American Foreign Policy Interests

The Journal of the National Committee on American Foreign Policy

ISSN: 1080-3920 (Print) 1533-2128 (Online) Journal homepage: http://www.tandfonline.com/loi/uafp20

U.S. Liquefied Natural Gas Exports and America's

Foreign Policy Interests
Jonathan Chanis
To cite this article: Jonathan Chanis (2012) U.S. Liquefied Natural Gas Exports and
America's Foreign Policy Interests, American Foreign Policy Interests, 34:6, 329-334, DOI:
10.1080/10803920.2012.742409
To link to this article: http://dx.doi.org/10.1080/10803920.2012.742409

Published online: 07 Dec 2012.

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American Foreign Policy Interests, 34:329334, 2012

Copyright # 2012 NCAFP
ISSN: 1080-3920 print=1533-2128 online
DOI: 10.1080/10803920.2012.742409

U.S. Liquefied Natural Gas Exports and

Americas Foreign Policy Interests
Jonathan Chanis

Downloaded by [95.95.75.203] at 07:41 05 May 2016

ABSTRACT The export of liquefied natural gas (LNG) from the United
States to other countries has significant foreign policy ramifications. Given
the uncertain impact of such exports, it is not surprising that the U.S. administration has equivocated on various permitting decisions. However, in
December 2012 or shortly thereafter, the Department of Energy is expected
to release a study analyzing and evaluating many of the trade-offs involved
in such exports. Unless this report conclusively demonstrates that (1) LNG
exports would cause significant damage to U.S. residential and industrial
consumers and (2) that higher domestic natural gas prices would not be
more than compensated for through the gains of international trade, the
administration should permit the construction of at least three or four more
LNG export terminals. Such a permitting approach would not greatly change
the existing domestic natural gas market, and it would allow the government
to observe how the markets and their participants react to the change.
Besides the probable benefits accruing to the United States through
increased trade, such a change would bring a number of other foreign
policy benefits.
KEYWORDS energy security; environmentalism; fracking; international trade;
liquefied natural gas; natural gas

Jonathan Chanis has worked in finance

for 25 years. Most of that time has been
spent trading and investing in the emerging markets and in various commodities
markets, especially petroleum. Currently,
he is Managing Member of New Tide
Asset Management, a proprietary firm
focused on global and resource investing.
Mr. Chanis is a member of the Council on
Foreign Relations, a member of the Board
of The Energy Forum, and a trustee of the
National Committee on American Foreign
Policy. He holds a Ph.D. in Political
Science from the Graduate School,
CUNY, and a B.A. in Economics from
Brooklyn College.

It was little noticed, but one of the issues Prime Minister Yoshihiko Noda of
Japan raised with President Barack Obama during their April 2012 meeting
concerned the permitting and expediting of U.S. liquefied natural gas
(LNG) exports to Japan. For Japan, with its tsunami-induced, post-Fukushima
electric power shortage, this issue is critical. Most of its nuclear power plants
remain closed, and the country still experiences acute electricity shortages
and, in some areas, even periodic blackouts. To make up for the shortfall
in electricity generated from nuclear power, Japan has become, and will
remain, heavily dependent on the import of large quantities of LNG.1
For the U.S. president, and indeed for many Washington policy makers and
analysts, the issue of U.S. LNG exports is problematic because of sharply
contradictory interests pursued by powerful domestic constituencies. These
constituencies include, among others: oil and gas companies, coal companies,
electric utilities, fertilizer manufacturers, other industrial manufacturers (e.g.,
petrochemicals, steel, glass), consumer groups, labor unions, national security
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groups, free-trade proponents, and environmental

