[Senate Hearing 113-263]
[From the U.S. Government Publishing Office]
S. Hrg. 113-263
IMPORTING ENERGY, EXPORTING JOBS
=======================================================================
HEARING
before the
COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
ON
``IMPORTING ENERGY, EXPORTING JOBS. CAN IT BE REVERSED?''
__________
MARCH 25, 2014
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COMMITTEE ON ENERGY AND NATURAL RESOURCES
MARY L. LANDRIEU, Louisiana, Chair
RON WYDEN, Oregon LISA MURKOWSKI, Alaska
TIM JOHNSON, South Dakota JOHN BARRASSO, Wyoming
MARIA CANTWELL, Washington JAMES E. RISCH, Idaho
BERNARD SANDERS, Vermont MIKE LEE, Utah
DEBBIE STABENOW, Michigan DEAN HELLER, Nevada
MARK UDALL, Colorado JEFF FLAKE, Arizona
AL FRANKEN, Minnesota TIM SCOTT, South Carolina
JOE MANCHIN, III, West Virginia LAMAR ALEXANDER, Tennessee
BRIAN SCHATZ, Hawaii ROB PORTMAN, Ohio
MARTIN HEINRICH, New Mexico JOHN HOEVEN, North Dakota
TAMMY BALDWIN, Wisconsin
Elizabeth Leoty Craddock, Staff Director
Sam E. Fowler, Chief Counsel
Karen K. Billups, Republican Staff Director
Patrick J. McCormick III, Republican Chief Counsel
C O N T E N T S
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STATEMENTS
Page
Adam Sieminski, Administrator, Energy Information Administration,
Department of Energy........................................... 4
Chow, Edward C., Senior Fellow, Energy and National Security
Program, Center for Strategic International Studies (CSIS)..... 21
Goldwyn, David L., Nonresident Senior Fellow, Brookings
Institution, and President, Goldwyn Global Strategies, LLC..... 14
Landrieu, Hon. Mary U.S. Senator From Louisiana.................. 1
Montgomery, W. David, Ph.D., NERA, Economic Consulting........... 8
Neverovic, Jaroslav, Ministry of Energy, The Republic of
Lithuania...................................................... 27
APPENDIXES
Appendix I
Responses to additional questions................................ 59
Appendix II
Additional material submitted for the record..................... 79
IMPORTING ENERGY, EXPORTING JOBS
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TUESDAY, MARCH 25, 2014
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 10:06 a.m. in
room SD-366, Dirksen Senate Office Building, Hon. Mary
Landrieu, chair, presiding.
OPENING STATEMENT OF HON. MARY LANDRIEU, U.S. SENATOR FROM
LOUISIANA
The Chair. Good morning, everyone. Thank the members for
attending and thank our witnesses for being a part of this
important hearing.
It's my pleasure to bring the Energy Committee to an
opening session this morning on the subject of natural gas. Our
title, ``Importing Energy, Exporting Jobs. Can this be
reversed?''
I just want to say to begin with that Senator Murkowski is
on her way. She's in a very important meeting. We expect her
momentarily and looking forward to her opening statement.
I want to thank Senator Ron Wyden, my dear friend and
former leader of this committee, for his leadership and his
support, former chairman of this committee. Look forward to
continuing to working with him and all members of the committee
on both sides of the aisle.
Not quite a decade ago members of this committee attended
numerous meetings in this room to consider the 2005 Energy
Policy Act. At that time we discussed, at length, the need to
import more liquefied natural gas to meet our growing energy
demands. Thanks to an extraordinarily and swift, extraordinary
and swift advances in technology to locate, capture and produce
natural gas, today this committee will discuss the expanded
opportunities to export liquefied natural gas and the
possibilities to create high paying jobs in America and support
our allies in Europe and budding democracies across the world.
When President George W. Bush signed EPACT in 2005, the
price of natural gas was averaging $9.50 cents per cubic feet.
By October of that year, the price had risen to $13 and
continued to rise in December of that year to $15. These high
prices force chemical manufacturers to close up their factories
and head overseas.
This affected many States, not just Louisiana, Michigan and
other industrial States around the country. They did so in
droves. The fact that less than 10 years later we are now in a
4-year period of domestic gas prices at $5 or less is stunning,
with only a long term favorable outlook ahead of us.
Because of this price reduction and price stabilization
Methanex, for instance, the world's largest producer of
methanol is literally breaking down a factory piece by piece in
Chile and shipping it back to Geismar, Louisiana, where it
originally was.
What caused this reversal of fortune?
What game changing technologies were involved?
What actions should this committee and the U.S. take given
this new set of data and facts?
New discoveries in oil and gas have fortified our economy
in the last few years buffering us from an even deeper
recession which, I believe, would have occurred and providing
new, high paying jobs for thousands of Americans. Nowhere is
this more evident than in my home State of Louisiana and all
along the Gulf Coast, America's energy coast. According to
2013, a study by David Dismukes at LSU, over 200,000 jobs will
be created by new, unconventional production in Louisiana alone
by 2019. This is not considering the other jobs in other States
around the country. It is quite promising.
The oil and gas industry currently supports over 300,000
jobs in Louisiana and has been a major factor in securing below
average unemployment for the last 5 years. For also for States
such as North Dakota that have had increased ongoing
production, Colorado, etcetera.
A recent LSU report estimated that from 2012 to 2018
approximately $47,000,000 of private sector investment will be
made in new and existing plants and projects in Allen Parish,
Beauregard, Calcasieu, Cameron and Jefferson Davis. Parishes
that people on this committee have probably never heard of and
people in America have never heard of either. But these are
real places, with real people, 100-mile stretch between I-10
Lafayette and Lake Charles, Louisiana. That investment is
expected to create more than 37,000 new jobs, high paying jobs.
In America LNG exports will not only drive continued
investment in domestic production and create jobs they're also
a powerful geo-political tool, particularly in light of
Russia's illegal aggression in the Ukraine. The events in the
Ukraine have shown that Russia President Putin is intent on
using his monopoly on energy supplies to pressure our allies in
Europe to advance his economic and philosophical agenda.
Last week Russia sanctioned 9 officials. I was one of them.
Being sanctioned by President Putin is a badge of honor for me
and the people that I represent.
It has only encouraged me to redouble my efforts to
increase domestic energy production here in the United States
and make the U.S. a global leader in energy exports. America
can and should be an energy super power in all aspects of
conventional and advanced sources of energy including new
alternative fuels and alternative energy sources. We all know
that real competition in real open markets drives efficiency
and lowers prices for everyone.
The last thing Putin and his cronies want is competition
from the United States of America in the energy race. Tyrants
and dictators throughout history have had many reasons to fear
revolutions. This U.S. energy revolution is one they should all
keep their eyes on.
I look forward to playing a role to bring energy security
independence to America and its democratic allies around the
world to advance freedom of speech, freedom of religion and
yes, the freedom of the press and to hold the new promise to
hold leaders accountable for what they do. Today's hearing is
part of this effort. Far too often when faced with complex and
difficult challenges we stand still, unsure, hesitant, moving
in every different direction. I can assure you this will not be
the case with this committee under my leadership.
We will do our part to use our domestic production of gas,
oil, advanced coal technologies, alternative fuel technologies
and exciting renewables to meet our energy needs here at home
and abroad. We will also break the stranglehold of tyrants and
oppressors who use their energy stockpiles to crush the hopes
and promise of freedom and democracy for all people,
particularly women and girls.
We have a great panel of experts assembled here today. I
look forward to hearing from them about how we can achieve
these goals.
I will turn to Ranking Member Murkowski as soon as she's
here for her opening statement. Until then, let me call on my--
our witnesses this morning.
I do want to mention, for the record, and give credit to
Senator Mark Udall, who is here with us this morning, on a bill
that he has introduced that is currently pending. Hopefully we
can take this up at some point, the American Job Creation and
Strategic Alliances Act, cosponsored by Senator Begich. It
amends a section of the Natural Gas Act to allow for exports of
natural gas to world trade organization countries. We'll look
forward to hearing more specifically about many other pieces of
legislation on this subject, both pro and con and neutral, as
we develop our policy. But I want to thank you, Senator Udall,
for your introduction of this bill.
I'd like to put into the record an Op Ed that I thought was
particularly on point from the Wall Street Journal, their
editorial, a Gas Export Strategy and from the New York Times,
from Thomas Friedman, From Putin, a Blessing in Disguise, for
the record.
The Chair. Now I'd like to begin with our witnesses then we
will go through a round of questions.
