Carpe Diem

Gas-guzzling companies seek to restrict natural gas exports

Image Credit: Shutterstock

Image Credit: Shutterstock

A major energy controversy in Washington right now is whether the federal government should allow US energy companies to sell some of their natural gas bonanza to eager buyers overseas, and if so, whether those gas exports should be restricted or limited. The main concern of those groups opposing “unchecked” natural gas exports and who are aggressively engaged in lobbying rent-seeking to limit gas exports if they are even allowed, is the possibility that exports of our low-cost, abundant natural gas would put upward pressure on domestic prices.

And who are those groups that are worried about rising gas prices? Heavy gas-consuming chemical and manufacturing companies like Dow Chemical, Nucor Steel, and Alcoa aluminum who want to keep as much of America’s shale gas bonanza to themselves at the current, historically low prices, and keep their profits as high as possible. Those energy-hungry gas-guzzlers have recently joined forces in an organization called America’s Energy Advantage (for Big Chemical and Big Steel), to engage in rent-seeking activities to oppose “unfettered natural gas exports.”

So the big question is: What effect would natural gas exports actually have on domestic prices? Based on three independent research reports, the answer is clearly “not very much.” Based on research that Dow Chemical paid for, the answer is “a lot.” Here’s a breakdown:

1. A 2011 study by the Deloitte Center for Energy Solutions estimated that natural gas exports would increase US prices by only a negligible 1.7% between 2016 to 2035. In dollars, average natural gas prices might rise due to exports by only $0.12 per million Btus (MMBtus).

2. According to a 2012 study from The Department of Energy, gas expenditures for US residential, commercial, and industrial users, depending on the exact level of exports, could increase by between 3 to 9 percent between 2015 to 2035.

3. In a 2012 research report contracted for by the Department of Energy, the economic consulting firm NERA found that: “Natural gas price changes attributable to LNG exports remain in a relatively narrow range across the entire range of scenarios. Natural gas price increases at the time gas exports could begin range from zero to $0.33 (per 1,000 cubic feet, Mcf). The largest price increases that would be observed after five more years of potentially growing exports could range from $0.22 to $1.11 per 1,000 cubic feet.”

Note: A million Btus of natural gas is roughly equivalent to 1,000 cubic feet.

In summary, the consensus of those three reports is that natural gas prices would rise only modestly from the effects of exports, in a range from 12 cents to about $1 per MMBtu or Mcf.

In contrast, a firm hired by Dow Chemical Company, Charles Rivers Associates (CRA), found that natural gas prices would gradually increase under its ”likely exports scenario” from $4 per MMBtu in 2015 by 50% to about $6 per MMBtu in 2025, and eventually doubling from the 2015 level to $8.80 per MMBtu by 2030 (in 2012 dollars, see chart below). Under CRA’s likely scenario, natural gas prices would increase by almost $5 per MMBtu due to exports.

gasprices

In its conclusion, the CRA predicted that higher natural gas prices from exports would have this adverse effect on US manufacturers like Dow Chemical:

A significant, gas-intensive sub-sector exists that will be challenged in passing through high natural gas costs in the competitive, global market. Manufacturers will look to establish new plants and relocate existing operations in more favorable gas markets around the world. The historical precedence of companies exiting US manufacturing is well documented and can happen again if LNG exports rise too high.

Flashback to 2009, when Edward Stones, director of energy risk at The Dow Chemical Company, testified in October of that year before the US Senate at a hearing of the Committee on Energy and Natural resources. The topic of the hearing was ”The Role of Natural Gas in Mitigating Climate Change” and a full transcript of the hearing is available here.

Question from the Committee: If Congress were to enact legislation that somehow promoted natural gas use, and natural gas was available at a consistent $6-8 dollar per MMBtu range, how would that impact your competitiveness?

