Sunday, August 19, 2012

The Reality of Exporting LNG

I have to say that I have been a bit surprised at the battle developing in Washington over the exportation of liquefied natural gas from the U.S.  I view it as a win-win for the U.S. because it provides a means to raise the floor on natural gas prices to a more economic level to support this valuable industry while boosting U.S. exports to offset our appetite for imported plastic crap (and foreign oil).  It will not lead to massive price spikes but rather will be another tool in the chest to make gas production economically viable.

Export seems reasonable to me given that natural gas is one of the few growth industries these days in the U.S. other than developing iPhone apps.  But an odd association of environmentalists and industrialists have put up a robust fight against LNG exports.  The former arguing that exporting gas will lead to more drilling and therefore more hydraulic fracturing, and the latter arguing (behind the scenes) that they need "cheap gas" to foster the "manufacturing renaissance" that we've all now read about in the papers.  The battle rages on in the op/ed pages, as witnessed by another think tanker publishing a pro-export article in the New York Times today.

As I've previously stated, I've got problems with both arguments against exporting.  Environmentalists are playing on fear without facts, saying that gas drilling will pollute everything in sight.  In doing so, they indirectly are arguing to maintain the coal-based status quo, which is hardly a solution to pollution.  The industrialists are playing on greed and possibly stupidity.  If they are building chemical plants counting on sub-$4/MMBtu gas, they are delusional and should be out of jobs.

The reality is that gas will continue to be drilled through hydraulic fracturing from horizontal wells, with or without exports.  What few people point out is that a pad drilling site from which an operator can drill 8 to 16 big horizontal wells is much more efficient and has a far lower environmental impact that the 50-100 conventional wells that would have to be drilled to equal the same near-term production (all on separate pads).    Have you ever flown above west Texas or another active conventional drilling area?  It's surreal to look at the hundreds of conventional drilling pads scarring the landscape as far as the eye can see.

Additionally, the natural gas price economics are way out of whack right now because of the need to drill wells in big shale plays to hold production.  Over the past five years, producers have made economically irrational short-term decisions to be able to hold the leases for the long-term.  That's why gas is running around $2.75/MMBtu, well below the cost required to drill a new well.  While domestic gas consumers love and have become accustomed to the low price, it is not sustainable and definitely will not remain long-term because  producers now are in a slightly better position to reduce drilling activity to try to keep supply in check.

Exports create an opportunity for the U.S. to take advantage of its natural resources for long-term economic gain.  It is another tool for the gas industry to achieve success and predictability to support jobs and positive economic impacts in gas producing regions.  I still scratch my head at this debate.

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