Our first is Mr. Adam Sieminski, Administrator of U.S.
Information.
Next, Mr. David Montgomery, Senior Vice President of NERA
Economic Consulting.
Next, Mr. Edward C. Chow, Senior Fellow, Energy and
National Security Program Center for Strategic International
Studies.
We're very pleased to have the Minister of Energy from the
Republic of Lithuania that I think will give us a really
extraordinary and very timely view of what's happening in his
part of the world.
Then Mr. David Goldwyn, Nonresident Senior Fellow, Energy
Security Initiative at Brookings Institute.
So please, Mr. Sieminski, if you could proceed with 5
minutes of testimony and then a round of questions.
Thank you.
STATEMENT OF ADAM SIEMINSKI, ADMINISTRATOR, ENERGY INFORMATION
ADMINISTRATION, DEPARTMENT OF ENERGY
Mr. Sieminski. Chair Landrieu, members of the committee,
thank you very much for the opportunity to be here today. EIA,
as you know, is the statistical and analytical agency.
The Chair. Could you speak a little bit closer into your
microphone? All of you are going to have to press your buttons
and then lean into the microphone. Thank you.
Mr. Sieminski. Chair Landrieu, as you know, the EIA is the
statistical and analytical agency within the Department of
Energy. By law its data and analyses are independent of
approval by any other office or employee of the U.S.
Government. So my views should not be construed as representing
those of the Department of Energy or any other Federal agency.
EIA's latest short term outlook forecast total natural gas
consumption average, 71.3 billion cubic feet a day in 2014.
That's a slight drop from 2013 as power generators respond to a
year over year increase in natural gas prices.
In 2015 forecast natural gas consumption again falls
slightly as a decline in residential and commercial use more
than offsets increased demand from industry and electricity
generation.
On the supply side, EIA forecasts that natural gas marketed
production will grow at an average rate of 2 and a half percent
in 2014 and more than 1 percent in 2015. Production growth in
the Marcellus formation, centered in Pennsylvania, but also
evident in West Virginia, is particularly noteworthy. EIA also
expects increased drilling activity in the Haynesville in
Louisiana and Arkansas and the Barnett in Texas.
The past winter of prolonged widespread and very cold
weather which is continuing throughout the Northeast and
throughout much of the United States, has led to a record
breaking natural gas withdraw season. EIA expects natural gas
inventories at the end of this winter will be at the lowest
level in 11 years. However, EIA forecasts for production and
consumption indicate that operators will make record high
storage injections between April and October in order to
substantially rebuild inventory levels.
Growing natural gas production in recent years is already
having a significant impact on natural gas trade by displacing
some pipeline imports from Canada while enabling increased
pipeline exports to Mexico. As world scale domestic natural gas
liquefaction plants begin to come on stream, EIA expects the
United States to become a net exporter of natural gas beginning
later this decade.
Turning to longer term projections presented in EIA's
Annual Energy Outlook for 2014, natural gas production from
shale gas, tight gas and offshore natural gas resources rose
steadily increasing 56 percent between 2012 and 2040 when
production reaches 37.6 trillion cubic feet in our reference
case. The largest contributor, shale gas, will be over 50
percent of total production at that time with tight gas and
offshore gas production also increasing. Alaska's natural gas
production rises with the opportunity in the middle of the next
decade for liquefied natural gas exports to overseas customers.
The complete AEO 2014, the Annual Energy Outlook, which
will be released next month, includes cases that examine
uncertainties and alternative assumptions that can
substantially change this outlook.
For example, projected natural gas production in 2040 is
roughly 10 percent above the reference case level in the high
oil price scenario and roughly 20 percent above the reference
case level in the high oil and gas resource case. Projected
prices and export levels also differ considerably across these
cases. As producers develop lower grade resources over time EIA
sees the spot price at Henry Hub increasing at about 3.7
percent per year in the reference case from a low of $2.75
million, 275 per million BTU to $7 and 65 cents per million BTU
in 2040.
Even so, energy intensive industries in the United States
benefit from shale gas as both the availability and price of
natural gas are attractive compared to the situation in other
world regions. Generators using natural gas are also expected
to capture a growing share of total U.S. electricity
production.
Turning to natural gas trade, pipeline exports of U.S.
natural gas to Mexico grow by 6 percent a year in the reference
case and are more than 3 times net pipeline imports from Canada
by 2040. From 2012 to 2040 U.S. net exports of LNG increase by
3.5 trillion cubic feet with the remaining volumes originating
from export terminals located along the Atlantic and Gulf
Coasts along with 800 BCF of LNG originating in Alaska.
Future U.S. LNG exports depend on a number of factors that
are difficult to anticipate including price convergence in
global natural gas markets, competition with oil, the pace of
natural gas supply/growth inside and outside the United States.
While the AEO 2014 side cases are not yet completed, projected
exports by 2040 in our high oil price case are nearly twice as
high as the reference case. LNG exports in the high oil and gas
resource case which uses a reference case oil price scenario,
but is more optimistic about the size of the resource base and
technology advances, falls midway between those in the
reference and high oil and gas price cases.
Thank you, Chair Landrieu for the opportunity to testify
before the committee.
[The prepared statement of Mr. Sieminski follows:]
Prepared Statement of Adam Sieminski, Administrator, Energy Information
Administration, Department of Energy
Chair Landrieu, Ranking Member Murkowski, and Members of the
Committee, I appreciate the opportunity to appear before you today at
this hearing on the topic of Importing Energy, Exporting Jobs, Can it
be Reversed?
The Energy Information Administration (EIA) is the statistical and
analytical agency within the U.S. Department of Energy. EIA collects,
analyzes, and disseminates independent and impartial energy information
to promote sound policymaking, efficient markets, and public
understanding regarding energy and its interaction with the economy and
the environment. EIA is the nation's premier source of energy
information and, by law, its data, analyses, and forecasts are
independent of approval by any other officer or employee of the United
States Government. The views expressed herein should therefore not be
construed as representing those of the Department of Energy or any
other federal agency.
As requested, my testimony focuses on natural gas. It draws on
EIA's data covering production, stocks, demand, imports, exports, and
prices; on our forecast of trends over the next one to two years that
is updated each month in the Short-term Energy Outlook (STEO). It also
draws on long-term projections through 2040 that are updated each year
in our Annual Energy Outlook (AEO), including a variety of alternative
cases to reflect the effect of key uncertainties on energy market
outcomes.
Short Term: U.S. Natural Gas Production, Use and Trade
This winter of prolonged, widespread frigid weather throughout much
of the United States led to a record-breaking natural gas withdrawal
season, bringing inventories of natural gas to an 11-year low at the
end of the current winter. EIA's weekly natural gas storage report
issued on March 20 shows that stocks as of March 14 were 953 Billion
cubic feet (Bcf). However, EIA forecasts for production and consumption
indicate that operators will make record-high storage injections
between April and October in order to substantially rebuild inventory
levels. The demand response to higher natural gas prices should be
particularly apparent in the electric power sector, where decisions
made by operators regarding which power plants to run during shoulder
demand periods are quite sensitive to relative fuel prices.
EIA expects total natural gas consumption will average 71.3 Bcf per
day (Bcf/d) in 2014, a drop of 0.1 Bcf/d from 2013. The projected year-
over-year increases in natural gas prices contribute to declines in
natural gas used for electric power generation from 24.9 Bcf/d in 2012
to 22.3 Bcf/d in 2013 and 22.0 Bcf/d in 2014. In 2015, total natural
gas consumption falls by 0.3 Bcf/d as a decline in residential and
commercial consumption more than offsets consumption growth in the
industrial and electric power sectors. EIA expects natural gas
consumption in the power sector to increase to 22.6 Bcf/d in 2015 with
the retirement of some coal plants.
Total marketed production averaged 70.2 billion cubic feet per day
in 2013. The latest STEO forecasts natural gas marketed production to
grow at an average rate of 2.5 percent in 2014 and 1.1 percent in 2015.
U.S. natural gas production has increased significantly since 2005
mainly because of growth in production of shale gas resources. The
recent rapid natural gas production growth in the Marcellus formation,
centered in Pennsylvania, but also evident in West Virginia, is
particularly noteworthy. Supply growth in the Northeast is causing
natural gas forward prices in that region to fall even with or below
Henry Hub prices outside of peak-demand winter months. Consequently,
some drilling activity may again shift towards Gulf Coast plays such as
the Haynesville in Louisiana and the Barnett in Texas, where prices are
closer to the Henry Hub spot prices.
