Winter Is Coming. Should the U.S. Hang On to Its Natural Gas?

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Rising natural gas prices may pressure politicians to limit exports—but sanctions are likely to backfire

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If that happens, the ensuing tussle could worsen, damaging America’s reputation as a reliable supplier. Nearly a decade ago, long before the US became a major LNG exporter, industrial users—including Dow Chemical and steel maker Nucor—called for export restrictions to ensure that domestic users had access to affordable and abundant supplies. Have access to gas. The suppliers countered, saying the US could pump the commodity faster to meet both export and domestic demand.

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The cold weather could challenge the perception of suppliers. With domestic inventories below five-year average levels, US benchmark gas prices have already doubled from a year ago, most recently at close to $6 per million British thermal unit.

This is nothing compared to East Asia and Europe, where prices are almost five times higher than before the first snowfall. The supply crunch comes at a time when the US is exporting more natural gas than ever before – supercooled and liquefied so as to be carried to destinations overseas. US customers may have to pay an equally shocking sticker price if supplies only increase domestically. Making matters worse, US natural gas producers are in no hurry to drill for more gas, as past spreads have left them in debt. Coal, which can replace natural gas for electricity generation, is also in short supply.

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The grumbling is just starting. Two weeks ago, a trade group representing manufacturers sent a letter to Energy Secretary Jennifer Granholm urging “immediate action” to reduce LNG exports, saying that if natural gas prices increases, the manufacturers cannot compete in the market. This dynamic has already taken place in Europe, where rising energy prices have prompted some steelmakers and fertilizer plants to stop production. An LNG industry group countered with a letter from Secretary Granholm calling for continued support on LNG permits and approvals, saying exports stabilize and encourage US production.

Don’t stock up on firewood—a cold winter is unlikely to threaten Americans’ home heating needs, says Richard Redash, head of global gas planning at S&P Global Platts. But a jump in prices is certainly possible.

A rough back-of-the-envelope calculation shows that, if the US were to stockpile natural gas inventory at a five-year average pace, it would have more than 3.5 trillion cubic feet when the heating season begins in early November. There will be a little more storage. If winter turns as severe as 2013-2014, US inventory levels could drop by as much as one trillion cubic feet from mid- to late February. Historically, inventory near that level has prompted panic buying. From late September 2013 to the height of the price increase in February 2014, for example, natural gas prices rose 73%. At the time, the US bottom 48 states did not export any LNG. Today, the US exports about 10% of its production.

If hit, could the US halt exports, at least temporarily? Bob McNally, president of the Washington DC-based consultancy firm Rapidon Energy Group, noted that President Joe Biden has the authority to do so if he declares an emergency, although “in an emergency it almost doesn’t matter” if it is legal, he said.

Mr McNally said an export ban is unlikely, but he would not rule it out outright, adding that “few things scare US presidents more than raising energy prices,” especially when inflation is already on the rise. She goes. In February, Texas Governor Greg Abbott asked LNG exporters to limit fuel intake and ordered natural gas producers not to export the fuel out of the state during the state’s deep freeze.

The sanctions would prove detrimental to America’s reputation as an energy exporter, however, affecting the ability of developers to sign new contracts around the world. Many importers lie with utilities with an obligation to ensure that consumers in their respective countries have access to heat and electricity. Failing to deliver the promised LNG cargo at the height of winter could prove catastrophic.

This context is important because the growth outlook for US natural gas depends largely on foreign demand. According to the International Energy Agency, domestic natural gas consumption is expected to grow at an average annual rate of 0.7% from 2020 to 2024, while the Asia Pacific region, a singular importer, is expected to see an average growth of 4.5%. The IEA wrote in its report that US gas production growth will be primarily driven by the country’s growing LNG export capacity.

The same question may come up in future years as well. The big difference between the US and two other major exporters—Qatar and Australia—is that the US is also a major consumer of its natural gas. The more export capacity the US adds, the more likely it is to face pressure domestically to keep the fuel at home when prices rise.

There would be another way to curb exports: If export demand becomes uncertain, domestic drilling will suffer, potentially driving up US prices in the long run. This can be a very costly way to reduce energy costs.

Jinju Lee [email protected] . Feather


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