groups. The best that Prime Minister Noda was able
to obtain from his meeting with President Obama
was an agreement to continue negotiations.2
Given all the uncertainties in forecasting the impact
of LNG exports both on U.S. natural gas prices and on
the domestic economy, it is not surprising that the U.S.
administration deferred a decision. However, in
December 2012 or shortly thereafter, the government
expects to receive a second Department of Energy
(DOE) study detailing and illuminating many of the
trade-offs involved in exporting U.S. LNG. Unless this
DOE report conclusively demonstrates that: (1) LNG
exports would cause significant damage to U.S.
residential consumers and (2) higher domestic natural
gas prices would not be more than compensated for
through the gains of international trade, the U.S.
government should permit the construction of at least
three or four more LNG export facilities over the near
term. Such a gradual permitting approach would not
greatly change the existing domestic natural gas
market, and it would allow the government to observe
how the various markets and their participants react to
the change in conditions. In addition to the probable
benefits that would accrue to U.S. consumers through
increased exports, this change would also bring a
number of other positive foreign policy benefits.
Natural gas is a naturally occurring mixture of
hydrocarbon and non-hydrocarbon gases found in
porous rock formations. Its principal component is
methane.3 Natural gas differs substantially from petroleum (another naturally occurring hydrocarbon)
because it is much more difficult to transport and
store, and it is much less energy dense.4 Consequently, natural gas tends to be less valuable than
petroleum and is more difficult to trade.
Liquefied natural gas is natural gas that is turned
into a liquid by reducing its temperature to minus
258 F (at atmospheric pressure). LNG is important
because it makes natural gas less difficult to transport
and trade outside a pipeline network. Without
liquefaction, it would be uneconomic to transport
natural gas across the great distances of oceans.
Unlike the loose global integration of the global
crude oil markets,5 the natural gas markets are separated into three isolated and largely self-contained
regions.6 At 29 trillion cubic feet (tcf) per year, the
North American market is the largest consumer of
natural gas. At 21 tcf per year, the second largest
330

market is Europe, and the third largest market, with

19 tcf per year, is Asia.7 States in the Middle East
and the former Soviet Union are also significant consumers of natural gas, but a great deal, if not most, of
this consumption does not really trade at market
prices (i.e., if it is consumed locally, it is disproportionally allocated through government fiat).
In 2011, the United States produced approximately 23.0 tcf of natural gas and consumed approximately 24.3 tcf of natural gas.8 But, while the U.S.
consumption trend has been relatively flat, the trend
of production has been rising sharply. Between 2007
and 2011, production rose almost 12 percent, and,
depending on the price of natural gas in the future,
this trend could flatten out or rise even more substantially. There seems little doubt that the United
States has the shale gas reserves to dramatically
increase production.9
Shale gas is natural gas produced from shale, or
low-matrix permeable sedimentary rocks. Geologists
and the oil and gas companies have long known
about the vast amounts of oil and gas trapped in
shale formations, but only in the last ten years has
the technology (i.e., hydraulic fracking and horizontal drilling) made producing these hydrocarbons
economically feasible (i.e., profitable).10 The potential for U.S. LNG exports comes primarily from: (1)
the changed production outlook created by the
development of shale gas and (2) the huge price
gap between the United States and the other global
two regions. Consequently, if the U.S. shale gas
revolution were to be stopped, either by environmental restrictions or by industry miscalculation
(i.e., the industry was just wrong about how much
oil and gas were ultimately recoverable), LNG
exports would be moot. The partial exception to
the connection between shale gas and LNG exports
is found in potential Alaskan natural gas exports to
Asia.
Alaska has large natural gas reserves that can be
developed without hydraulic fracking, but its
remoteness makes construction of a pipeline system
to the major consuming markets along the U.S.
Pacific Coast cost prohibitive. However, these
reserves are highly suitable for production and
liquefaction and subsequent sale to Japanese and
other northeast Asian markets. Unsurprisingly, the
Alaskan congressional delegation, and especially
Sen. Lisa Murkowski, is at the forefront of attempts
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to move the U.S. federal government toward facilitating LNG exports.