Answer from Edward Stones: “US petrochemical competitiveness depends on a multitude of factors, such as the relative cost of energy, the relative cost of new facility construction, the strength of the economy in each global area, and the extent to which local industry is protected by local government policies. In general, we believe that if … natural gas were available at a consistent $6-$8 dollar per MMBtu range [in 2009 dollars], US petrochemical facilities could be globally competitive.”

Bottom Line: Adjusting for inflation, the range of natural gas prices for Dow Chemical to remain globally competitive would be between $6.41 to $8.54 per MMBtu in 2012 dollars, according to its 2009 Senate testimony. Therefore, even the natural gas price increases from exports predicted by Dow’s own consulting firm, which are several orders of magnitude higher than any other estimate, would allow Dow Chemical to remain profitable and globally competitive through almost the entire period out to the year 2030 (gas prices wouldn’t be higher than the upper-limit of $8.54 until about 2029). And under the more realistic, much smaller increases in natural gas prices from a consensus of other research reports, Dow Chemical and other energy-intensive US companies will have no trouble being competitive and profitable even with natural gas exports. Of course, Dow Chemical and its partners in America’s Energy Advantage will be more profitable if they can restrict nat gas exports, and that explains the group’s aggressive rent-seeking activities.

16 thoughts on “Gas-guzzling companies seek to restrict natural gas exports

  1. the discussion/negotiation/dialogue primarily takes places under the heading of what is in the best interest of the US citizens and companies.

    And this is, judging from the discussion, an admission, that the price of natural gas can be affected by making it available for export and that in doing that – there can be an effect on the competitiveness of US companies including their ability to provide jobs.

    but what is the actual justification for the US govt to be involved in the first place?

    We let Boeing sell as many airliners as they can. We are fine with exporting a plethora of US goods so what’s the deal with gas?

    Gas is a natural resource that, depending who you want to argue with, is somewhat finite and limited and not inexhaustible (or else supply/demand would have much less influence on it).

    But how can natural resources be developed and delivered to market over land that the owners of the natural resources do not own?

    therein lies the justification for the govt being involved.

    what justifies taking land from one property owner and giving it to another ?

    CATO had a pretty good discussion on this – comparing and contrasting the use of eminent domain for natural resources vs the use of eminent domain for other kinds of economic development aka Kelo.

    http://www.cato.org/sites/cato.org/files/serials/files/regulation/2008/6/v31n2-4.pdf

    • Larry – the only reason we are discussing this is because the Natural Gas Act of 1938 which was amended in 2005 by the Energy Policy Act. http://en.wikipedia.org/wiki/Natural_Gas_Act_of_1938

      The NGA says that DOE has to grant export licenses for natural gas. The irony here is that Dow can buy natural gas, turn it into fertilizer or methanol and export it to the same countries who need LNG and would not require a license.

      The comparisons to Kelo v. City of New London are not applicable here. We are talking about underground pipelines in predominantly rural areas with minimal impacts on the surface holders. You can still farm or graze on top of a pipeline. You just can’t build on it or dig on it.
      Pipeline companies try to avoid heavily populated or developed areas and use existing utility corridors to keep costs down. Besides, many of the LNG export applicants are for existing LNG import terminals who have idle pipelines to the large interstate gas pipelines. Many of these applicants will not need ANY additional land or right of way.

      To my knowledge, nobody is raising the land use issue concerning LNG exports.

      • re: ” The comparisons to Kelo v. City of New London are not applicable here. We are talking about underground pipelines in predominantly rural areas with minimal impacts on the surface holders. You can still farm or graze on top of a pipeline. You just can’t build on it or dig on it.
        Pipeline companies try to avoid heavily populated or developed areas and use existing utility corridors to keep costs down. Besides, many of the LNG export applicants are for existing LNG import terminals who have idle pipelines to the large interstate gas pipelines. Many of these applicants will not need ANY additional land or right of way.”

        then why do the pipeline companies have eminent domain and use it?

        read this: http://www.pennlive.com/editorials/index.ssf/2012/02/eminent_domain_its_an_imminent.html

        We are told in CD that the reason the govt cannot/should not involve itself in the export of gas is that “it’s not their gas” but also true is the fact that the land over which gas is transported is not their land.

        so my question has been – how “free” can a “free market” in gas be – without eminent domain from the govt?