Turning to natural gas trade, growing domestic production over the
past several years has displaced some pipeline imports from Canada,
while exports to Mexico have increased. EIA expects these trends will
continue through 2015. EIA projects net natural gas imports of 3.6 Bcf/
d in 2014 and 2.6 Bcf/d in 2015, which would be the lowest level since
1987. The latest AEO, which is discussed below, projects the United
States will be a net exporter of natural gas beginning later in this
decade.
The Long Term Outlook for U.S. Natural Gas
EIA released the Reference case projections for the Annual Energy
Outlook 20014 (AEO2014) in December. The Reference case is intended to
represent an energy future through 2040 based on given market,
technological, and demographic trends; current laws and regulations;
and consumer behavior. EIA recognizes that projections of energy
markets are highly uncertain and subject to geopolitical disruptions,
technological breakthroughs, economic fluctuations, and other
unforeseeable events. In addition, long-term trends in technology
development, demographics, economic growth, and energy resources may
evolve along a different path than represented in the Reference case
projections. The complete AEO2014, which will be released next month,
includes a number of alternative cases that examine uncertainties and
alternative assumptions regarding resources, technology advances, and
world energy prices that can significantly affect projections for
natural gas production, use, and trade.
In the AEO2014 Reference case, natural gas production grows
steadily, with a 56 percent increase between 2012 and 2040, when
production reaches 37.6 trillion cubic feet (Tcf). Shale gas production
is the largest contributor, growing by more than 10 Tcf, from 9.7 Tcf
in 2012 to 19.8 Tcf in 2040. The shale gas share of total U.S. natural
gas production increases to over 50 percent. Tight gas production and
offshore gas production both increase significantly, but their share of
total production remains relatively constant. Alaska's natural gas
production also increases during the projection period, driven by the
opportunity for Alaska liquefied natural gas (LNG) exports to overseas
customers, which is projected to be economic in the middle of the next
decade.
One key uncertainty that influences projected U.S. natural gas
production is the level of oil prices, relative to natural gas prices,
which significantly affects projected use of natural gas in the
transportation sector and projected foreign demand for U.S. natural gas
exports. A second key uncertainty influencing projected domestic
natural gas production relates to the abundance of tight oil and shale
gas resources and the pace of technology advances that influence both
drilling costs and the recovery factor. The impact of alternative
assumptions in these two areas will be explored in AEO2014 side cases
that address high and low oil price scenarios and more optimistic and
pessimistic assumptions regarding the resource base and the pace of
technology advances. The impacts of revised assumptions and scenarios
can be substantial. For example, projected natural gas production in
2040 is roughly 4 Tcf above the Reference case level in the High Oil
Price scenario, and roughly 8 Tcf above the Reference case level in the
High Oil and Gas Resource case. Projected prices and export levels also
differ considerably across these cases.
Average annual U.S. natural gas prices have remained relatively low
over the past several years as a result of the availability of abundant
domestic resources and the application of improved production
technologies. Growth in demand for natural gas, largely from the
electric power and industrial sectors (including oil refineries), and
for LNG exports, supports higher prices, particularly toward the end of
the present decade. To meet that rising demand, producers move into
basins where the recovery of natural gas is more difficult and
expensive, which leads to an increase in Henry Hub spot prices of 3.7
percent per year in the Reference case, from $2.75 per million Btu
(MMbtu) in 2012 to $7.65 per MMbtu (2012 dollars) in 2040.
Energy intensive Industries benefit from shale gas
Availability of natural gas and hydrocarbon gas liquids (HGL) from
wet gas production at prices that are attractive relative to those in
other regions supports the growth of energy intensive industries that
rely on those as both a fuel and as a feedstock in the United States.
Overall, industrial shipments grow at a 3.0 percent annual rate
over the first 10 years of the AEO2014 Reference case projection and
then slow to 1.6 percent annual growth from 2025 through 2040. Bulk
chemicals and metals-based durables account for much of the increased
growth in industrial shipments in AEO2014. Industrial shipments of bulk
chemicals, which benefit from an increased supply of natural gas
liquids, grow by 3.4 percent per year from 2012 to 2025 in AEO2014. The
higher level of industrial shipments leads to more natural gas
consumption in the U.S. industrial sector, increasing from 8.7
quadrillion British thermal units (Btu) in 2012 to 10.6 quadrillion Btu
in 2025 in AEO2014, compared to 9.8 quadrillion Btu in 2025 in AEO2013.
Natural gas use in manufacturing, the single largest component of
overall industrial gas use, rises rapidly over the next decade.
Projected prices for natural gas also make it a very attractive fuel
for new generating capacity. In 2040, natural gas accounts for 35
percent of total electricity generation, while coal accounts for 32
percent.
Growth in Transportation Demand and Exports
Some of the largest changes in consumption are seen for natural gas
consumed in transportation and exported as LNG, since the profitability
of natural gas as transportation fuel or as LNG for export depends
primarily on the price differential between crude oil and natural gas.
Although transportation use currently accounts for only a small portion
of total U.S. natural gas consumption, the percentage growth in natural
gas demand by heavy-duty vehicles, ships, and trains is significant.
Consumption in the transportation sector, excluding natural gas use at
compressor stations, grows from about 40 billion cubic feet in 2012 to
850 billion cubic feet in 2040.
U.S. exports of natural gas also increase in the AEO2014 Reference
case. Pipeline exports of U.S. natural gas to Mexico grow by 6 percent
per year, from 0.6 Tcf in 2012 to 3.1 Tcf in 2040. Over the same
period, as more U.S. demand is met by domestic production, net pipeline
imports from Canada fall to less than 1 Tcf. From 2012 to 2040, U.S.
net exports of LNG increase by 3.5 Tcf, including 800 Bcf of LNG
originating in Alaska, with the remaining volumes originating from
export terminals located along the Atlantic and Gulf coasts. In
general, future U.S. LNG exports depend on a number of factors that are
difficult to anticipate, including the speed and extent of price
convergence in global natural gas markets, the extent to which natural
gas competes with oil in U.S. and international gas markets, and the
pace of natural gas supply growth outside the United States.
Projected U.S. natural gas exports are sensitive to the abundance
of tight oil and shale gas resources, the pace of technology advances
that influences drilling costs, the recovery factor, and evolution of
global oil prices. While the AEO2014 side cases are not yet completed,
projected LNG exports by 2040 in the High Oil Price case are nearly
twice as high as in the Reference case. Projected LNG exports in the
High Oil and Gas Resource case, which uses the Reference case oil price
scenario but is more optimistic about the size of the resource base and
technology advance, fall midway between those in the Reference and High
Oil Price cases.
Thank you for the opportunity to testify before the Committee.
The Chair. Thank you very much.
Please proceed.
STATEMENT OF W. DAVID MONTGOMERY, PH.D., NERA, ECONOMIC
CONSULTING
Mr. Montgomery. Thank you, Madame Chair. I thought you were
going to ask questions of Mr. Sieminski.
The Chair. No, no. We do the whole panel. Then we'll have
questions.
Mr. Montgomery. Thank you.
Madame Chair and members of the committee, I'm also honored
by your invitation to testify today in this distinguished
company. It was my privilege to lead the study of the macro
economic impacts of U.S. LNG exports that my company, National
Economic Research Associates, did for the Department of Energy
and of our recent update to that study. I've provided a copy of
the updated report along with my testimony. I'd like to request
that that be entered into the record.
The Chair. Without objection.
Mr. Montgomery. Thank you.
My testimony and these reports represent my own opinions
and conclusions and do not necessarily represent the opinions
of any other consultant at NERA or its clients and in
particular, I do not speak for Cheniere Energy which funded the
update or for NERA, but only for myself. We tried to address
some issues that have been raised about our earlier study for
DOE in this update.
Two, in particular, one that using 2011 data made our study
too out of date, well we updated it to the Energy Information
Administration's most recent full set of long term forecasts.
We used the 2013 outlook because, as Mr. Sieminski just said,
they have not yet published the side cases that were critical
for our analysis of the scenarios. We agree with Mr. Sieminski
that we have to look at scenarios because it is very difficult
to predict exactly what the level of exports will be.
Then to deal with concerns that DOE does not have access to
a full analysis of the cumulative impacts of exports we
examined levels of exports all the way up to what they could be
if the Department of Energy put no restrictions on exports. We
again found that LNG exports provide net economic benefits in
all the scenarios we examined, the greater the exports, the
greater the benefits. Put another way, there's no sweet spot
that would justify limiting LNG exports below market determined
levels on the basis of their net economic benefits.
