Thursday, December 27, 2012

U.S. Industrial Renaissance Grapples with Looming Exports of Cheap Natural Gas

Natural gas is a new king of the hill, according to a newly released ExxonMobil’s 2013 Energy Outlook. Natural gas would displace coal as the world’s second biggest energy source after crude oil, claims the report. One of the key conclusions of the ExxonMobil report is that “North America will change to a net energy exporter from an importer by 2025.” It predicts that over “half of the growth in unconventional gas supplies will take place in North America, providing a foundation for strong U.S. economic growth with solid contributions from the energy, chemical, steel, and manufacturing industries.”

The latter points, however, appear to be a matter of debate. To a degree, industrial growth is in a collision course with America’s ambitious natural gas export plans. Gas prices hovering at around $3 per million metric British thermal units in the U.S. for many months and energy companies switching to more profitable crude oil production from shale formations, exporting natural gas seems like a sensible policy, pushed forth by the energy industry and some government officials. While it will take years before gas exports will become a reality, given the time required to secure licenses and high costs of liquefied natural gas (LNG) infrastructure, there is also a concern that exports could be a setback for the U.S.

Namely, the manufacturing and industrial sectors see greater difficulty to grow in the U.S. if natural gas exports materialize and push domestic prices up. The revolution of the shale gas industry has revitalized domestic industrial sector and brought back manufacturing from abroad to the U.S. Manufacturing costs are much cheaper in the U.S. due to low-cost natural gas compared to even places such as China, the world’s leading manufacturing workshop.

Major industrial firms began taking advantage of low energy costs in the U.S. and creating jobs. For example, “steelmaker Severstal recently expanded its Mississippi and Michigan plants, and Airbus unveiled plans for a giant, new factory in Alabama.” Dow Chemical, among other major chemical companies, “which is investing $4 billion to build three new chemical plants in Texas and restart a fourth in Louisiana, compiled a list of 102 projects across a range of industries worth a total of some $80 billion that are being started in response to the availability and low price of domestically produced natural gas.” Investment in manufacturing is attractive to even some energy companies, such as Shell Oil, which is mulling over construction of a large petrochemical complex in shale gas-rich Pennsylvania to produce ethylene, a feedstock for plastics, from ethane.

These and other companies are now concerned that exports of natural gas will increase the prices, which have enabled the U.S. industrial renaissance, and threaten billions of dollars worth investments in capital. According to Dow Chemical’s vice president of climate change and energy, George Biltz, “if a single cubic foot of natural gas is exported, it gives the United States a one-time jolt. But if you take that same cubic foot and you roll it through manufacturing, whether it's steel or chemicals or pulp and paper or rubber, this has as much as a 20x impact when you roll it through the whole GDP of the country.” A recent study by NERA Economic Consulting for Department of Energy argues that exports will not bring sharp increases in gas prices; on the contrary, “export revenue would generally help most Americans. The NERA report admits that “natural gas prices could jump by over a dollar per thousand cubic feet, or more than 25 percent, over five years if there are significantly more exports,” which would still be much lower than just four years ago. It is to be seen whether the U.S. Department of Energy will manage to ensure that continued issuance of export licenses would not to drive up gas prices high enough to carry negative consequences on manufacturing and industrial production.