AEA Letter to Committee on House Energy and Commerce Chairman Fred Upton on LNG Export White Paper

February 13, 2014
The Honorable Fred Upton
Chairman, Committee on Energy and Commerce
2125 Rayburn House Office Building
Washington, DC 20515

Dear Mr. Chairman:

We appreciate your leadership in shaping federal energy policy to support a growing economy, job creation, energy independence, and affordable energy supplies for America’s consumers and businesses.  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 as we have seen the power of open markets to create economic growth.  We also support advanced recovery techniques, including hydraulic fracturing, and appreciate your efforts to help increase domestic production of natural gas.

The issue of how much domestic natural gas (LNG) the U.S. should export to countries which have not signed free trade agreements (non-FTA nations) with the U.S. is one of considerable debate, and we have carefully reviewed the policy paper released by the Energy and Commerce Majority Committee Staff on February 4, 2014.  We respectfully submit these considerations to you, the Members of the Committee, other Members of Congress, and staff as this important public policy debate proceeds.  We simply cannot afford to get this policy wrong.

While we respect the Committee’s thoughtful approach to the subject, we strongly disagree with the report’s central recommendation to export nearly half of current U.S. natural gas production to non-FTA nations.  If we were to export such a high volume of LNG, it would have devastating effects on consumers, job creation, re-shoring, the American manufacturing renaissance and efforts to open closed markets overseas for more American goods and services.

Our specific objections are enumerated below, but in summary, our primary concerns with exporting such a large volume of LNG are as follows:

• Domestic gas prices for American consumers would skyrocket, hitting low and middle income people hardest, which would hurt consumer spending and expand income inequality.  The current suffering caused by propane price spikes and shortages are the unfortunate but informative effects of an imbalanced approach to exports.

• The American manufacturing renaissance that is leading to increased job creation, re-shoring, and direct foreign investment would be stifled, and could revert to massive offshoring of American jobs and manufacturing facilities.

• American efforts to open closed markets in countries that have not signed FTAs with the U.S. would be greatly weakened, as countries would get “free” access to prized LNG without making reciprocal trade concessions for other U.S. goods and services.

• The primary data (the NERA report) that the committee staff used to justify these recommendations is built upon the wrong foundation and is already obsolete, does not account for a number of highly likely developments which will greatly change the supply and demand landscape for domestic natural gas, and contradicts the common understanding of the “public interest.”
Consumer Prices Would Skyrocket, Hitting Low and Middle Income People Hardest:

As you know, natural gas prices have nearly doubled since DOE’s approval of the first LNG export terminal, and consumers are paying some of the highest natural gas prices they’ve seen in recent years.  Including yesterday’s approval of the Cameron export application, DOE has already approved exports of approximately 12 percent of domestic natural gas production, so an increase to 50 percent would certainly cause consumer prices to skyrocket.  Moreover, these massive energy cost increases would act as a significant regressive tax, hitting low and middle income families the hardest.

These price spikes are inevitable, as confirmed by multiple expert third party analyses. 

• Last year, Purdue University found that whether LNG export levels are at 6Bcf/day or 12Bcf/day (NERA’s low and high scenarios and well below the volume level the report recommends), GDP will decline and all American’s will be plagued by higher electricity prices.   Moreover, U.S. consumers lose due to higher energy prices, and foreign consumers gain.”

• Last March, 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.  

• In June, 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.

• 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. 

Job Creation, Re-shoring and the American Manufacturing Renaissance Would Suffer:

America’s newfound abundance of natural gas is powering a remarkable manufacturing renaissance, which to date has generated more than $110 billion of announced investment in over 120 different manufacturing projects, responsible for creating more than 68,000 manufacturing jobs this year.  America’s natural gas advantage is so significant that U.S. companies are beginning to “re-shore” foreign operations back to the U.S.s, a trend that could lead to an additional five million direct and indirect jobs by 2020.  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:

• In August 2013, the Boston Consulting Group (BCG) found that the growth of natural gas supplies and the re-shoring of businesses are projected to create 2.5 million to 5 million U.S. jobs by decade's end as manufacturing relocates to the U.S. That, in turn, could reduce the unemployment rate by as much as two or three percentage points.   The report also suggests that by 2015, the U.S. 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.  