Another point that's been raised frequently is about the
notion that somehow if we export natural gas it won't be
available for manufacturing in the U.S. That's simply a false
dichotomy. We looked at it very closely.
You're absolutely right, Madame Chair, the U.S. chemicals
industry was very threatened in 2005. But at this point it has
moved to being tied for the world's lowest cost producer of
chemicals with a very large advantage over any of its rivals
that import natural gas which will not be taken away to any
noticeable extent by the effect of LNG exports. It's simply a
false dichotomy.
There is ample gas for both. We find that in fact in our
scenarios the increased demand for exports is almost all
satisfied by increased production. None of it, almost none of
it is taken away from any domestic uses because of higher
prices.
I'd like to cover 2 other topics.
One, just extending the economic analysis to talk about
jobs. There are 2 things about LNG exports that I am convinced
are true no matter what level of exports we look at.
First is that LNG export facilities in shale gas production
require workers. They're going to be drawn from all over the
economy. Since the facilities have to be built before the gas
can be loaded the investment in employment associated with that
investment is going to be coming up front.
We calculated, this is on page 8 of my testimony, and I
believe the committee may have a handout. We calculated the
annual employment, just direct jobs, building liquefaction
facilities. Those jobs could hit a peak between 2,000 and
30,000 jobs onsite building liquefaction facilities between now
and 2018. Of course the faster we export gas, the more jobs
there will be. The faster we get going on exporting gas,
building the facilities, the more jobs there will be.
I mentioned the year 2018 because I think it's really
important. The Congressional Budget Office, where I used to be
an Assistant Director, does economic forecasts for the budget.
It always assumes that the economy will be back at full
employment after we come out of the current cycle simply
because we can't do any better than that at forecasting what
will happen. It has been the long term secular trend in the
economy.
So what's really important about employment is the period
between now and when we reach full employment which CBO now
projects for 2018. So these jobs are actually coming exactly
when they're needed, which is during a period when we are still
looking at unemployed workers, who can be brought back into the
labor force. We project that somewhere between 2,000 and 45,000
unemployed would be put back to work between now and 2018 by
the construction of these, by basically, the entire enterprise
of gearing up for LNG exports.
The final point I would like to make is about Russia which
we all are, really, the focus of this hearing.
I've looked at our new study and asked myself what is it
that is effective and sufficiently attractive on its own merits
that would be a credible promise of punishment for Russian
aggression?
I believe that that is LNG exports. If you look quickly at
another handout that I believe you have or on page 13 of my
testimony. We've taken a look at what would happen to Russia's
revenues if 2 things happened.
One of them is we've removed, you know, a policy, you know,
however it is actually phrased in law, that committed the U.S.
not to put a cap on LNG exports combined with putting serious
effort into being sure that we do not cutoff the shale gas
revolution through ham handed regulation or giving in to, you
know, groundless fears and encourage production. Those 2 things
together are needed.
But with that we could see Russia's exports dropping by up
to 5 trillion cubic feet per year in 2038 due to this
competition from the U.S. That's what would happen if Russia
does not meet the prices that the U.S and other competitive
producers. We would take away a huge amount of their market.
If they do meet the competition they're going to have to
sell at lower prices. What that adds up to me in this chart is
somewhere between a 40 percent and a 60 percent loss in export
revenues from natural gas for Russia through this policy of the
U.S. entering the LNG market aggressively. I think that's a
punishment that would mean something.
Thank you.
[The prepared statement of Mr. Montgomery follows:]
Prepared Statement of W. David Montgomery, Ph.D., NERA
Economic Consulting
Chairman Landrieu, Ranking Member Murkowski and Members of the
Committee:
Introduction
I am honored by your invitation to testify on this very important
topic. I am an economist and Senior Vice President at NERA Economic
Consulting. I had the privilege of leading the study of the
``Macroeconomic Impacts of U.S. LNG Exports'' that was issued by the
Department of Energy (DOE) in December 2012 and of the update to that
study, ``Updated Macroeconomic Impacts of LNG Exports from the United
States,'' that my colleagues and I have just completed. I have provided
a copy of this report along with my testimony and I request that it be
entered into the record. I would like to thank Cheniere Energy, Inc.
for their sponsorship of this update, and in particular to thank them
for giving us the same freedom to conduct an objective and independent
study that the U.S. Department of Energy gave us.
Statements in this testimony represent my own opinions and
conclusions and do not necessarily represent opinions of any other
consultant at NERA or any of its clients. I do not speak for Cheniere
Energy, Inc. or NERA, in particular, but only for myself.
Findings of the NERA 2014 Study
We based our updated analysis on the Energy Information Agency's
(EIA) 2013 Annual Energy Outlook (AEO 2013), in order to address claims
that our original study was out of date. Compared to our 2012 report,
natural gas prices are lower, LNG exports are larger, and economic
benefits are greater. We again find that LNG exports provide net
economic benefits in all scenarios, and the less regulators restrict
U.S. exports, the greater the benefits from natural gas production.
We used AEO 2013 in this update because the preliminary release of
AEO 2014 did not contain the side cases exploring high and low oil and
gas resources that were needed to recapitulate the scenarios of our
2012 study. I do not expect our findings to change when we incorporate
AEO 2014 scenarios because when we jumped forward two years from AEO
2011 to AEO 2013 everything became more favorable to LNG exports: lower
U.S. natural gas prices, higher LNG exports and greater economic
benefits in every case.
In order to address concerns about the ``cumulative'' impact of LNG
exports above levels that DOE asked us to study, our update considers
additional scenarios in which we assume no constraints on LNG exports
and let the market determine their level. These scenarios of LNG
exports unconstrained by government policy provided the largest net
benefits.
Another goal that we had in this update was to dispel some myths
that are still being retold about natural gas exports, and I will turn
to them now:
LNG exports will not cause runaway increases in natural gas
prices.--Both LNG export volumes and price impacts will be limited by
the market, by rival exporters ready to undercut high prices, and by
price-sensitive buyers. Only if natural gas prices fall and remain
below today's levels will there be high levels of exports. If
regulatory ham-handedness chokes off the shale revolution, not even the
currently authorized LNG export projects will be running. The U.S.
would not find buyers at high prices for large volumes of LNG exports,
even with extraordinary global demand and supply shocks. There are too
many other sellers that can beat high U.S. prices.
Exhibit 1* shows the impact of LNG exports on U.S. natural gas
prices with EIA Reference Case supply assumptions and a global demand
shock\1\ for unconstrained exports. The historical variation in prices
around their mean from 2000 to 2013 is superimposed on projected
natural gas prices and their mean from 2025 to 2038. We can see that
the difference of less than $1 is dwarfed by historical variations.
---------------------------------------------------------------------------
* All Exhibits have been retained in committee files.
\1\ The demand shock assumes greater international demand for
natural gas than assumed in the 2013 International Energy Outlook.
---------------------------------------------------------------------------
Exhibit 1--Price Impacts of LNG Exports Are Dwarfed by Historical
Variation
Exhibit 2 shows the maximum increase in natural gas prices that we
find across all scenarios to be about $1 per Mcf. In contrast, the
difference in natural gas prices between EIA's High Oil and Gas
Resource (HOGR) case and its Low Oil and Gas Resource (LOGR) case is
over $3.50. We find that natural gas prices as high as in the LOGR case
would choke off LNG exports at levels less than what DOE has already
authorized.
Exhibit 2--Price Impacts of LNG Exports, Limited Shale Development,
and Winter Weather
Price spikes will not become more damaging.--Returning to our own
analysis, short term natural gas price spikes, as we observed last
winter, have been a frequent occurrence in natural gas markets even
with zero LNG exports. They are caused by unexpected weather events and
problems in the pipeline system, and have always been temporary.
Referring again to Exhibit 1, Henry Hub prices that rose to almost
$8.00/Mcf last winter are already down to $4.50. There has always been
a solution for price spikes: which is increased storage and
overbuilding of the pipeline system. But neither natural gas suppliers
nor their customers have found the permanent cost of this extra
security worth the temporary cost of price spikes.
LNG exports actually provide a deliverability cushion for domestic
consumers. Our analysis shows that when U.S. wellhead prices become as
high as they were last winter, they would likely choke off LNG exports
and free up that gas for domestic use. The additional natural gas
deliverability built up to serve LNG exports would then become
available to surge deliveries for domestic needs. Thus LNG exports
provide a built in buffer of supply like a Strategic Petroleum Reserve.