        • I disagreed with Kelo because the justification for taking was for higher property taxes, not for an easement or road.

          ED is a difficult problem. If we used the term “road” instead of “pipeline” would that make it easier to think about? If my land surrounded your farm, should I have the right to deny you a way to get your products to market? Should you set ANY price you want for a road. That doesn’t sound very “free” to me.

          NOBODY in my business likes to use ED. The vast majority of pipeline right of way deals avoid using it. I’ve seen lines rerouted when the pipeline company could have brought condemnation proceedings.

          • I disagreed with Kelo because the justification for taking was for higher property taxes, not for an easement or road.

            ED is only allowed for a public use. Neither Kelo nor ED for pipeline easements are for public use. Kelo was a taking for the benefit of a private pharmaceutical company, and gas pipeline easements are a taking for the benefit of private pipeline companies. If you were outraged by one, you should be outraged by the other.

            ED is a difficult problem. If we used the term “road” instead of “pipeline” would that make it easier to think about? If my land surrounded your farm, should I have the right to deny you a way to get your products to market? Should you set ANY price you want for a road. That doesn’t sound very “free” to me.

            You are missing the fact that there is no possible way in which a piece of property will be completely surrounded by property owned by someone else, with no access to the outside world.

            Every piece of land, anywhere, that is owned and used by people has a road, or a trail of some kind connecting it to the rest of the world. No one could homestead or buy up all the property around that original piece without acknowledging the right of way provided by that original access road or trail.

            Even if I bought a farm from you in the middle of of your other property, I wouldn’t do so without buying the rights to cross your property for access to the outside world.

          • ” No one could homestead or buy up all the property around that original piece without acknowledging the right of way provided by that original access road or trail.

            Even if I bought a farm from you in the middle of of your other property, I wouldn’t do so without buying the rights to cross your property for access to the outside world.”

            Without a govt and without rule of law – you’d not necessarily have access to start with though and access to your property without ED-obtained public roads would also not be as likely.

            I know this personally because I own a piece of land that ended up “land-locked” (cut off by a reservoir) and there was no other access to it through others properties.

            and the truth of the matter with regard to pipelines – is that many pipeline companies (property owners) have themselves been give the right of eminent domain so they take other people’s properties for their own economic benefit -just like Kelo – just a different kind of economic benefit.

            Realistically, beyond public roads, what kind of a pipeline network would we have today without it and right now with oil/gas shale, how viable would those economic activities be without ED?

          • Without a govt and without rule of law – you’d not necessarily have access to start with though and access to your property without ED-obtained public roads would also not be as likely.

            You are still missing it. Ask someone to explain it to you. I would not *start with* a property I didn’t have access to.

            I know this personally because I own a piece of land that ended up “land-locked” (cut off by a reservoir) and there was no other access to it through others properties.

            If you owned it before the reservoir, your land was taken, Larry, can you understand that?

            If you acquired it after it became inaccessible by land, then you aren’t telling the whole story. In any case you aren’t going to discover and drill for gas on it and worry about getting your product to market.

          • re: ” “Without a govt and without rule of law – you’d not necessarily have access to start with though and access to your property without ED-obtained public roads would also not be as likely.”

            You are still missing it. Ask someone to explain it to you. I would not *start with* a property I didn’t have access to.”

            missing what Ron? your idiotic la la land ideology that does not exist in the real world?

            or are you calling all those gas/oil companies that used ED to get their product to market – coercive thugs?

            which is it boy?

            should I explain it to you?

          • Kojiro Vance

            NOBODY in my business likes to use ED.

