Debate Over Exports and Fracking

How will excess supplies of natural gas and large increases in domestic oil production affect exports? And will they affect imports of oil from Canada?

These issues will come front and center when we have the necessary export terminals to ship large quantities of liquefied natural gas to Asia and Europe.

The argument on one side will be to use our natural gas for domestic purposes. But could those purposes consume enough natural gas to force the price far above $3 per million BTU? (Prices have been as high as $13/MBTU when a shortage appeared imminent a few years ago, and as low as $1.80 /MBTU with the current surplus.)

Or would exporting large quantities of natural gas push natural gas prices higher in the U.S.?

The price of natural gas will be an important issue in this debate, largely because a high price for natural gas could cripple the proposed new investment in chemical plants that use natural gas as feed stock. Higher prices for natural gas could also result in higher costs for generating electricity and restore coal as a competitive energy source.

It’s also necessary to differentiate Alaskan natural gas from that being produced in the lower forty-eight. Alaskan natural gas is stranded now that there is no economic rationale for building a pipeline to bring it to the lower forty-eight.

What uses of natural gas could increase demand and thereby potentially result in higher prices?

• The generation of electricity could continue to see increased usage of natural gas as coal is displaced.
• The use of liquefied natural gas (LNG) for long haul-trucking will likely increase, albeit gradually.
• The use of compressed natural gas in cars is a possibility, though not likely without a huge investment in fueling stations.
• The use of CNG in local delivery and utility trucks and buses will likely grow at a faster rate.
• Gas to liquids (GTL) could consume large quantities of natural gas, though investment requirements for this technology are very large.
• Natural gas for heating could increase, but any increase will likely be gradual.
• New chemical plants could be large consumers of natural gas.

It’s the last category that bears watching and which will receive the most political attention.

New chemical plants not only add value to low-cost natural gas, they also create jobs.

Anything that would deter investment in new chemical plants will be looked at with a jaundiced eye.

House members wrote Secretary Chu asking him to accelerate approval of export terminals for natural gas. They said, “Creating more opportunities to sell natural gas into global markets and access overseas customers could help the goals of increasing gas use and smooth out the historical boom-bust cycles. … [and] making gas prices sustainable will continue to stimulate resurgence of US chemical and other manufacturers, electricity generators, and farmers while keeping home heating and transportation costs low.”

Their letter frames the debate.

Some will say that GTL is a type of chemical plant that deserves consideration for political support.

The Shell GTL plant in Qatar has been a huge success. It uses 1.6 billion cubic feet per day of natural gas, so any significant GTL plant in the U.S. would consume large quantities of natural gas.

The cost of the Qatar plant was $19 billion, so any plant in the U.S. would require a huge investment. The Qatari plant is very profitable with oil at $100 per barrel, but the cost of the natural gas is zero. Having to pay for the natural gas in a plant built in the United States would cut profitability.

The product from GTL is essentially diesel fuel, so it would replace and compete with domestic oil.

Shell and two other companies are looking at a possible GTL investment in the United States.

All of this assumes that the government won’t severely curtail fracking. Curtailing fracking will reduce the supply of natural gas and drive up its cost.

Environmentalists are up in arms against fracking, with demonstrations here and abroad. Yahoo, with a view opposed to anything that results in CO2 emissions, headlined one such rally sponsored by the Sierra Club in Pittsburgh, Pennsylvania.

The Sierra Club strenuously objects to using natural gas for any purpose, period.

The debate over how to make use of our natural gas should center on which strategy makes the best use of our natural gas, in terms of value added, return on investment and jobs. The debate must keep in mind that decisions about its usage and supply affect the price of natural gas. If the price is pushed above $5 per MBTU, it could kill the goose that laid the golden egg. Eliminating fracking would drive prices to much higher levels.

Another objective of environmentalists is to stop Canada from producing oil from tar sands, because the process for extracting oil from tar sands emits CO2.

Interestingly, the effort to stop fracking could result in more production from Canadian tar sands.

Fracking has resulted in a huge increase in oil production in the United States.

If fracking is stopped, America’s oil production would return to the bad old days with increased oil imports – including from Canada’s tar sands.

Because of our threatening the Keystone pipeline, it’s clear that Canada will build new pipelines and export its oil to Asia. China is investing heavily in Canada’s oil industry.

It’s easy to build a case for exporting Alaska’s stranded natural gas, but this needs to be done quickly as there are large LNG projects in Australia that will get to the East Asian market before it’s possible to build the necessary pipelines and LNG terminals in Alaska.

It’s entirely possible that a sound energy strategy could result in natural gas being exported from the lower forty-eight, while still reaping the benefits of new investments in chemical plants that create jobs.

GTL may be a special case because of the large amounts of natural gas used by the process. Market forces would establish whether investments in GTL are economically sound, especially since, with fracking, we have ample supplies of diesel fuel from domestic oil production.

While there should be a debate on how to best use our supplies of natural gas and oil, government should get out of the way by allowing drilling on federal lands and not interfering with fracking.

We have an opportunity to become energy independent which would free us entirely from Mideast and Venezuelan oil, improve our balance of payments, improve our economy and create more jobs.

Curtailing fracking will kill this opportunity.

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