Limiting LNG exports would take away this deliverability cushion,
and the disastrous consequences of past governmental attempts to
allocate supplies and control prices during price spikes should be a
warning against trying again. Natural gas prices were regulated through
the 1970s, and the consequence was an allocation system that cut off
major users--mostly industrial customers--when shortages appeared.
Decisions by government regulators and politicians about who should be
awarded the benefits of price-controlled gas just made things worse for
everyone. There have been no such curtailments since we created an open
market for natural gas in the U.S.
Natural gas will not be taken away from U.S. manufacturing or
residential consumers to supply LNG exports.--LNG exports occur
precisely because there is enough natural gas to satisfy needs inside
and outside the U.S. We consistently find that most of the demand for
increased natural gas exports is satisfied by new production, and that
demand reduction is largely confined to the electric power sector
(Exhibit 3).
In the electric power sector, an increased price of natural gas as
a fuel for generation would lead to a small reduction in demand, but
for the most part natural gas is displaced by additional generation
from nuclear, renewables, and (depending on forthcoming EPA rules)
possibly coal.
Exhibit 3--Where Do Exports Come From?
The competitive advantage of U.S. manufacturing will not be taken
away, at least not by LNG exports.--Right now U.S. chemical producers
enjoy about a 4 to 1 cost advantage over their rivals in Europe and
Asia. Exhibit 4 from the American Chemical Council shows how the
competitive position of this sector has become fundamentally
invulnerable to effects of LNG exports. For ethylene, an important bulk
chemical and indicator of competitiveness used by the American Chemical
Council, costs in the U.S. are about 20 cents per pound and in China
and Europe over 80 cents per pound. The maximum impact that LNG exports
could have on U.S. natural gas prices would raise costs in the U.S. by
about 5 cents per pound--still leaving a 55 cent per pound cost
advantage.
Exhibit 4--Competitive Position of U.S. Chemical Industry
For ethylene producers, the picture is even rosier because their
primary feedstock, ethane, is a natural gas liquid that is produced in
large quantities along with tight gas. Ethane is so ``hot'' that the
amount that can be mixed into natural gas in pipelines is limited, so
that a glut of ethane has developed over the past two years and lowered
the price of ethane relative to natural gas. And, the more LNG we
export, the greater the glut of ethane will be and the greater the
advantage to chemical producers.
All U.S. manufacturing continues to enjoy a cushion of low natural
gas costs no matter how high LNG exports go. Any importer of natural
gas from the U.S. will be paying a landed price more than twice the
price that U.S. manufacturers pay--because the cost of transporting gas
to Europe or Asia is about equal to the price of gas in the U.S. Adding
the two together means that rivals importing gas from the U.S. will be
paying double the U.S. price. As a result, we find across all sectors
and in all scenarios that LNG exports alter the rate of growth in U.S.
manufacturing by no more than a few hundredths of a percentage point.
And at that, natural gas will be a bargain to the countries that
import from the U.S. LNG imports in Asia and pipeline imports into
Europe from Russia are now for the most part indexed to oil prices.
That makes the current price of natural gas 3 to 4 times higher in
those countries than in the U.S. That is what makes the prospect of LNG
exports so attractive to both buyers and sellers, and why LNG exports
from the U.S. are such a threat to Russia.
LNG exports will not cost U.S. jobs.--Just the construction of
liquefaction capacity sufficient to support the LNG exports projected
in our study would create a peak of 2000 to 40,000 onsite jobs, largely
in the Gulf Coast region and in the critical years between now and 2018
(Exhibit 5). That year is important, because it is the year when CBO
forecasts that the U.S. will return to a normal state of full
employment. The investment in LNG export facilities and in additional
natural gas exploration and production for export would take from 3,000
to 45,000 workers off the unemployment rolls during the next four years
of continued softness in the labor market, and hasten the return to
full employment by as much as two months. The faster projects are
authorized and the sooner they begin construction, the greater the
impact on unemployment will be.
Exhibit 5--Eployment Impacts
Benefits of LNG exports will be distributed broadly.--Employment,
labor income and investment income will continue to grow no matter what
level of LNG exports the market demands from the U.S. In the scenario
with the highest level of LNG exports across all those we examined, GDP
in 2038 will increase by about $25 billion compared to the no export
case. In terms of the components of GDP, government revenues will
increase by over $10 billion, investment income by about $15 billion,
and resource income by about $10 billion, and labor income will be
about $15 billion less, all compared to the no export case.
Exhibit 6--LNG Exports Lead to Higher GDP
There is no point in turning these findings into class warfare. A
considerably larger share of royalty income could accrue to the Federal
government if more Federal lands opened up for oil and gas exploration
and production, and that would in turn likely reduce resource income to
private landowners. The increase in investment income more than offsets
a decline in wage income, and that increase plus a share of resource
income will accrue to all Americans who invest and who hold their 401k
plans in a reasonably diversified portfolio of stocks.
There is no ``sweet spot'' lower than the market-determined level
of exports--Finally, we found no sweet spot that would justify
government interference with U.S. obligations under the WTO to allow
free trade in commodities like natural gas. In every scenario we
investigated, higher levels of LNG exports led to larger economic
benefits to the U.S. (See Exhibit 7).
Exhibit 7--When the Market Decides, the More We Export, the More We
Benefit
We examined a range of LNG exports in our study, including market-
determined levels of exports that could be expected if DOE
automatically approved all applications. Even in cases where worldwide
supply and demand shocks were combined with optimistic assumptions
about U.S. natural gas resources to lead to LNG exports approaching
one-half of total domestic supply, the U.S. gained larger benefits by
allowing unlimited LNG exports than it would have achieved in those
cases with restricted exports
Strategic Energy Policy
Now let me turn to the subject of this hearing. LNG exports from
the U.S. could reduce Russia's stranglehold on energy supplies to
Europe. Immediate announcement of a policy of allowing unlimited LNG
exports would signal potential competition that Russia would have to
meet by offering lower natural gas prices as it renegotiates its supply
contracts with Europe. The power of this signal will depend on whether
it is accompanied by effective action to accelerate the shale gas
revolution by avoiding or removing unreasonable regulations, costs, and
constraints on natural gas exploration and production.
In order to estimate the potential demand for U.S. LNG exports and
the prices at which LNG exports could be sold, we analyzed supply and
demand for natural gas around the world. Russia supplies about 25
percent of the natural gas consumed in Europe and Russian exports are
projected by EIA to increase by 33 Bcfd from current levels by 2040,
making Russia the largest potential rival to the U.S. in global LNG
supply. Much of this gas is now supplied by Russia under long term
contracts that link natural gas prices to oil prices. As these
contracts come up for renewal or renegotiation, Russia's power to
extract high prices will depend greatly on the competition expected to
appear in the market during that contract term.
Monopolists can be restrained as effectively by potential
competition as by actual production by their rivals. Eliminating any
possibility of a cap on U.S. exports is necessary to create effective
potential competition. The existence of a major competitor with the
capacity and willingness to sell large quantities of natural gas will
discipline Russia's pricing even if actual LNG exports are low. To
provide such competition, it must be possible to move additional LNG
exports into the market on a large enough scale to punish any Russian
effort to raise prices above competitive levels with a substantial loss
of market share.
Our results show that if U.S. policies encourage growth in natural
gas production and remove all limits on exports, Russia would face the
choice of ceding a large share of its market to the U.S. and other
rivals or lowering its prices to levels determined by gas-on-gas
competition. Even if it takes 5 to 10 years for U.S. LNG exports to
equal a large share of Russian natural gas exports, the effect of a
clear policy to encourage domestic oil and gas production and remove
obstacles to LNG exports would have an immediate effect on the pricing
of natural gas and Russia's revenues.
To be specific, I would like to refer to Exhibit 8. The shows the
range of impacts that a policy of unlimited U.S. LNG exports could have
on Russia's natural gas export revenues if shale gas resources and
regulatory policy toward drilling lead to levels of production
approximating the most recent EIA High Oil and Gas Resource case. Since
U.S. LNG exports will affect Russian pipeline as well as LNG exports,
these estimates of Russia's revenues include both pipeline and
waterborne shipments. The U.S. need not be competing directly with
Russia for U.S. exports to have the effect of reducing Russia's exports
and revenues. Even if U.S. exports move to Asia, they would divert LNG
to Europe and thus take away Russia's sales and revenues.
