder if Markey would think this is a good or a bad thing (not trying to be snarky–I really do wonder).
I scanned back through Markey’s letter to see just what he said about prices and noticed he mentioned “exports to Asia” where prices are “four times as much as in the United States.” He doesn’t mention exports to Europe. I would speculate that the letter mentions Asia and not Europe because it would be less politic to worry about LNG exports to Europe, which would counterbalance Russian natural gas market power and aid traditional trading partners. However, it seems like Atlantic and Gulf coast LNG exports would be more likely to head to Europe, while Pacific coast exports would likely head to Asia.)
The renewables observation is a good one. The letter explicitly says that one of the good things about low natural gas prices is that they promote substitution away from dirtier fuels (i.e. coal), so obviously he or his staff thought about the issue in general. I suppose he doesn’t mention renewables in this case because it would weaken his position (in the current DC policy world where any renewable power is good).
When I quoted $10 to $12/mmbtu prices I was working from (often faulty) memory of current typical prices, but since you asked about it I went looking for actual data. This world bank data shows average European prices at $10.52/mmbtu and Japanese prices over $14: http://siteresources.worldbank.org/INTPROSPECTS/Resources/334934-1304428586133/Pink_LatestVersion.pdf
Mike,
US wellhead natural gas prices would probably have to decline further to make US LNG exports competitive in Europe or Japan, since the price of NG celivered to the liquifaction plant represents only 15-20% of the delivered price of the LNG.
Ed.
The Global Liquefied Natural Gas Market: Status and Outlook
——————————————————————————–
Report #:DOE/EIA-0637
Release Date: December 2003
Next Release Date: One-time
LNG Industry Costs Declining
Costs throughout the value chain have been declining in the LNG industry in recent years. According to the Gas Technology Institute (GTI), liquefaction costs have decreased 35 to 50 percent over the past ten years, with plant capital costs decreasing from more than US$500 per ton of annual liquefaction capacity to less than US$200 for trains at existing plants (in nominal dollars). Building costs for LNG tankers have decreased from about US$280 million (nominal) in the mid-1980s to about US$155 million in late 2003. Regasification terminal costs have also fallen, though costs tend to be site-specific and can range from US$100 million to more than US$2 billion.
LNG projects are among the most expensive energy projects. Accurate data on LNG plant costs are difficult to pinpoint since costs vary widely depending on location and whether a project is greenfield, i.e., built in a new location, or an expansion of an existing plant.
According to an independent LNG consultant,19 there are four main price components of an LNG project, from the gas field to the receiving terminal:
— Gas production: from the reservoir to the LNG plant, including gas processing and associated pipelines (15 to 20 percent of
costs);
— LNG plant: gas treating, liquefaction, LPG and condensate recovery,
LNG loading and storage (30 to 45 percent of costs);
— LNG shipping (10 to 30 percent of costs); and Receiving terminal: unloading, storage, regasification and distribution (15 to 25
percent of costs).
As natural gas flows increase, storage costs and capacities become as issue (WSJ article below). New pipelines and new industrial demand will absorb much of the increase but price changes can only go so far in matching the domestic supply and demand as natural gas flows increase significantly.
LNG plants and export infrastructure offer a combination of increased demand as well as increased storage capacity (onshore(?), or while on route to overseas consumers). So the LNG processing and transport costs should maybe be evaluated compared to storage costs and limited capacity as natural gas flows increase.
This Jan. 7 WSJ article discusses: “Natural-Gas Supplies Bulge, Pressuring Prices”
http://online.wsj.com/article/SB10001424052970203513604577145152796714394.html?mod=googlenews_wsj
— Greg Rehmke
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