On the other side of the argument are legislators
like Rep. Edward Markey, the ranking Democrat on
the U.S. House of Representatives Natural Resources
Committee. Rep. Markey fears that LNG exports will
raise prices prohibitively for U.S. residential consumers and needlessly damage U.S. manufacturers.11
In addition to these traditional, protectionist objections, some, but not all, environmental groups
(e.g., the Sierra Club) are opposed to LNG exports
because of the connection to hydraulic fracking.12
LNG exports are especially controversial because,
under any foreseeable scenario, the price of domestic natural gas would rise with the level of exports.
For example, the U.S. Department of Energy published a study in January 2012 that indicated that
under some assumptions domestic natural gas prices
could rise by more than 50 percent with exports.13
Obviously, anything close to this level would seriously and negatively affect the welfare of individual
and industrial U.S. consumers. However, many of
the assumptions and scenarios in the study were
characterized as unrealistic by industry critics and
independent policy analysts.14
The ultimate price impact of LNG exports is difficult to forecast because so many variables affect
the analysis. Also, ones assumptions tend to critically
affect the analysis. Just a few of the relevant variables
would include:
.

the global rate at which natural gas displaces coal

in the power-generation sector;
the future of nuclear power in Japan, Germany,
China, and elsewhere;
the amount of U.S. shale gas that is ultimately
recoverable;
what other countries (particularly Argentina and
China) do with their shale gas reserves;
the economic growth rates in the United States
and elsewhere; and
the future of the manufacturing economy versus
the service economy in the United States and
worldwide.

Modest changes to any of the above variables

could lead to radically different price forecasts.
And, since a wide spectrum of views exists on all
of the above issues, it is near-impossible to get
Volume 34, Number 6, 2012

agreement on what the impact of LNG exports would

be on U.S. domestic natural gas prices.
As a result of criticism, the DOE has commissioned
a second report that will attempt to better gauge the
price impact of exports and their macroeconomic
implications for the U.S. economy. This study was
first supposed to be published in March 2012. Then
it was to be published in August 2012. Now the study
is expected after the November 2012 presidential
election. To those who favor LNG exports, the
primary argument is that LNG exports would not
substantially increase domestic natural gas prices
because most of the export volume would come
from new production. Additionally, the export advocates argue that any loss to consumer welfare
through higher domestic prices would be more than
offset by lower-priced manufactured and industrial
imports, higher domestic employment and income,
and higher profits for U.S. companies and shareholders.
However, the weakness of this free-trade argument (assuming that the numbers actually bear it
out) is that it may not adequately account for the difference in the distribution of benefits from increased
exports. For example, if 310 million Americans pay a
quarter or half a cent more per kilowatt for their electricity, how is this offset by providing an additional
half million jobs (if that is the right number) or the
funneling of corporate profits to the top 1020 percent of Americans who actually own most of the
nations corporations that would benefit from LNG
exports?
The arithmetic on these types of issues probably
would indicate that everyone is better off by a modest flow of U.S.-produced natural gas to foreign markets, but much of the work to prove this has yet to be
done. Given both the complexity and sensitivity of
the LNG export issue, all sides seem to be waiting
for the second DOE report before reengaging and,
perhaps, escalating the political confrontation over
exports. Presumably, U.S. LNG exports more more
likely to happen under a Romney adminsitration
than under a second Obama adminstration.
As long as natural gas prices in the United States
remain substantially below LNG prices in Europe
and Asia, the economic argument for exporting
U.S. LNG will persist. Current U.S. benchmark
prices for natural gas (i.e., the New York Mercantile
Exchange [NYMEX], Henry Hub price) have been
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gyrating around high $2 per million British Thermal