• The shale gas revolution continues to power manufacturing growth.  The Institute for Supply Management’s monthly index shows the manufacturing sector has grown for six consecutive months.  The October, 2013 reading of 56.4 is the index’s highest point since April 2011.

• A September 2013 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 U.S. trade deficit.”   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.” 

• An American Chemistry Council May 2013 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.

American efforts to open markets in countries which haven’t signed FTAs with the U.S. would be greatly weakened, as countries would get “free” access to prized LNG without making reciprocal trade concessions for other U.S. goods and services.

As Peter Huntsman, CEO of AEA Member Company the Huntsman Corporation wrote in a recent op-ed:

“The best bargaining chip U.S. trade negotiators have at their disposal to open world markets is American natural gas.  The shale gas revolution has transformed the country’s energy outlook – we are now the largest oil and gas producer in the world.  Correspondingly, the international appetite for our energy is insatiable.

“Earlier this month, the United States joined 11 Pacific Rim nations working on a new U.S. Asia-Pacific trade agreement.  There is a lot riding on the talks, particularly for states and industry sectors that have seen rapid export growth, as Asian nations have historically been some of the most closed markets to U.S. goods.  A new free trade agreement would promote innovation, economic growth and support job creation.

“This raises an important question: why are we giving away this strategic commodity to foreign nations –rewarding protectionist behavior – that do not provide access to their markets for other American products?  At the same time the United States is negotiating for greater access, we are ceding our most important leverage point for opening these closed Asian economies.

“Consider our trading relationship with Japan. Historically, Japan has been one of the most closed markets to U.S. goods.  Our trade deficit was $76.3 billion in 2012, up $13.1 billion from 2011.  The country continues to be virtually closed to agricultural imports, maintaining a whopping 777.7 percent tariff on imported rice, a 252 percent tariff on wheat, a 360 percent tariff on butter, a 328 percent tariff on sugar and 38.5 percent for beef.  Additionally, a variety of other barriers impede access to Japan’s automotive market.

“Japan is the largest importer of natural gas in the world, making American gas exports a powerful hammer to break down protectionist barriers.  Yet at the same time we are in the middle of trade talks to open the closed Japanese market, the Obama administration is undermining those efforts, giving away access to our natural gas to Japan without getting anything in return.

“Increased exports of all American goods and services – not just natural gas – opens markets, creates jobs and raises living standards for all Americans.  America’s natural gas advantage presents a once-in-a-generation opportunity to increase free trade across the world.  Many American businesses would prosper with access to closed Asian economies – particularly if there are open markets for finished U.S. goods.  But it is foolish to expect our trading partners to buy the cow when they are getting the milk for free.

The complete text of Mr. Huntsman’s oped is available on our website, americasenergyadvantage.org

The primary data (the NERA report) that the committee staff used to justify these recommendations is built upon the wrong foundation and is already obsolete:

The NERA report is built upon the forecasts of long-term natural gas supply, demand and price prepared by the EIA – specifically, the EIA Annual Energy Outlook for 2011 (AEO2011).  The EIA makes these long-term forecasts by extrapolating twenty or more years into the future with a model based entirely upon historical interrelationships between natural gas supply, demand, price and various sectors of the U.S. economy.  In the case of AEO2011 the models were based upon data and relationships in the U.S. economy in 2006 and earlier.  Even the recent AEO2014 preview is built on data no more recent than 2010. 

Consequently, the period of time and the interrelationships frozen into these backward-looking EIA models represent a time during which the US was anxious to speed LNG imports; a time during which natural gas supply was contracting and prices increasing; and a time that saw the decline of U.S. manufacturing to its lowest ebb.  While models that extrapolate historical conditions into predictions of future conditions can be useful provided the forecast is not very far into the future and provided conditions remain similar to the assumptions built into the models, they are incapable of making long-term predictions for periods that follow dramatic change.   All parties agree that the shale gas boom has caused a paradigm shift in U.S. public policy discussions and our economy.  It is therefore highly risky and irrational to make far-reaching policy decisions for this new future by relying upon models based on the opposite dynamics of the past.