Exhibit 8--Effective U.S. Competition Would Force Russia to Cut
Prices or Lose Sales
Thus, we estimate that in the next 5 years, U.S. competition could
drive Russia's revenues from natural gas exports down by as much as 30
percent, and in the longer term could cut those revenues by as much as
60 percent. Since energy exports are the mainstay of the still
inefficient and lagging Russian economy, this is a penalty with teeth.
LNG exports will not alone be sufficient to discipline Russian
aggression, but it is a step in the right direction.
A likely consequence of high levels of U.S. LNG exports based on
Henry Hub prices lower than today is that they could break the system
of oil-linked pricing by which Russia has enriched itself at Europe's
expense. This outbreak of gas-on-gas competition is a major part of the
erosion of Russia's export revenues found in our results, and it would
limit Russia's energy and economic power.
Gas-on-gas competition will also benefit U.S. consumers by lowering
costs of manufacturing in countries that import natural gas, and
thereby lowering the cost of consumer goods imported from those
regions. This reduction in costs of our trade partners can only benefit
the U.S. consumer, but it may be opposed by some manufacturing
interests. The outbreak of gas-on-gas competition may erode further the
profits of U.S. chemical producers that I discussed earlier, by
bringing their rivals' costs for feedstocks down closer to U.S. levels.
The competitive advantage of the U.S. will not disappear because the
U.S. as an exporter will have natural gas prices half those that
importers must pay to obtain LNG plus shipping. But the profits of some
of those U.S. chemical producers could be eroded, by the same events
that provide U.S. consumers with the benefit of lower prices of many
other imported goods and the world with a meaningful counter to Russian
aggression.
Since oil, natural gas, and coal markets in Europe are linked,
exports of any of the three energy forms could contribute to weakening
Russia's power over Europe and eroding its export revenues. By
increasing coal exports to Europe, the U.S. would likely displace
natural gas used for power generation in Europe and thereby allow
either more rapid refilling of European storage or directly cut back
needs for Russian natural gas. Crude oil exports might not directly
compete with Russian supplies to Europe, but to the extent that crude
oil exports make greater U.S. production possible they would shift the
global supply-demand balance toward excess supply and put downward
pressure globally on oil prices. This would then reduce Russia's oil
export revenues. The combined loss of oil and natural gas export
revenue would further weaken the Russian economy and its ability to
finance military expansion, and uneconomic withholding of energy
supplies to blackmail its neighbors. Much as the efforts of the Soviet
Union to match U.S. military strength in the 1980s broke its centrally
planned economy and led to the downfall of communism, U.S. energy
strength fostered by a strategic commitment to production and exports
could ultimately break Russia's energy dominance and restrain its
revanchist ambitions.
Like the victory over Communism, these changes will take years. The
FERC process for approving export terminals will remain, and market
conditions and financing will stretch out construction. The fears
promoted by some that the entire 8 Bcf/day of capacity approved by DOE
to date to non-FTA countries will appear overnight and suddenly drain
the U.S. of natural gas are entirely unfounded. There will be an
immediate effect on Russia's ability to hold up European customers for
oil linked prices in long term contracts, because of the potential
competition of U.S. exporters and the expectation that U.S. entry into
the global market could wreck the oil-based pricing system. It is also
true that Russia's exports to Europe will not be replaced overnight,
but countering the Russian Anschluss is not the only reason for
removing limits on LNG exports.
However rapidly LNG exports actually grow over the next few years,
a strategy of maximizing U.S. oil and natural gas production by
removing unreasonable constraints and obstacles and of pre-authorizing
exports without any quantitative cap will have a long run effect of
weakening the Russian economy. The Cold War lasted for 50 years before
the economic superiority of the Free World defeated Communism, and a
long view is necessary to resist what appears to be resurgent Russian
nationalism and territorial expansion. Fortunately, that long strategic
view is in this case in line with U.S. immediate economic interests,
which are served best by removing limits on LNG exports.
The Chair. Thank you, Doctor.
Mr. Goldwyn.
Then I'm going to come back to the Minister at the end and
let this group go first. Thank you.
Mr. Goldwyn.
STATEMENT OF DAVID L. GOLDWYN, NONRESIDENT SENIOR FELLOW,
BROOKINGS INSTITUTION, AND PRESIDENT, GOLDWYN GLOBAL
STRATEGIES, LLC
Mr. Goldwyn. Great. Thank you, madame chair and ranking
member and members of the committee for this opportunity to be
here today and with my distinguished panelists. I also speak on
my own behalf and not for Brookings.
The dramatic growth in natural gas reserves and production
in the United States over the last 5 years has resulted in
economic growth, relative reductions in greenhouse gas
emissions and greater energy security. Every credible estimate
of our future energy supply suggests we will have exportable
surpluses of natural gas for decades to come. This bounty could
enhance our national power by positioning our Nation as a
reliable supplier of natural gas to regions of the world that
suffer from intimidation from their suppliers or simply the
economy crushing burden of oil linked prices.
The question before us is not whether we have this
geopolitical potential, but whether we will realize it in time
to help our friends and allies.
Countries enhance their national power when they act as
reliable suppliers of strategic commodities to the global
market. This power can be wielded for good to stabilize markets
and create competitive prices. But it can also be wielded for
ill as we have seen with Russia using its market power to
intimidate its neighbors.
The U.S. can be a strategic supplier to the global gas
market.
While our government doesn't dictate where that supply will
go it does control how fast we will connect to the global
market. The Natural Gas Act has inadvertently put our friends
and allies, those who don't have free trade agreements with us,
at the back of the line. In addition the process and the tempo
for reviewing these exports to LNG counties that we don't have
free trade agreements with is potentially out of sync with
commercial realities.
The crisis in Ukraine should cause us to think anew on this
process. See if we can leverage our natural gas bounty to help
our allies by accelerating the consideration of export
applications so they can plan for the day when they can reduce
their reliance on Russian gas or on the oil linked prices that
are crippling their economies. In addition we should begin now
to compete actively with Russia for Asia's markets before we
see that region as well to dependence on Russian supply.
While the benefits of U.S. LNG exports would be global, my
remarks will focus on Europe because of the crisis in Ukraine.
Also--they also reflect an article that I published for
Brookings which I'd also like to enter into the record.
Russia's annexation of Crimea illustrates both the
challenge and opportunity that we face. The challenge is grave.
This Russian challenge will be with us as long as President
Putin remains in power. His unabashed desire to recover
territories that became independent after the fall of the
Soviet Union is a threat to European security and to American
leadership.
The President has responded, I think, with savvy and with
skill by targeting the kleptocratic inner circle that tries to
use Russia's private, well, public resources for private gain.
But Russia's neighbors, especially the Nations of Central
and Eastern Europe remain dependent on Russian gas and Russian
oil linked supplies. Now to address its energy insecurity
Europe has to do a lot on its own.
It needs to make strides toward further integrating its gas
markets so it can move from point to point.
It needs to promote internal market reform in member
countries so someone would want to invest there.
It needs to develop further infrastructure to support
alternative gas supply, interconnections among member countries
and indigenous gas development.
The U.S. will also need to recommit to our Caspian policy
to ensure that the southern corridor is completed and that
Azerbaijan and Kazakhstan maintain their autonomy and sustain
their roles as suppliers of oil and gas to Europe. We can make
further integration of Europe's gas markets a key tenant of our
engagement as well. But a clear signal from the U.S. that LNG
exports will be available to European allies for future
purchase would put immediate pressure on Russia's market share
and would also help accelerate investment in and construction
of gas transportation infrastructure in Europe.
Their LNG import project is tabled in Lithuania, Ukraine,
Poland, Croatia and Estonia. There are interconnections planned
to move gas to Poland, Latvia and Finland.
While it's no panacea and I don't profess that it is,
removing the uncertainty as to whether and when U.S. LNG export
projects that contract with European empires can get that
approval will accelerate both the financing of U.S. LNG export
projects and European import projects. Those who dismiss the
utility of accelerating these approvals underestimate the
impact it can have on eroding Russia's market power now. We
signal the availability of Henry Hub LNG pricing it impacts
price formation for the future and erodes the price Russia can
get for its gas in Europe and Asia. Reducing Russia's market
share in Europe makes its companies less attractive and
investment in its upstream less valuable.
Witness the fall in the prices of Novatek just after we
announced sanctions. Markets react today to news in the future.
Finally, allowing European LNG projects to access Henry Hub
pricing makes those projects more financeable. It may be true
that Asian buyers rather than European buyers buy U.S. LNG. But
from a geopolitical perspective it doesn't make a difference.
