3 Reasons Why Exporting Natural Gas MUST be Approved!
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
News hit the wire the other day that the long-awaited analysis by the Department of Energy on natural gas exports is being delayed by several months. This delay will push back the approval of several facilities that would be converted to export natural gas overseas. I think that the delay in the report is only delaying the inevitable as these projects will eventually be approved. In fact, I’ll go as far as to say that these projects simply MUST be approved and here are three reasons why:
It’s Hypocritical to Import but Not Export
Oil is a global commodity and because of the well-developed transportation infrastructure it is priced on a global scale and affected by global events. Natural gas on the other hand is a more localized commodity because its mobility is constrained by limited infrastructure. These localized pricing environments can diverge wildly, in the US for example natural gas is around $3/MMBtu while it’s $12 in Europe and $15 in Asia. In the US our infrastructure is limited to importing gas because until the shale gas bonanza we were doing just that.
Now these same facilities like Dominion’s (NYSE: D) Cove Point, Exxon’s (NYSE: XOM) 30% owned Golden Pass and Cheniere Energy’s (NYSEMKT: LNG) 61% interest in the owner of Sabine Pass are all seeking approval to be converted to export gas. However, there is growing pushback that we shouldn’t allow gas to be exported. While I understand the idealist protectionism of some as well as concerns of our national security it’s simply hypocritical to have had a policy that allowed imports when we needed the fuel but to withhold its exports when we now have it in abundance.
Just take a look at the numbers, in 2011 the US imported $2.2 trillion worth of goods and of that total 8.2% was crude oil. Last month alone that worked out to $37.8 billion dollars being sent overseas. On the other side we’re the world’s third largest exporter of goods at $1.5 trillion which is a number we’d like to bring back into balance if not reverse. While exporting gas won’t put much of a dent in that number, it should be free to flow in that direction.
One advocate of exporting is Exxon subsidiary XTO’s President Jack Williams. He recently said, “Just as we export grain and cars and other American products, exporting LNG can create economic (opportunity). It will promote free trade with potential partners around the world. It will encourage increased natural gas production.” To me those ideals of protectionism and national security go out the window when put in context of how much we already export.
Low Natural Gas Prices Are a Long-Term Negative for Our Economy
One of the biggest critics of exporting gas is actually the fuel’s biggest champion. Boone Pickens said of exports that “we’d go down as the dumbest crowd that ever came to town if we send clean natural gas abroad and import oil from OPEC.” He’s certainly got a point and I’m all for using gas as a transportation fuel as Boone has been advocating. However, low natural gas prices are a long-term negative for our economy and we can’t afford to let that continue when we have solutions.
One of the big concerns with exporting our abundant gas is that it’ll drive up prices for consumers, but exporting is believed to only have about a 10% effect on pricing. Because our exporting infrastructure will remain capacity constrained until many new facilities come online it will take years before any price increase impacts consumers.
Even if the impact on prices is much higher that is not necessarily a bad thing for our economy. Top natural gas drillers like Chesapeake (NYSE: CHK) and Southwestern Energy (NYSE: SWN) are struggling to produce consistent profits with depressed gas prices. If prices remain unprofitable they’ll stop expending capital to drill new wells. We’re already starting to see that at Southwestern as they reduced their 2012 capital budget by 5% from last year to a number that’s below their 2010 spending. Meanwhile, Chesapeake has been shedding assets and aggressively shifting their capital to liquids rich plays do deal with low prices. That capital spend from higher prices creates and sustains more jobs and when multiplied across the industry it’s tens of thousands of jobs. Finally, low natural gas prices yield lower profits and by extension lower taxable income. Not that I’m a fan of paying more taxes but higher profits from gas will put more money into the government’s coffers.
It Will Create Jobs
Politicians talk a lot about creating jobs, especially at this time of year, but exporting gas will create them. Not just from building and operating these projects but from drilling new wells to support the exports as well as from the multiplier effect. LNG export terminals are very expensive to build. Exxon’s Golden Pass would require an investment of up to $10 billion. Cheniere’s Sabine Pass is estimated to cost about $11 billion to complete while Dominion hasn’t yet released a cost estimate for Cove Point, but it will likely be a substantial investment.
Infrastructure spending is one of the most effective ways to create jobs as for every $1 billion in new investment the total of direct, indirect and induced jobs is 18,000. When you total up all the jobs that could be created by using our national resources it’s a staggering 3.6 million jobs by 2020 which could increase our GDP by as much as 3%. However, that’s only possible if drilling remains profitable and shutting off another market for gas won’t help.
Being energy independent and securing our energy supply is important to us all. Yet, exporting natural gas would only amount to 7.4% of the increase in supplies from new shale gas supply coming online according to Cheniere Energy for one of their projects. With such a minimal effect on supply and pricing I don’t understand why we’re being hypocritical in the stance against something that’ll create thousands of jobs. That’s why I think exporting natural gas must be approved.
Do you agree that we need to export our extra natural gas? Click the like button below. Not sure if that's such a good idea and want to hear the other side? Check out fellow blogger Robert Zimmerman's rebuttal here.
latimerburned has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil and has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2013 $25.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls on Chesapeake Energy. Motley Fool newsletter services recommend Dominion Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.