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To Export LNG Without Restriction, or Not?

Liquefied natural gas (LNG) storage tanks and a membrane-type tanker are seen at Tokyo Electric Power Co.'s Futtsu Thermal Power Station in Futtsu, east of Tokyo (REUTERS/Issei Kato).

Legislative proposal H.R. 6 would provide for expedited approval for liquefied natural gas (LNG) exports to World Trade Organization countries. It is the most recent in a series of legislative proposals to move the gridlocked discussion about U.S. LNG exports forward. In this instance too, we are not certain that it actually will accelerate the debate and even if so, it may be the wrong direction for U.S. public policy. This is because the essential question of whether or not the U.S. should allow unrestricted LNG exports is not being debated.

That debate started several years ago, when it became clear that the U.S. would be producing more natural gas than it consumed. The existing regulatory framework only allowed for exports of LNG to countries with a Free Trade Agreement (FTA). These FTA countries are mostly large producers of natural gas themselves (Canada, Mexico) or did not consume any relevant amounts (many Central American states). Non-FTA countries had to go through a more complex process involving a positive determination that the exports would be in “the national interest.” What followed was an exchange of views and opinions between opponents and proponents of allowing unrestricted LNG exports, with those in favor claiming that the benefits would far outweigh the costs. Opponents have argued that unrestricted exports will drive up domestic prices – a position supported by energy intensive consumers such as the petrochemical industry – and increase domestic production of natural gas, which will accelerate greenhouse gas emissions.

Subsequently, the Department of Energy commissioned a number of studies to examine the macroeconomic consequences of allowing for unrestricted LNG exports, which were published in December 2012. The often quoted NERA study was clear in its assessment: allowing for unrestricted exports of LNG from the U.S. was only expected to have a modest upward effect on domestic prices for natural gas. Given the record low prices in the country, this would have positive implications for gas producers, and probably also for consumers in the long term. As Trevor Houser and Shashank Mohan have noted in their new book Fueling Up, at this point it remains to be seen how competitive U.S. LNG will be on global markets, with estimates varying widely. Our study in 2012 questioned whether U.S. LNG exports entering the market after 2020 would still be competitive.

Interestingly, what followed in 2013 was not an executive decision on whether or not the U.S. should allow unrestricted exports of LNG. Rather, what emerged were a number of legislative proposals, which aimed to increase LNG exports to a select group of countries, such as NATO allies, and in the most recent case, WTO members. The current crisis in Ukraine has once again fueled the debate on LNG and crude oil exports, even though it is highly debatable how increased U.S. exports would help solve the crisis, if only because there will be no exports of LNG before late 2015. As we and others have argued, the more viable and realistic approach to end the crisis in Ukraine lies in diplomatic efforts, not in energy sanctions and Cold War rhetoric.

That, however, does not resolve the question that was spurred by the dramatic increase in natural gas production, which is whether the benefits of unrestricted exports of LNG from the U.S. outweigh the costs. We believe that there is ample evidence to suggest they will, but they will have no effect on the current political crisis. It is time for a decision on unrestricted LNG exports, removed from the geopolitical rhetoric that has been spawned by the Ukrainian crisis. Bills such as H.R.6, while perhaps well intended, offer little more than political bluster.

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