Eroding Russia's Asian market share and pricing power also
hurts their cash-flow. The more U.S. Henry Hub priced gas hits
the market, the greater the bargaining power of European
buyers.
So, as I said at the outset, these are serious times that
call for serious solutions. Having a refreshed European energy
security policy and accelerated U.S. LNG exports are part of
that tool box. They may be long term measures, but they're
serious measures. The time to get started is now.
[The prepared statement of Mr. Goldwyn follows:]
Statement of David L. Goldwyn, Nonresident Senior Fellow, Brookings
Institution, and President, Goldwyn Global Strategies, LLC
the role of natural gas exports in u.s. foreign policy
Madam Chairwoman and Members of the Committee, it is an honor to
speak with you today about the geopolitical benefits of America's
natural gas bounty. The dramatic growth in natural gas reserves and
production in the United States over the past five years has resulted
in economic growth, relative reductions in greenhouse gas emissions,
and greater energy security. Every credible estimate of our energy
future suggests we will have substantial exportable surpluses of
natural gas for decades to come. This bounty could enhance our national
power by positioning our nation as a reliable supplier of natural gas
to regions of the world that suffer from intimidation from their
suppliers or simply the economy crushing burden of oil linked prices.
The question before us is not whether we have this geopolitical
potential, but whether we will realize it in time to help our friends
and allies.
Several reports and studies have established a consensus that the
benefits of liquefied natural gas (LNG) exports from the U.S.
significantly outweigh the costs. As the co-chair of the Brookings
Institution Natural Gas Task Force, we explored many of the issues
surrounding LNG exports. Following the completion of the Task Force
sessions, my colleagues at Brookings published a well-received report
that found that price impacts of LNG exports would be minimal, and that
the effects of LNG export on the U.S. gross domestic product and trade
balance would be positive\1\ The macroeconomic LNG study commissioned
by the Department of Energy, prepared by NERA Economic Consulting,\2\
found that there would be net economic benefits to the U.S. at all
levels of exports modeled. Just last month, NERA released an update to
that study which added several new scenarios,\3\ once again finding
that ``LNG exports provide net economic benefits in all the scenarios
investigated, and the greater the level of exports, the greater the
benefits.''\4\
---------------------------------------------------------------------------
\1\ Charles Ebinger, Kevin Massy, and Govinda Avasarala, ``Liquid
Markets: Assessing the Case for U.S. Exports of Liquefied Natural
Gas,'' Brookings Institution, May 2012, p. xiii. (Ebinger, 2012)
\2\ W. David Montgomery, Robert Baron, Paul Bernstein, Sugandha D.
Tuladhar, Shirley Xiong and Mei Yuan, ``Macroeconomic Impacts of LNG
Exports from the United States,'' NERA Economic Consulting, December
2012.
\3\ Robert Baron, Paul Bernstein, W. David Montgomery and Sugandha
D. Tuladhar, ``Updated Macroeconomic Impacts of LNG Exports from the
United States,'' NERA Economic Consulting, February 2014.
\4\ ``NERA Releases Updated Study on Economic Impacts of LNG
Exports,'' March 6, 2014. http://www.nera.com/83__8451.htm
---------------------------------------------------------------------------
I am here today to speak about the foreign policy benefits that LNG
exports can provide. Countries enhance their national power when they
act as reliable suppliers of strategic commodities to the global
market. This power can be wielded for good, to stabilize markets and
create competitive prices. It can also be used for ill, as we have seen
with Russia, using its market power to intimidate its neighbors. The
U.S. can be a strategic supplier to the global gas market. While our
government does not dictate where that supply will go, it does control
how fast we will connect to the global market. The Natural Gas Act has
inadvertently put the friends and allies who need us most at the back
of the line. The process for reviewing exports of LNG to countries we
do not have free trade agreements with has proven to be cumbersome, and
potentially out of sync with commercial realities.
The crisis in Ukraine should cause us to think anew on this process
and see if we can leverage our natural gas bounty to help our allies by
accelerating the consideration of export applications so that they can
plan for the day when they can reduce their reliance on Russian gas or
on the oil-linked prices that are crippling their economies. In
addition, we should begin now to compete actively with Russia for
Asia's markets before we cede that region as well to dependence on
Russian supply.
While the benefits of U.S. LNG exports would be global, my remarks
will focus on the impact to Europe in light of the current crisis in
Ukraine. I will briefly address the implications for Asia towards the
end of my testimony. My remarks today reflect an article that I
published just last week at the Brookings Institution,\5\ which I will
also submit for the record.
---------------------------------------------------------------------------
\5\ David L. Goldwyn, ``Refreshing European Energy Security Policy:
How the U.S. Can Help,'' Brookings Institution, March 2014 (Goldwyn,
2014)
---------------------------------------------------------------------------
If the U.S. were to accelerate the consideration of exports to non-
FTA countries, by allowing projects that have received environmental
clearance to receive expedited consideration,\6\ or by agreeing to
consider all projects with environmental clearance from the Federal
Energy Regulatory Commission (FERC) within 90 days of receiving that
clearance,\7\ or more broadly by deeming exports of LNG to all
countries to be in the national interest,\8\ the energy security of
import dependent countries like Japan and the nations of Central and
Eastern Europe would be improved. Expectations of future supply drive
energy prices and impact infrastructure investment decisions made
today. While no panacea, U.S. LNG exports would have a significant
impact on global markets for natural gas and the energy security of
some of our closest partners and allies.
---------------------------------------------------------------------------
\6\ David L. Goldwyn, ``A Modest Proposal for Improving the
Department of Energy Non-FTA Liquefied Natural Gas Export Application
Process,'' Brookings Institution, May 2013
\7\ The Energy Policy and Conservation Act can be interpreted to
require that all agencies responsible for issuing national interest
determinations have a responsibility to do so within 90 days after FERC
completes its review: ``a final decision on a request for a Federal
authorization is due no later than 90 days after the Commission issues
its final environmental document, unless a schedule is otherwise
authorized by Federal law.'' 18 C.F.R. Sec. 157.22
\8\ Such a determination would only affect the approval of the
export permit application at the Department of Energy, and would not
release a company from its environmental assessment requirements before
the Federal Energy Regulatory Commission (FERC)
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The U.S.'s European Energy Security Policy
Europe is in a unique position with regard to energy security. The
region's energy insecurity varies greatly. The nations of Western
Europe have traditionally had greater access to diverse supplies of
energy resources at competitive prices, particularly natural gas, than
their Central and Eastern European counterparts. This is due in part to
successful Western European efforts to diversify their sources of
supply after Russian gas exports through Ukraine were disrupted in
2006, and once again in 2009. Yet as Western Europe has enjoyed
progress, Central and Eastern Europe remain heavily dependent on Russia
for their energy supplies, with some NATO allies, like Bulgaria and
Lithuania, wholly dependent on Russian gas. This situation has become
starkly clear in the wake of the ongoing events in Crimea.
For many years now, the U.S. has made European energy security a
top foreign policy objective. U.S. policy focused on encouraging new
suppliers (such as Azerbaijan, Turkmenistan, and Iraq) to send energy
to Europe, the promotion of new pipelines and infrastructure, and
utilization clean energy technology and energy efficiency. The U.S. has
promoted infrastructure projects, like the Baku-Tbilisi-Ceyhan and the
Southern Corridor (particularly the Nabucco pipeline), with differing
levels of success. We believed a more secure Europe equals a more
secure U.S. Independently, Europe has, of course, taken major steps to
increase its energy security- approving the Third Energy Package,
making destination clauses for natural gas illegal and seeking to
create integrated EU markets for electricity and natural gas.
Despite these successes, much of Europe remains energy insecure. In
the wake of the crisis in Crimea, energy importing nations were left to
wonder whether they would once again suffer as a result of the Russian-
Ukrainian dispute, grateful that this crisis did not take place in the
depth of winter when another gas shut-off could have been hugely
disruptive to their economies. While Western Europe has been able to
work to diversify its gas imports through LNG import terminals and
agreements with other suppliers, the beneficiaries of geography and
relatively strong economies, the nations of Central and Eastern Europe
remain dependent on Russia.