Units (mmbtu). The current cost of Middle Eastern,
South Asian, or West African LNG sold to Japan
generally has been in excess of $15 per mmbtu
occasionally even approaching $18 per mmbtu.
While LNG import prices in Japan tend to be the
highest in the world, Korea, India, Taiwan, France,
and Spain and most other countries that import
LNG tend to pay very high prices for it because a
few dominant natural gas suppliers, especially Russia
and Qatar, have been able to constrain supply and
insist on maintaining the link to crude oil prices that
prevailed in previous decades. In the U.S. natural gas
market, the link to crude oil prices was eroded as
natural gas and crude oil developed into two distinct
markets with little inter-fuel substitutability or competition. It is the oligopolistic structure of the global
LNG market, and the difficulty of selling U.S. LNG
into Europe and Asia, that keeps prices high in those
regions.
Export of U.S. LNG to Asia and Europe probably
would expedite the decoupling of European and
Asian natural gas prices from that of crude oil. It
might also help bring back a more uniform global
level of natural gas pricing. As noted above, there
is little doubt that the United States has sufficient
natural gas available for export. There also is little
doubt that the United States can build the infrastructure necessary for such exports. The primary issues
(besides the previously noted domestic ramifications
of higher domestic prices) are cost and corporate
profitability.
If one takes a Henry Hub price of $3.50 to $4.00
(which is well in excess of where prices are today)
and adds on roughly $45 for liquefaction, shipment,
and regasification, exporting U.S. natural gas to Asia
or Europe can be extremely attractive.15 Hence, the
keen interest in Japan in facilitating U.S. LNG
exports. But Japan is not the only Asian state with
an interest in this. India, South Korea, and Taiwan,
as well as China, also want to see the United States
export LNG. For India and China, the primary concern is one of gaining access to increasing quantities
of natural gas to power their economic and social
development. But for all these Asian states, as well
as for a few in Europe (especially Spain and the
United Kingdom), the issue is diversification of
supply and breaking the stranglehold that a few producers have on their imports.
332

Because of the very large amounts of capital

necessary to finance LNG projects, governments,
especially if they already were inclined toward mercantilism, tend to be heavily involved in the LNG
trade. Between the drilling and field development,
liquefaction plant construction, ship construction,
and regasification plant construction, a LNG project
can easily cost more $35 billion. The cost advantage
for the United States, however, is that most of its
infrastructure for natural gas production is already
in place. Moreover, the risk of increasing production
to meet rising foreign demand can be spread around
hundreds of firms that make incremental investments
instead of massive capital outlays. And, as far as the
larger capital outlays for the actual export terminals
and liquefaction facilities, these can be built for
approximately $47 billion each. (While this is still
a very large amount of money, it is a lot less than
investing $35 billion in a single, integrated project.)
Current U.S. law places a number of obstacles in
the way of LNG exports. In particular, LNG can only
be exported to countries with free trade agreements
(FTAs) with the United States. If no such agreement
exists, then the Department of Energy must determine that such exports are in the public interest.
Thus far, only Cheniere Energys Sabine Pass, Louisiana, facility has been granted the right to export LNG
to non-FTA countries.16 This is an issue because the
United States only has 18 FTAs in force, and few of
these countries, except Korea, are good markets for
U.S. LNG exports.17
After construction is completed, the Cheniere
facility will have an export capacity of approximately
2.5 billion cubic feet per day (bcf=day). Total U.S.
natural gas production in 2011 was approximately
63 bcf=day. Consequently, Chenieres capacity
would represent just under 4 percent of U.S. production. Approximately a dozen more LNG projects
are waiting for federal government decisions on their
export licenses. By some estimates, if all these projects were approved and built, natural gas exports
could easily exceed 20 percent of domestic production. However, even if all the projects are
approved, it is highly unlikely that all the projects
would be built. Even with the current gap between
U.S. prices and overseas prices, such a large number
of export projects are unlikely to see completion
since they almost definitely would destroy the economics of exports by raising domestic gas prices to
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such a level that buying the gas, liquefying, and shipping it overseas would be unprofitable.
Given all the uncertainties in forecasting the
impact of LNG exports on U.S. natural gas prices,
what should the U.S. government do? It would seem
prudent to take an incremental approach to permitting and observe how the various markets and their
participants react to the change. Unless the second
DOE report conclusively demonstrates that LNG
exports would cause significant damage to U.S. residential consumers and that the gains to trade would
not more than compensate for the protectionist case
for favoring some domestic industries over others,
then the DOE can permit three or four more projects
over the next two years and wait and see if more projects are justified. In addition to the probability that
increased exports will benefit many more Americans
than they hurt, a few foreign policy reasons make
LNG exports in the national interest. These include:
1. The energy security of key U.S. allies in Asia,
especially Japan and South Korea, can be enhanced through the provision of greater volumes
of U.S. LNG. By facilitating shipments to these
countries, or at least by not prohibiting them,
the United States helps provide them with a more
diverse supply of energy, thus lessening their
dependence on other potentially unstable
sources.
While it is impossible for the United States to
reduce totally its allies dependence on these
potentially unstable sources of natural gas, by
reducing their dependence, the pressure on the
United States to sustain large-force commitments
in the Persian Gulf and along the energy sea lines
of communication might also be reduced.18
2. Increased U.S. LNG sales to Asia, even if they are
primarily to just Japan and Korea, will have a similarly positive impact on the energy security of
near-allies, such as India, and even non-allies
such as China. It can be argued that anything that
helps reduce the pressure on India and China to
venture out and secure energy in other places
may potentially decrease tension with the United
States. Consequently, by reducing Japans and
Koreas need for alternative supplies, the United
States helps China and India secure their own
supplies since there will be less competition from
Japan and Korea for these alternative supplies.
Volume 34, Number 6, 2012

