U.S. Energy Exports – Council on Foreign Relations

Rising production of U.S. shale gas and tight oil is sparking a debate about energy exports. But getting crude oil and natural gas out of the United States is complicated by regulatory, economic, environmental, and political concerns. Constraints on exports need to be relaxed, and costly infrastructure to liquefy natural gas and transport crude oil out of the United States must be expanded before exports can reach foreign buyers. Proponents of allowing U.S. oil and gas exports appear to be winning the argument, and some advocates predict significant impact on prices and international relations, especially by reducing reliance on Middle Eastern oil and freeing Europe from its dependence on Russian energy. Many experts, however, caution that while the United States will benefit from exports, the overall market and geopolitical effects will be less dramatic than expected.

Production Surges

After decades of declining oil (and more recently gas) production and rising consumption, new drilling technology and better fuel efficiency have transformed the energy market in the United States. The country isn’t self-sufficient and will likely always need to import crude oil, but mismatches between the type of crude oil produced in the United States and that which can be optimally processed by domestic refineries, as well as a rising output of natural gas, signal the rise of energy exports.

Natural gas is cheap and plentiful thanks to the exploitation of shale resources. The U.S. Energy Department is reviewing more than twenty applications for projects to liquefy the gas for export to countries that don’t have free-trade agreements with the United States. Cheniere Energy spent billions to transform its Louisiana operation, originally designed as an import facility prior to the shale gas boom, into an export plant that plans to ship out its first batch of liquefied natural gas (LNG) in 2015. Other companies are slated to follow later this decade.

Tight oil production hasn’t pushed U.S. supply above demand, but it has reversed the decades-long trend of dwindling output. Oil produced from shale basins is expected to increase to 4.8 million barrels per day in 2021 compared to 900,000 barrels per day in 2009, according to the latest figures from the U.S. Energy Information Administration (EIA), which publishes an annual outlook on the sector. It predicts total oil production will peak at 9.9 million barrels per day this decade, the highest level in more than forty years. Forecasts of shale gas and tight oil have significantly underestimated future production, an error which the government agency admits. “There is considerable uncertainty about the expected peak level of tight oil production because exploration, appraisal, and development programs are expanding operator knowledge about producing reservoirs,” the EIA says, noting that its current projections may end up being conservative.

Natural Gas Exports

The United States has exported natural gas for almost a century, primarily through pipelines to Canada and Mexico, and also through a relatively small LNG plant in Alaska that operated from 1969 to 2012, according to the Congressional Research Service (CRS). Now the country is preparing for a larger role in the broader, fast-growing global LNG market.

The first hurdle for exporters is obtaining federal approval. Trade agreements allow for some LNG exports, but U.S. government permits are required for many countries that are World Trade Organization (WTO) members. This requirement may become obsolete for European and Asian countries if the Transatlantic Trade and Investment Partnership and the Trans-Pacific Partnership are completed. Domestic consumers of natural gas, both individual and commercial, may also hinder exports if prices increase as supply falls. Concerns about damage to the environment from increased shale gas production can also stunt the growth of the U.S. LNG industry. Overall, the benefits of “allowing exports outweigh the costs of explicitly constraining them, provided that appropriate environmental protections are in place,” writes CFR Senior Fellow Michael Levi in a 2012 paper. The U.S. government has approved large volumes of natural gas exports in recent years, and the EIA expects the country will become a net LNG exporter by 2016 and a net natural gas exporter in 2022.

An influx of U.S. natural gas in global markets will have significant, if not immediate, consequences. “If all the proposed U.S. LNG export projects were operational today, the United States would rank first in the world for global export capacity,” the CRS says in a September 2013 report. Few experts, however, expect all the facilities will be built. Qatar is currently the largest LNG exporter, but Australia may surpass it by 2017. Global liquefication capacity is expected to rise significantly by 2020 which may foster more competitive pricing, providing an advantage for U.S. producers. But the long-term contracts and oil-linked pricing structures for current LNG agreements, as well as transport costs, will delay price convergence and the emergence of a global spot price for natural gas similar to the market-pricing mechanism for oil.

via U.S. Energy Exports – Council on Foreign Relations.