One important issue in the debate about expediting the U.S. Department of Energy s LNG permitting

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1 ACCF CENTER FOR POLICY RESEARCH SPECIAL REPORT NOVEMBER 2013 LNG EXPORTS: HOW MUCH WILL THEY IMPACT U.S. NATURAL GAS PRICES? BY MARGO THORNING, PH.D. SENIOR VICE PRESIDENT AND CHIEF ECONOMIST AMERICAN COUNCIL FOR CAPITAL FORMATION One important issue in the debate about expediting the U.S. Department of Energy s LNG permitting process is the impact of exports on domestic natural gas prices. U.S. shale gas production, which has risen by 50% over the period, has contributed to the fall in natural gas prices from a high of $11/million cubic feet in 2008 to the current well-head price of about $3.70/million cubic feet. While a recent Black & Veatch survey, 2013 Strategic Directions in the North American Natural Gas Industry concluded that natural gas prices would increase to a range between $4.50 to $7.49 MMBtu (one million British thermal units) in 2020, most analyses forecast that prices will remain below $5.00 MMBtu over the next 5 to 10 years. 1 This issue brief summarizes the recent research from a variety of government organizations and economic consulting firms. How Much Supply? How Much Demand? In most markets, price is determined by supply and demand and natural gas is no exception. Estimates of recoverable supplies of natural gas keep increasing, as shown in Figure 1. For example, in 2012, DOE s EIA forecast 2,203 trillion cubic feet and other credible estimates are much higher, reaching as much as 3,600 trillion cubic feet. Demand for natural gas is projected to rise from 66 Bcf/d in 2012 to 82 Bcf/d in 2018 according to recent projections by McGraw Hill s Bentek Energy. 2 As shown in Figure 2, most of the increase in natural gas demand between now and 2018 comes from the electric power generation sector (5.1 Bcf/d). Residential/commercial, industrial and exports to Mexico and other countries add increments to gas demand that are much smaller than those from power generation. By 2018, potential domestic production will have increased by 14.3 Bcf/d but domestic demand will only have increased by only 8.3 B Bcf/d according to Bentek Energy s projections (see Figure 3). Thus, LNG exports to other countries and pipeline shipments to Mexico can fill the gap between the fast growing U.S. natural gas production capacity and the slower growing domestic demand for gas. LNG Exports and U.S. Domestic Natural Gas Prices A number of analyses conclude that LNG exports in the range 6 to 12 Bcf/d would not have a significant impact on domestic prices. For example, the Peterson Institute for International Economics report Liquefied Natural Gas Exports: An opportunity for America 3 notes that recent economic analyses conclude that LNG exports would raise domestic natural gas prices by only 3.5% to 16.0%. (See Table 1.) In addition, the new Bentek Energy report projections show U.S. natural gas prices will remain in the range of $ 4.18 MMBtu through 2018, see Figure 4. Dr. Margo Thorning is Executive Vice President and Director of Research for The American Council for Capital Formation Center for Policy Research. ACCF Center for Policy Research brings together academics, policymakers, business leaders and the media to focus on important new research on economic, tax, energy and regulatory policies. For more information about the Center or for copies of this special report, please contact the ACCF, 1750 K Street, N.W., Suite 400, Washington D.C ; telephone: ; website:

2 Table 1. Natural gas price impact of U.S. LNG exports, measured from Henry Hub prices Source: Economic Impact of LNG Exports Multiple economic analyses over the past two years demonstrate the power of allowing U.S. producers to export LNG. 4 Using various assumptions regarding export levels, global market conditions, and the cost of producing natural gas within the U.S. and also examining alternative scenarios that might affect natural gas supply and demand, the vast majority of these analyses have reached the same fundamental conclusion. As explained in the NERA study commissioned by the U.S. Department of Energy: Across the scenarios, U.S. economic welfare consistently increases as the volume of natural gas exports increased. This includes scenarios in which there are unlimited exports. The reason for this is that even though domestic natural gas prices are pulled up by LNG exports, the value of those exports also rises so that there is a net gain for the U.S. economy measured by a broad metric of economic welfare or by more common measures such as real household income or real GDP. 5 tax receipts. The net effects on U.S. employment are anticipated to be positive with net job growth of between 73,100 to 452,300 jobs on average between 2016 and 2035, including all economic multiplier effects. 6 Manufacturing job gains average between 7,800 and 76,800 net jobs between 2016 and 2035, including 1,700-11,400 net job gains in the specific manufacturing sectors that include refining, petrochemicals, and chemicals. The net effect on U.S. GDP is expected to be positive at about $15.6 to $73.6 billion per year on average between 2016 and 2035, including the impacts of associated liquids production, increases in the petrochemical manufacturing of olefins, and all economic multiplier effects. 7 Conclusions As mentioned above, the preponderance of the economic analyses of the impact exports of LNG from the U.S. show positive overall benefits in terms of jobs, investment and GDP growth. In addition, the impact on U.S. domestic natural gas prices rises will be relatively small, thus allowing U.S. customers to maintain a strong competitive advantage over our trading partners. Another macroeconomic analysis by ICF International finds that expanded LNG exports would spur significant gains in nationwide employment, GDP and federal LNG EXPORTS: HOW MUCH WILL THEY IMPACT U.S. NATURAL GAS PRICES? 2