3. While not all global LNG exporters are hostile to

U.S. interests (e.g., Australia or Trinidad), some
of them are less than friendly or certainly problematic (e.g., Russia, Yemen) for the United
States. By exporting LNG, the United States can
assist in breaking the oligopolistic structure of
the international trading regime for natural gas.
This ultimately would result in a decrease in the
economic rents these states capture from their
natural gas sales. While it is not certain, lower revenue would probably make these states less able
to oppose U.S. interests around the world.
4. The United States can reaffirm its commitments to
global free trade. For decades, the U.S. government has chided various countries for their shortcomings on free trade. Now that the United
States is in a position to make a choice between
protectionism and free trade, it should live up to
its own standards and choose free trade.
5. In the discussions with Japan about waiving the
FTA requirements for U.S. LNG sales, the United
States can ask for near-term, offsetting concessions from Japan. Such concessions later can be
included in any U.S.Japan FTA should one be
successfully negotiated.
6. It is likely that the United States will not be a
low-cost producer of natural gas for more than a
decade or so. In particular, global supply circumstances will eventually change and other, lowercost producers will enter the market and erode
the U.S. cost advantage. With all the euphoria in
some quarters about the shale gas revolution, it
can be forgotten that there is a major producer
that can eventually enter the market and force a
radical realignment of LNG sales. This potential
producer is, of course, Iran. Consequently, the
United States and its corporations should take
advantage of the current favorable situation and
capture as much of the economic rents that have
largely fallen to Russia, Qatar, and a few other
states. The United States can be a free rider on
the actions of these states until such time as the
ability of those states to restrain production
breaks down. And, the very U.S. behavior that
allows it to capture these rents also undermines
the regimes it seeks to change.
For all the reasons outlined above, it seems prudent for the United States to gradually increase the
333

number of permits for LNG exports over the next

three-to-four years. By gradually removing itself from
what are primarily market-driven decisions, the U.S.
government can use the decisions of individual domestic consumers and local and foreign investors
to better protect American national interests.