The natural gas marketplace has evolved so rapidly that the conclusions made in the NERA report have been rendered obsolete.  Nearly every respected energy market analysis has forecast natural gas demand – domestically and internationally – to dramatically exceed DOE projections.   

• In September 2013, Facts Global Energy projected LNG export volumes at a much higher level than the Energy Information Administration (EIA): 40 million tonnes/year in 2020 and almost 80 million TPY in 2025, assuming full utilization of capacity, vs. 5.5 million TPY in 2020 and almost 30 million TPY in 2030 in the annual energy outlook reference case.

• In September 2013, ConocoPhillips projected domestic natural gas demand will exceed DOE’s projections by 30 percent in 2017 – just four years from today.  

• In September 2013, JP Morgan’s global head of commodities research projected that natural gas prices will spike to $8.00 per million Btus by 2016 — more than doubling its current price in three years.  

• In October 2013, engineering and construction firm Black & Veatch released a survey of market participants that projected natural gas prices to climb to as high as $7.49 per million Btus through 2020.

• The Eurasia Group predicted that natural gas demand could be as much as 10 times greater than the 2020 EIA reference case scenario.

Moreover, the NERA report does not account for new developments that would dramatically affect the supply and demand landscape for natural gas, especially new greenhouse gas regulations for existing baseload electric generation facilities in the U.S. or power switching in the transportation sector. 

The “Public Interest” Determination Has Been Contradicted:

The Natural Gas Act requires DOE to approve licenses to export LNG to non-FTA countries unless it finds that such a license “…will not be consistent with the public interest.”   While no set definition for public interest exists, the common understanding based on 100 years of precedent and experience is that the public interest is that which yields the most good for the most people.  The NERA report asserts that exporting LNG to non-FTA countries serves the public interest because in all cases studied it increases real GDP.  However, as the NERA report also describes, this increase in real GDP is achieved by large gains for those who a) own natural gas resources (Resource Income), or b) participate in the merchant function outweighing the losses from reduced capital and wage income to U.S. consumers.

In other words, the gains realized by the first narrow group (few Americans own natural gas resources) are so large that in the aggregate they slightly outweigh the losses suffered by the much broader group of Americans who derive income from capital or wages.  As the NERA report states: “Note that these are positive but, on the scale of the entire economy, very small net effects.”
    
To make matters worse, the world described by the NERA report grows more distant from reality every day.  The NERA report assumes that all of the Resource Income contributes to U.S. GDP when it explicitly assumes that “foreign purchasers take title to LNG when it is loaded at a United States port”.   However, as various foreign interests increase their investment in shale wells and LNG terminals, less Resource Income is left within the U.S. to contribute to U.S. GDP and offset the losses to capital and wage income.  Because the NERA report and the DOE base their public interest finding on a “very small net effect”, it does not take much of this foreign investment to reverse the delicate balance and render unlimited LNG

Export “not consistent with the public interest”.  In short, current trends assure that producers, exporters, foreign and domestic investors, and our global competitors will win, while the rest of America loses – hardly an outcome which benefits the “public interest.”

Given the uncertainty, unpredictability and historical volatility of the natural gas market, caution is warranted before irreversible harm is done to the economy.  Granting access to these resources without a reciprocal guarantee of open markets is a shortsighted decision benefiting narrow interests.  It is a bad trade of U.S. resources, as opposed to an approach which would broadly benefit the American people if done in a balanced fashion which opened closed markets overseas. 

We appreciate your service to our country and your interest in this vital issue, and we would welcome the opportunity to discuss these issues with you or your staff in the very near future.

Thank you for your attention. 

Sincerely yours,

America’s Energy Advantage
Alcoa
American Public Gas Association
Celanese
Dow
Eastman
Huntsman
Incitec Pivot
Nucor

Cc. Henry Waxman, Ranking Member
Ed Whitfield, Chairman, Subcommittee on Energy and Power
Bobby Rush, Ranking Member, Subcommittee on Energy and Power