            If that is the case, then why do they do it? And why don’t they like to do it?

            Yes, those are loaded questions, but I’m wondering if you’re able to answer them honestly without justifying theft.

          • missing what Ron? your idiotic la la land ideology that does not exist in the real world?

            As expected you didn’t address the comment but instead chose to attack the messenger. I will start calling you Ad Hom Larry.

  2. “If that is the case, then why do they do it? And why don’t they like to do it?”

    I can’t speak for others, but there are times when landowners make unreasonable demands, or are totally unwilling to negotiate, making ED the last resort. One of the projects I was involved with built a 60 mile rural pipeline with over 200 property owners and not a single condemnation. In fact most of the landowners welcomed the right of way payments and improvements we made to the property (new fences, roads, etc.). Ranchers in particular like pipelines because they get paid for the land but still can graze cattle on top of the line.

    We don’t like ED because it is time consuming, expensive, contentious, bad publicity, and the outcome is not always certain. Also keep in mind that to use ED, a pipeline either must be designated a public utility, or be “open access” with rate of return established and limited by whatever government authority grants the ED. In that sense it is just like a road.

    What we are talking about here is balancing various property rights. In an ideal world natural resource holders or businesses negotiate with landowners for the rights to use a portion of their property to transport their goods to market. Both parties come to mutualy agreeable terms and commerce continues, benefiting society as a whole.

    • re: ” but there are times when landowners make unreasonable demands, or are totally unwilling to negotiate, making ED the last resort.”

      if you buy/accept the libertarian philosophy, owned land is personal property and you should have the right to keep it and not sell it.

      The thing about ED is that it has to justify by saying that the taking is for a public purpose – which – depending on your viewpoint – is a higher/more legitimate purpose than private property ownership.

      In a Libertarian world – there would be no ED. Every transaction would be a voluntary one.

      In the real world – commerce .. basic commerce would be severely compromised if pure Libertarian principles were followed to the “T”.

      For instance, all the gas/oil developed – could not leave the property where it was produced – without a clear corridor obtained purely by willing transactions.

      • I agree that under a pure Libertarian model we might have less commerce. It is possible to believe that ED is a necessary thing and still think that Kelo went too far.

        The island argument does exist in real life. For example, when putting in our new fence, the workers cut the internet/phone line to my next door neighbor’s house. The phone company showed up at my house asking to run a new line from the pole (on my property) to the neighbor. What if I said “No”, or demanded $1,000 as fair compensation? Would that be right? Wouldn’t that impact my neighbor’s right to enjoy his property?

        Perhaps the phone company could install a pole for everybody and just string wires directly to each house. That would raise the cost and look horrible, impacting everyone’s enjoyment of the property.

        • The island argument does exist in real life. For example, when putting in our new fence, the workers cut the internet/phone line to my next door neighbor’s house. The phone company showed up at my house asking to run a new line from the pole (on my property) to the neighbor.

          This isn’t exactly the island argument. You might find that the utility companies already have an easement on your property allowing them access to to the pole, if I understand you correctly. If the pole existed when you bought the property, that’s almost certainly the case. You never had the right to say no.

          What if I said “No”, or demanded $1,000 as fair compensation? Would that be right? Wouldn’t that impact my neighbor’s right to enjoy his property?

          If you now own 100% of all rights associated with your property, how did your neighbor ever get access to phone and internet service in the first place? Somewhere along the line, he was given access by you or a previous owner of your property.

          In all likelihood, your neighbor already has access to those services thorough an easement on your property, used by utility companies. In that case, you are obligated to allow repairs to be made, especially since your activity – the fence people – caused his loss.

          If your neighbor bootlegged his service by trespassing on your property, then you are under no obligation to correct his problem, and a fee of $1000 might be perfectly fair for the use of your property for phone access.

          • “prior access” – most states have public utility laws that guarantee access for things like electricity. Often cable will use the same corridor if they can but sometimes the cable infrastructure cannot.