3 Figure 1. Estimated U.S. Recoverable Natural Gas Estimates of U.S. Recoverable Natural (TCF trillion cubic feet)) Potential Shale Gas Resources Other Potential Natural Gas Reserves Total Reserves (uncategorized by 2,689 2,836 source) 2,170 2,074 2,102 2, ,532 Source: Natural Gas: Our National Treasure, Jim Tramuto, Southwestern Energy, presentations/j-tramuto.pdf 2,203 3,600 3, ICF 2010 CERA 2010 MIT 2012 EIA NPC 2011 INGAA ICF Survey High 2011 Study Potential Gas Committee Gas Other Estimates Sources: ICF: As reported in MIT Energy Initiative, 2010, The Future of Natural Gas, interim report ; Table 2.1 EIA: 2012 AEO, June 2012 PGC: Potential Gas Committee s Advance Summary and press releas e of its biennial assessmen t; see CERA: IHS CERA, 2010, Fueling North America s Energy Future: The Unconventional Natural Gas Revolution and the Carbon Agenda MIT: MIT Energy Initiative, 2010, The Future of Natural Gas, interim report NPC: Realizing the Potential of North America s Abundan t Natural Gas and Oil Resources Johns Hopkins University ; Prudent Developmen t Study 2011 Figure 2. U.S. Power Burn Drives Demand Growth Source: Bentek Market Call Long Term, Jack Weixel, North American Natural Gas Outlook Supply, Demand and Pricing Through 2018, Bentek Energy, October 28, 2013, Slide 25. LNG EXPORTS: HOW MUCH WILL THEY IMPACT U.S. NATURAL GAS PRICES? 3

4 Figure 3. Growth in Domestic Demand Not Enough: Exports Needed Source: Bentek Cell Model, Jack Weixel, North American Natural Gas Outlook Supply, Demand and Pricing Through 2018, Bentek Energy, October 28, 2013, Slide 26. Figure 4. NYMEX Forward Curve Expectations Source: Bentek Market Call Long Term, Jack Weixel, North American Natural Gas Outlook Supply, Demand and Pricing Through 2018, Bentek Energy, October 28, 2013, Slide 27. LNG EXPORTS: HOW MUCH WILL THEY IMPACT U.S. NATURAL GAS PRICES? 4

5 Endnotes 1 Mcf = 1.023MMBtu 2 Jack Weixel, North American Natural Gas Outlook Supply, Demand and Pricing through 2018, Bentek Energy, October 28, Gary Clyde Hufbauer, Allie E.Bagnall, and Julia Muir Liquefied Natural Gas Exports: An Opportunity for America, February 2013,Table 3, 4 For example, Macroeconomic Impacts of LNG Exports from the United States, Dec 2012: Made in America: The economic impact of LNG exports from the United States, 2011: Liquid Markets: Assessing the Case for U.S. Exports of Liquefied Natural Gas, May 2012: The Benefits of Natural Gas Production and Exports for U.S. Small Businesses, May 2013: U.S. LNG Exports: Impacts on Energy Markets and the Economy, May 2013: /~/media/Files/Policy/LNG-Exports/API-LNGExport-Report-by-ICF.pdf; Liquefied Natural Gas Exports: An Opportunity for America 5 NERA, on behalf of DOE, Macroeconomic impacts of LNG Exports from the U.S., December 2012, page 6. 6 ICF, page 2. 7 ICF LNG EXPORTS: HOW MUCH WILL THEY IMPACT U.S. NATURAL GAS PRICES? 5

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