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Notes
1. Before the March 2011 nuclear accident, Japans LNG
imports grew at approximately 4 percent per year. In the
months following the accident, Japans LNG imports
increased by more than 12 percent. See EIA, Japan Country
Analysis Brief, http://www.eia.gov/countries/cab.cfm?fips=
JA (June 4, 2012).
2. See Toru Nakagawa, Noda, Obama Back Talks on U.S.
Shale Gas Exports to Japan, Ashai Shimbun, May 2, 2012.
3. New York Mercantile Exchange, Glossary of Terms, http://
www.commodity-trading-solutions.com/support-files/futuresterminology.pdf, 30.
4. Energy density is the amount of energy produced from a
given amount (defined either by area, volume, or mass) of a
specific substance. High energy density is why gasoline is such
a good fuel for motor vehicles; relatively low energy density is
why natural gas is not a very good fuel for motor vehicles.
5. For a discussion of this subject, please see Jonathan Chanis,
Crude Oil Is Not Fungible, Where It Comes from Does
Matter, and Global Markets Are More Fragmented Than
Many Think, American Foreign Policy Interests (May=June
2012): 144148.
6. While crude oil markets also are regionalized, they are generally connected by much more vigorous trade between
these regions. More than a third of all crude oil moves great
distances across oceans. Less than 10 percent of natural gas
moves across oceans.
7. EIA, Global Natural Gas Consumption Doubled from 1980
to 2010, Today in Energy, April 12, 2012.
8. EIA, Naural Gas Monthly, Summary of Natural Gas Supply
and Disposition in the United States, 20072012, http://
www.eia.gov/naturalgas/monthly/pdf/table_01.pdf, 3. U.S.
consumption is roughly split in thirds between electricity
generation, industrial consumption, and residential and
commercial heating and cooking.

334

9. Very conservative figures place U.S. reserves at 25 years of

consumption; more aggressive numbers would place it at
more than 75 years of consumption.
10. For additional information, please see EIA, What Is Shale
Gas and Why Is It Important?, http://www.eia.gov/
energy_in_brief/about_shale_gas.cfm, April 11, 2012.
11. See U.S. House of Representatives, Natural Resources
Committee, Drill Here, Sell There, Pay More, undated,
http://democrats.naturalresources.house.gov/sites/democrats.
naturalresources.house.gov/files/content/files/2012-03-01_ _
RPT_NGReport.pdf.
12. See the Sierra Clubs Motion to Intervene Out off Time,
Protest, and Comments (In the Matter of Sabine Pass
Liquefaction, LLC & and Sabine Pass LNG, L.P.), http://
content.sierraclub.org/sites/default/files/documents/SC%
20Mtn%20to%20Intervene%204-18-12.pdf, April 18, 2012.
13. EIA, The Effect of Increased Natural Gas Exports on Domestic
Energy Markets (January 20, 2012), http://www.eia.gov/
analysis/requests/fe/pdf/fe_Ing.pdf.
14. For a review of the DOE and several other studies, see
Charles Ebinger, Kevin Massey, and Govinda Avasarala,
Liquid Markets: Assessing the Case for US Liquefied Natural
Gas (Washington, DC: The Brookings Institution, 2012).
15. Obviously, prices would also have to stay at these levels for a
very long time to make this worthwhile.
16. Cheniere has signed supply contracts with companies in
India, South Korea, Spain, and the United Kingdom.
17. Currently, the United States has in force FTAs with: Australia,
Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican
Republic, El Salvador, Guatemala, Honduras, Israel, Jordan,
Korea, Mexico, Morocco, Nicaragua, Oman, Peru,
Singapore. See Office of the United States Trade Representative, Free Trade Agreements, http://www.ustr.gov/tradeagreements/free-trade-agreements/, undated. (Chile, an
FTA country, may also be a market for U.S. LNG sales, but
it is a very small market and much depends on what Argentina eventually does with its shale gas resources.)
18. It is not generally appreciated, but the consequences of a
concerted disruption to LNG shipments to northeast Asia
are potentially much more serious than a similar disruption
to the crude oil flows. And, it is probably easier to disrupt
LNG shipments than crude oil flows, at least by a determined
state actor. LNG flows are more highly concentrated both at
their origin and destination, and it is much harder to replace
a facility, or even a ship, if one is destroyed.

American Foreign Policy Interests