            If you live on a public road – you likely have guaranteed access.

            if you live on a private road you have access at the point your road intersects with the pubic road.

            sometimes – access to the property is shorter through other properties or from one property to the next.

            the germane point is that the govt in most states utilizes a public utility access that piggybacks on the public road.

            where the roads are private – it’s entirely problematical but at least in our state – if you have a private road you have to have an easement and if you have the easement you usually have it for road, electricity and other utilities.

            significantly this does NOT apply to nature resource pipelines which do not normally follow public roads and go overland through properties they do not own – and if the owner objects to their passage – the pipeline company either directly or indirectly through the state has the right to “take” the property (with “just” compensation of course).

            Without ED – all the recent shale gas and oil would have a much more difficult (and expensive) time trying to market.

            The govt – the nasty coercive thug govt if you are a hard core libertarian – then steps in to assure that commerce can occur – even if some property owners are opposed.

            If you look at the rail and interstate highway system in many parts of the country – it goes straight as an arrow – and it got built that way – with or without the concurrence of the property owners.

    • Kojiro

      Thanks for your thoughtful response. I can see that we may disagree on first principles, in which case there’s no possibility of ultimate agreement.

      I can’t speak for others, but there are times when landowners make unreasonable demands, or are totally unwilling to negotiate…

      Which I assume is their right as legitimate owners of the property, assuming all mineral rights and other rights remain intact with the owner. They can ask what you consider to be an “unreasonable” price, or refuse outright.

      …making ED the last resort.

      You are assuming that you MUST have the power to take property for a private purpose whether the legitimate owner agrees or not. This is commonly known as theft.

      One of the projects I was involved with built a 60 mile rural pipeline with over 200 property owners and not a single condemnation.

      As it should always be.

      In fact most of the landowners welcomed the right of way payments and improvements we made to the property (new fences, roads, etc.). Ranchers in particular like pipelines because they get paid for the land but still can graze cattle on top of the line.

      I agree, and as a rancher I would personally welcome the extra income, but wouldn’t expect my property rights to be violated if I wasn’t interested and declined the offer.

      We don’t like ED because it is time consuming, expensive, contentious, bad publicity, and the outcome is not always certain.

      All are good reasons to avoid ED, but you didn’t mention that ED is essentially theft of private property by another group of private citizens in the case of a pipeline.

      Also keep in mind that to use ED, a pipeline either must be designated a public utility, or be “open access” with rate of return established and limited by whatever government authority grants the ED. In that sense it is just like a road.

      Government approval of theft doesn’t make it any more legitimate. You can call a dog a cat, but it’s still a dog.

      What we are talking about here is balancing various property rights.

      Balance? The owner of private property has a right to their property. Other individuals who desire it but have no legitimate claim to it, don’t. You are suggesting that a group of individuals has the right to take the property of another individual for their own private benefit because, in the case of a pipeline, it’s cheaper than the alternative methods of transporting gas.

      In an ideal world natural resource holders or businesses negotiate with landowners for the rights to use a portion of their property to transport their goods to market.

      This is the case in the world we live in now, but in an ideal world, when negotiations fail to reach a conclusion acceptable to those who want access to someone else’s property, they wouldn’t have the power to just take it, essentially at gunpoint, and pay some price *they* decide is reasonable.

      What would you think if I wanted to buy your car, and you were adamant that you didn’t want to sell it, so I pulled a gun and just took it from you, leaving you with some amount of money *I* thought was reasonable?

      I realize that’s hyperbole, but the principle is no different.

      Both parties come to mutualy agreeable terms and commerce continues, benefiting society as a whole.

      Other than lower prices for natgas, how does society benefit from the ability of one individual or group of individuals to take the property of another? If that’s the case, then anyone’s property can be taken for essentially any reason.

      It seems you are justifying lower gas prices at the expense of private property rights.

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