AEA Memo on Hearing to Review H.R. 6, the Domestic Prosperity and Global Freedom Act

Date:               March 20, 2014

To:                   Members, Subcommittee on Energy and Power

From:               America’s Energy Advantage

On Tuesday, March 25, the Energy and Commerce Subcommittee on Energy and Power will hold a legislative hearing to review H.R. 6, the Domestic Prosperity and Global Freedom Act.

America’s Energy Advantage (AEA) is a trade association representing many of the world’s leading manufacturers and commodity producers, as well as the United States’ publicly-owned natural gas distribution companies.  Our organization is a strong supporter of rules-based free trade but we are very concerned that H.R. 6 will result in the export of nearly half of U.S. natural gas production to our overseas competitors.

Exporting such a large volume of this strategic commodity will raise domestic natural gas and electricity prices for every American, undermine manufacturing competiveness and cost the nation good-paying jobs.  Equally troubling is the fact that the legislation would prevent the Department of Energy from mitigating or even reviewing the impacts of unlimited LNG exports on domestic prices, consumers, electricity markets, manufacturers or the economy.

Some have claimed that World Trade Organization (WTO) rules obligate the U.S. to allow unlimited exports of American natural gas.  While there is significant legal debate on these issues, especially as energy has always been treated as a commodity separate and apart from standard commercial trade, the fact is that there are vast deposits of untapped natural gas throughout Europe that could be harnessed long before the first U.S. exports reached their shores.

Export licensing, under certain conditions, is a recognized and allowable tool under the WTO.  Some proponents of unchecked LNG exports suggest that the way DOE is managing the licensing process may constitute a WTO violation.  However, a deliberative process to review applications against clear criteria explains why this process takes time and should be consistent with WTO guidance.  It also reinforces our long-standing call for action on defining public interest, establishing clear criteria and developing a more consistent, transparent review process.

To aid policymakers in their ongoing debate on the question of LNG exports, we have prepared the following memorandum that summarizes the issues at stake and cites a multitude of independent third party studies that conclude that excessive LNG exports will have profoundly negative effects on the U.S. economy. 

I.          LNG Exports Will Not Help Ukraine But Will Harm U.S. Consumers and Economy

We agree that the current crisis in Ukraine is a very serious situation, and appreciate government efforts to pass legislation to provide American aid to Ukraine in its time of need.  But U.S. LNG exports to Ukraine are a false hope to the people currently suffering:

• No LNG export facilities exist in the continental United States.  LNG exports won’t begin in earnest until 2018, as these billion-dollar projects need to be built or retrofitted.[1]
• A much better option for weakening Putin is to export American hydraulic fracturing technology to our Ukrainian allies so they can develop their own domestic shale gas resources.  Ukraine has more than 40 trillion cubic feet of technically recoverable natural gas.  Such resources could come online years before the first LNG tanker ship leaves an American port. 
• Ukraine could sign a contract today to import LNG from one of the six facilities that have already been approved if it wanted to pay market rates, which in Asia are as much as 50 percent higher than in eastern or central Europe.  There is no barrier or impediment other than the fact they are simply not economically viable.  Andrzej Szczesniak, a Polish energy analyst, said in the Financial Times recently that, “gas delivered by tanker will never be able to compete with gas delivered by pipeline.”[2]
• The U.S. government does not select which companies buy U.S. LNG – these are private commercial contracts.  Michael Levi of The Council on Foreign Relations makes this point clearly.[3]  Market forces – not policy interests – will dictate where gas is sold.  The first place American gas is headed is to Asia, not Ukraine, according to Michael Smith, Chairman and CEO of Freeport LNG[4], a major exporter.  Foreign Policy also makes this point.[5]

II.        Unchecked LNG Exports Will Cause Domestic Gas Prices to Spike, Harming Consumers, Manufacturers and Adversely Impacting the Economy and a Weaker American Economy Will Not Help our Ukrainian Allies

Multiple expert third party analyses suggest that increased domestic demand, exacerbated by high exports, will increase natural gas prices to harmful levels:

• Purdue University found that whether LNG export levels are at 6Bcf/day or 12Bcf/day (NERA’s low and high scenarios), GDP will decline and all Americans will be plagued by higher electricity prices.[6]
• The Purdue study concluded that, “Increased U.S. natural gas exports will reduce energy costs for industry and consumers in foreign countries and increase those costs for the U.S.  Thus, U.S. industry will be rendered less competitive compared with foreign industry.  This loss of export revenue would be in addition to the GDP loss estimated in this analysis.  Moreover, U.S. consumers lose due to higher energy prices, and foreign consumers gain.”[7]
• Charles Rivers Associates (CRA) warned that unchecked exports of U.S. natural gas could lead to a tripling of natural gas prices from current levels by 2030.  It also noted that manufacturing is highly sensitive to natural gas prices, and a significant portion of the U.S. manufacturing sector is exposed to impacts from projected increased natural gas prices.[8]
• The PIRA Energy Group released analysis showing that unchecked exports will lead to “significantly more” volatility in the U.S. gas market due to exposure to supply, demand, inventory and pricing issues in other parts of the world.[9]
• The same PIRA analysis concluded that “the Henry Hub price ramifications will be substantial,” projecting prices will rise to the $6-$8.20 per million Btus range in the 2020-2025 period.[10]
• Gas prices have doubled since the first LNG export application was approved and parts of the U.S. are in the midst of a gas crisis.  In the Northeast, a shortage of natural gas has caused price spikes and even rationing.
• U.S. gas markets are extremely volatile, with prices surging as high as $8/MMbtu – up 250% from a year ago.[11]
• A shortage of propane – a byproduct of natural gas production – has sparked a national and regional emergency, with crippling prices for consumers, business and agriculture.  30 states declared propane emergencies.  Propane exports have quadrupled in the last five years to a record 20 percent of U.S. production, outstripping the growth in supply causing massive price spikes and shortages.[12]

