Fayetteville Shale Play Part Of LNG Export Debate

Easing the rules to allow exports of U.S. produced liquified natural gas (LNG) is an energy policy is becoming a contentious energy policy discussion, with the outcome most likely to determine future activity in Arkansas’ Fayetteville Shale Play.

Debate has been fierce at times among proponents and opponents of permitting more LNG terminals in the U.S. for export. With the U.S. supply of natural gas at record highs (more than 100 years of supply by most estimates), and with the price of natural gas near record lows, proponents say LNG exports will boost the U.S. energy industry, help the U.S. become more energy independent, and allow the U.S. to provide cheaper energy to its global allies.

An increase in customers for natural gas could renew activity within the Fayetteville Shale Play. Drilling activity has been reduced in the north-central Arkansas region after years of persistently low natural gas prices.

An updated Fayetteville Shale Play economic impact [2] study found that production in the Play between 2008 and 2011 created total economic activity of more than $18.5 billion. The updated study, produced by the Center for Business and Economic Research at the University of Arkansas, was released in May 2012.

The study also noted that total annual state employment impacts increased from more than 14,500 people to more than 22,000 people during the 2008-2011 period.

“Natural gas is a game changer for Arkansas and we are grateful for the Fayetteville Shale. It has resulted in an economic boom for Arkansans and helped keep the state budget in balance,” noted a statement from the office of U.S. Sen. Mark Pryor, D-Ark.

LNG EXPORT OPPOSITION
Opponents say boosting LNG exports will raise the prices of natural gas for U.S. consumers. With 20% of electricity generated by natural gas, higher prices would result in higher household bills and could harm the nascent U.S. manufacturing rebound.

Paul Cicio, president of the Industrial Energy Consumers of America, has advised a cautious approach, because an LNG terminal could lock-in delivery of U.S. energy to other countries. If prices rise and supply falls in the U.S., the LNG would still be shipped out.

“The price risk is being shifted to consumers because we don’t know what actual supplies and demand will be,” Cicio said in this report in the Oil & Gas Journal [3].

The Oil & Gas Journal report also indicated that G. O’Neal Hamilton, a member of South Carolina’s Public Service Commission, and Todd Snitchler, chairman of Ohio’s Public Utilities Commission, expressed concern that ramping up LNG exports should be carefully considered because of the potential risk in stifling manufacturing investment in the U.S.

‘SELF-SERVING’ OPPOSITION
Mike Callan, president of Fort Smith-based Arkansas Oklahoma Gas Corp., is skeptical of claims that more LNG exports will harm U.S. industry.

“The argument against exporting natural gas is a self-serving endeavor by certain industries to try and keep the natural gas used in production and as a feedstock low. Also, consumer advocates often take a shortsighted view of commodity prices,” Callan explained.

Continuing, he noted: “Neither group seems willing or capable of recognizing what happens when prices are not sufficient to encourage drilling and that is demand will eventually outpace supply and prices will spike once again. Keep in mind the drilling industry, once it steps down exploration, takes many months to ramp back up when and if prices recover to again incentivize their efforts.”

To that point, the closely watched Baker Hughes rig count reported 425 active North American natural gas rigs as of Feb. 8, down from 720 a year ago, and well below the 1,606 high reported in August 2008. The natural gas rig count hit a 13-year low in November 2012.

Callan said natural gas prices now – ranging the $3 per MCF – are too low to support more natural gas drilling in the U.S.

“I do not know what the ‘magic’ price range is which will encourage the natural gas producers to drill while at the same time providing affordable energy for consumers, but various industry analysts define that range as between $4.00 and $7.00 per thousand cubic feet. Higher than $7.00 and demand is destroyed, lower than $4.00 and the incentive to drill disappears,” Callan explained.

REPORT FINDINGS
A report written by Nicolas Loris [4] for the Heritage Foundation suggests that federal agencies are “causing unnecessary delays” and that Congress “should remove the DOE (Department of Energy) from the export permitting process and lift restrictions on natural gas recipient countries.”

Loris points to a comprehensive 216-page report issued in December 2012 by NERA Consulting to bolster his claim that increased LNG imports will not cause increases in U.S. natural gas prices that harm U.S. economic interests. The NERA report was conducted on behalf of the DOE.

“While LNG exports would raise domestic prices, those higher prices would act as incentives for more exploration and production, offsetting some of the price increase, or even keeping prices as low as they are now, since the gas is still profitable to produce at a low price in some regions of the country,” Loris wrote.

He also said providing cheaper energy to other countries could improve economic conditions and allow for great import of American-produced goods.

“Simply put, the gains from free trade far outweigh any losses incurred,” Loris asserted.

The summary in the NERA report [5] noted: “Across all these scenarios, the U.S. was projected to gain net economic benefits from allowing LNG exports. Moreover, for every one of the market scenarios examined, net economic benefits increased as the level of LNG exports increased. In particular, scenarios with unlimited exports always had higher net economic benefits than corresponding cases with limited exports. In all of these cases, benefits that come from export expansion more than outweigh the losses from reduced capital and wage income to U.S. consumers, and hence LNG exports have net economic benefits in spite of higher domestic natural gas prices. This is exactly the outcome that economic theory describes when barriers to trade are removed.”

FEDERAL AGENCY DEBATE
U.S. Sen. Mark Pryor does not share the concerns that increased LNG imports will dramatically increase natural gas prices. But he does believe the DOE and the Federal Energy Regulatory Commission should remain in charge of managing LNG exports.

“Exploration and development of U.S. natural gas resources is happening very quickly. It was only a few years ago that the U.S. was planning to import LNG from places like Qatar. Now we are looking at exporting LNG to Japan and Europe,” noted a statement from Pryor spokesman Michael Teague. “Management of natural gas resources needs to be done thoughtfully. DOE and FERC already have the authority to issue permits to build LNG export terminals. Senator Pryor wants these Federal agencies to use their good judgment and balance both the domestic and export interests. He thinks this can be done without affecting natural gas prices.”

U.S. Sen. John Boozman, R-Ark., does believe Congress should move to ease LNG export restrictions. He noted in a statement sent from his office: “Arkansas is blessed with an abundance of natural gas and is a key player in developing this energy product. Opening up markets to natural gas will benefit our state and help create job opportunities. That’s why I cosponsored legislation to lift legal barriers preventing LNG exports. This is a commonsense solution to allowing energy producers to meet industry needs. We have seen the benefits of market exports in refined fuel, and are now seeing similar opportunities in the natural gas market. We can take advantage of his opportunity and provide our allies with the resources they need while growing our economy.”

ENERGY, JOBS ISSUE
U.S. Reps. Tom Cotton, R-Dardanelle, and Steve Womack, R-Rogers, also support efforts to allow for more LNG exports. Womack said such restrictions “hinder our ability to produce affordable energy right here at home.” Cotton couched it as a jobs issue.

“The opportunity to export liquid natural gas, or LNG, is a win-win for Arkansas workers and companies involved in its extraction and production. Exporting LNG would provide jobs, drive investment in new facilities and provide a clean, cheap energy resource to Arkansas consumers. If the federal government were to expedite the approval process for exports, there would be further incentive for companies to invest in shale formations across America, turbocharging our economy and keeping energy prices low,” noted a statement from Cotton’s office.