III.       The Shale Gas Revolution is Powering an American Manufacturing Renaissance

America’s newfound abundance of natural gas is powering a remarkable manufacturing renaissance, which to date has generated more than $100 billion of announced investment in over 120 different manufacturing projects.  Our natural gas advantage is directly responsible for the nine consecutive months of growth in the manufacturing sector.  America’s natural gas advantage is so significant that U.S. companies are beginning to “reshore” foreign operations back in the United States[13].  A wide range of foreign companies are locating manufacturing operations – and the jobs that accompany them – in the U.S.  Recent expert analyses document these trends:

• The Boston Consulting Group (BCG) found that the growth of natural gas supplies and the reshoring of businesses is projected to create 2.5 million to 5 million U.S. jobs by decade's end as manufacturing relocates to the United States.  That, in turn, could reduce the unemployment rate by as much as two or three percentage points.[14]
• The report also suggests that by 2015, the United States will have an 8 to 18 percent cost advantage over the advanced economies of Europe with the biggest drivers being cost advantages in natural gas and electricity.[15]
• The shale gas revolution continues to power manufacturing growth.  The Institute for Supply Management’s monthly index shows the manufacturing sector has grown for nine consecutive months.
• A report from IHS Global Insight offered further confirmation of the manufacturing renaissance underway because of unconventional gas supplies.  “Driven by a rise in domestic production and manufacturing that will displace imports . . . the trade deficit will be reduced by more than $164 billion in 2020 – equivalent to one-third of the current US trade deficit.”[16]
• IHS also noted that unconventional gas supplies will support “more than 460,000 combined manufacturing jobs (3.7 percent of all manufacturing jobs) . . . in 2020, rising to nearly 515,000 (4.2 percent of total manufacturing jobs) in 2025.”[17]
• An American Chemistry Council report examined nearly 100 announced chemical and plastics manufacturing projects totaling $71.7 billion in potential new U.S. investment.  By 2020, the projects are projected to create 46,000 chemical industry jobs, another 264,000 jobs in supplier industries and 226,000 “payroll induced” jobs in communities where workers spend their wages, generating $20 billion in federal, state and local tax revenue. Nearly 1.2 million additional, temporary jobs will be created during the capital investment phase that occurs between 2010 and 2020.[18]
• The export of value-added products accrues much greater benefits to the economy than the export of raw materials.  A recent study by Charles River Associates found that increased manufacturing output from domestic natural gas creates twice the direct value to the economy and eight times as many jobs as gas exports alone.[19]

IV.       Use America’s Energy Advantage to Increase America’s Global Leadership

Oil and gas are strategic commodities, fundamentally different from blueberries or ball bearings.  In order to maximize the full potential of this newfound bounty and create a broadly shared prosperity, policymakers should pursue a cautious, thoughtful and deliberative approach to the question of LNG exports:

• U.S. natural gas is the biggest bargaining chip U.S. trade negotiators have at their disposal to open closed markets, improve our balance of trade and remove tariffs and barriers to U.S. products.
• The current TPP negotiations are a tangible example, where the promise of LNG access is a useful tool to win hard-fought concessions from negotiating partners, such as Japan.
• America’s natural gas advantage presents a once-in-a-generation opportunity to create market access opportunities for American companies, exporters and workers.  Why give it away for free to our overseas competitors and get nothing in return?[20]  
• Use American natural gas to negotiate ground-breaking, high standard Free Trade Agreements, increase exports of all American goods and services, open markets, create jobs and raise living standards for all Americans.

V.        Conclusion

In approaching the complex decision of how much American natural gas should be exported to our global competitors, especially those who have not yet negotiated reciprocal free trade agreements, the United States should continue its case by case approach.  The benefits of this newfound natural gas abundance to our domestic economy – robust job creation, manufacturing investment, affordable consumer prices and lower utility bills – are in the public interest of all Americans, and the export volume of this valuable national resource should be considered in this light.  A strong American economy commands a position of strength in geo-politics and the global economy. 

Ukraine has more than 40 trillion cubic feet of technically recoverable natural gas.  There are tremendous untapped shale gas resources throughout Europe.  To weaken Putin and strengthen our European allies, the Committee should be focused on the export of American drilling technology and know-how to allies so they can develop their own domestic shale gas resources.  Horizontal drilling and tight oil and gas extraction techniques could bring undeveloped resources on line years before the first LNG tanker ship arrives on European shores.  It is much better to teach a man to fish than to give him a fish.      

The U.S. Department of Energy has already approved a significant amount of LNG – close to 13 percent of current domestic production – for export to countries that have not signed a free trade agreement with the U.S. and the ramifications of these actions are playing out across the country, impacting Americans from every walk of life. 

After decades of dependence that left the U.S. at the mercy of foreign countries and international cartels, American consumers and job creators – not our foreign competitors – should have the first claim on this public natural resource.