To address its energy insecurity Europe will have to make
significant strides internally towards further integrating its markets,
promoting internal market reform in member countries, developing
further infrastructure to support alternative gas supplies and
interconnections among member countries, and encouraging indigenous gas
development. The U.S. will need to recommit to its Caspian policy, to
ensure that the Southern Corridor is completed and that Azerbaijan and
Kazakhstan maintain their autonomy and sustain their roles as suppliers
of oil and gas to Europe. Refocusing the U.S. policy towards European
energy security to consider all of these topics is vital. The U.S. is
already active in helping European nations develop their indigenous
shale gas resources, through the Global Shale Gas Initiative (GSGI),
which I started during my tenure at the U.S. Department of State, now
known as the Unconventional Gas Technical Engagement Program (UGTEP),
but the U.S. can do more. We can make further integration of European
gas markets a key tenet of our engagement in the U.S.-EU Energy
Council, and continue to encourage the responsible development of local
gas resources. Because the focus of this hearing is U.S. LNG exports, I
will limit my remarks on those topics and direct you to the Brookings
article submitted to the record for further information.
How Could U.S. LNG Exports Help?
A clear signal from the U.S. that LNG exports will be available to
European allies for future purchase would put immediate pressure on
Russia's market share, and would also help accelerate investment in and
construction of gas transportation infrastructure in Europe. Russia,
through its national natural gas company Gazprom, has already found it
necessary to renegotiate contracts for natural gas with Western
European customers as a result of the U.S. shale gas boom. As many
observers have noted, including very recently the Czech Republic's
Ambassador-at-Large for Energy Security,\9\ the U.S. shale boom
resulted in the unexpected availability of LNG cargoes originally
destined for the U.S., which increased gas supply to Europe and put
downward pressure on prices. Exports of LNG from the U.S. could ensure
that the increased negotiating power that Western Europe has had for
the past few years is not diminished, and may even be able to extend
that negotiating power to the Central and Eastern European nations that
remain heavily dependent on Russian exports of natural gas.
---------------------------------------------------------------------------
\9\ Remarks of Czech Republic Ambassador-at-Large for Energy
Security Vaclav Bartuska, Atlantic Council of the United States
Conference Call, ``Crisis in Ukraine: The Energy Factor,'' March 17,
2014.
---------------------------------------------------------------------------
A Deloitte report on the international implications of U.S. LNG
exports found that even modest levels of U.S. exports, roughly six
billion cubic feet per day, would result in wealth transfers from
Russia to European consumers of up to four billion dollars, simply as a
result of reduced contract prices and lost Russian market share.\10\ In
terms of European energy security, not to mention economic
productivity, that could be considered a success.
---------------------------------------------------------------------------
\10\ ``Exporting the American Renaissance: Global impacts of LNG
exports from the United States,'' Deloitte Center for Energy Solutions
and Deloitte MarketPoint, 2013.
---------------------------------------------------------------------------
Some respected analysts have been too quick to dismiss the
connection between U.S. LNG exports and increased European energy
security. In dismissing that connection, they make four mistakes: `` .
. . 1) assuming most U.S. LNG exports will go to Asia, 2) assuming the
post 2016 delivery time for U.S. LNG will not impact price formation
today, 3) underestimating the importance of securing Henry Hub based
LNG supply for financing European infrastructure projects and 4)
failing to see the immediate strategic importance of degrading Russia's
future share of the European gas market.''\11\
---------------------------------------------------------------------------
\11\ Goldwyn, 2014
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1) LNG exports to Europe
A number of skeptics have questioned whether Europe would receive
any LNG exports from the U.S., arguing that higher priced markets in
Asia are more likely to win the cargoes. This view is simplistic. While
it is true that gas prices remain higher in Asia than in Europe today,
European gas prices remain approximately twice as high as Henry Hub
prices. Indeed, European buyers, including Central and Eastern European
consumers, have contracts with high-priced suppliers like Russia and
Qatar that they are currently seeking to renegotiate. In the event that
Russia cuts off supply to Western Europe, European prices could easily
approach Asian pricing levels. Asian demand may prove to be weaker than
expected in the short to medium term, as a result of nuclear capacity
coming back online, and those consumers are also seeking to erode oil-
linked pricing. ``Meanwhile, the governments of CEE nations are using
diplomatic channels to make it clear that they see imports of U.S. gas
to be a vital component of their energy diversification strategies.\12\
Purchasers weigh price heavily of course, but they also weigh the
diversity of supply source, and the likelihood of timely project
completion.''\13\,\14\
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\12\ Multiple nations have been vocal about their desire to import
U.S. LNG. The Ambassadors of the Visegrad 4 nations (Poland, the Czech
Republic, Hungary and Slovakia) sent a letter to Congressional
Leadership asking them to remove the bureaucratic hurdles surrounding
export permits; meanwhile plans are in the works to create a lobbying
group named ``LNG Allies,'' which will represent a larger group of
countries and lobby the U.S. government in favor of LNG exports. (Amy
Harder, ``Europe to America: We Want Your Gas,'' National Journal,
January 16, 2014; Veronika Gulyas, ``Central Europe Turns to U.S. for
Natural Gas,'' Wall Street Journal, March 10, 2014)
\13\ While LNG projects are being developed globally, many of the
projects abroad have suffered from major delays and cost overruns,
including some of the large-scale projects under development in
Australia and the South Pacific. (Ed Crooks, ``Cost of Australia's
Gorgon LNG project rises to $54bn,'' Financial Times, December 12,
2013)
\14\ Goldwyn, 2014
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2) Price Formation
As stated previously, long-term gas supply prices are formed based
on future price and supply expectations. Energy is a business where the
marginal barrel (or cargo) sets the price, and the lead times for
project development can be long. Every decision, from investments in
oil and gas to production to power generation infrastructure to the
construction of LNG import or export terminals, is based on future
price expectations. Allowing US based LNG to compete for market share
in Europe could decrease Russia's future market share in Europe, and
ensure that the gas that they do provide is competitively priced. The
availability of alternative supply is central to the continent's energy
security, and the availability of American LNG supplies may be the only
direct tool that the U.S. has to achieve that goal.
3) Financing New Infrastructure
It is true that commercial parties, rather than governments, make
final investment decisions about infrastructure development in Western
nations. However, commercial energy infrastructure projects are
difficult to develop without access to reliable, competitively priced
sources of supply. The availability of U.S. LNG supply at prices that
are competitive against piped Russian gas or oil-linked Qatar gas will
make it easier to develop much-needed infrastructure projects in
Europe.
4) Degrading Russia's Market Share
Disregarding the benefits of U.S. LNG exports simply because they
won't be available until 2016 or beyond is short sighted, at best.
Energy consumers are looking for natural gas supplies to purchase in
the future, because they have generally already contracted long-term
supply through 2016 or so. The U.S. policy regarding European energy
security has been predicated on the pursuit of long-term projects that
would ensure supply diversity. The Southern Corridor will not be in
place till 2018. Potential supplies from East Africa will not enter the
market until after 2020. Our litmus test (and time horizon) for
assisting European consumers dependent on Russian gas supply should be
forward-looking, extending far beyond how we help them next week.
The LNG Approval Process: A Source of Uncertainty
Today, companies seeking to export LNG from the U.S. are required
to seek a national interest determination from the U.S. Department of
Energy. Applications to export LNG to countries that the U.S. has free
trade agreements (FTA) with are automatically determined to be in the
national interest, in accordance with Section 3 of the Natural Gas
Act.\15\ Applications for exports to non-FTA nations, on the other
hand, go through a longer national interest determination process, in
which the Department of Energy considers the applications on a case-by-
case basis, assessing the cumulative impacts of LNG exports. The
uncertainty that results from this process is a result of the
opaqueness of the process and there is no clear timeline for the
approval or denial of projects. This uncertainty makes it difficult for
potential suppliers of U.S. LNG to secure financing for their projects
and for consumers abroad to accurately assess and compare potential
suppliers when they seek to sign contracts.
---------------------------------------------------------------------------
\15\ 15 USC Sec. 717b
---------------------------------------------------------------------------
The U.S. could minimize this uncertainty by deeming exports of
natural gas to be in the national interest, regardless of whether their
destination is to FTA or non-FTA nations. This would allow the market
to decide whether supplies will go to Europe or Asia. While this might
be the economically optimal approach, it has obvious political
challenges and the Department of Energy has other choices. One would be
to grant early preference to the countries of Central and Eastern
Europe and Japan, which would allow projects with those customers to
enjoy a financing advantage and accelerated consideration. This will
help countries most in need but picks winners in a way that could
invite trade based challenges. A process-based improvement would be to
allow commercially mature projects (those with contracts and which have
obtained FERC environmental clearance) to be considered promptly by
DOE, either by jumping to the head of the queue or by agreeing to
consider them within 90 days of obtaining FERC approval. There are
multiple options available; the U.S. should choose an option that will
signal certainty that U.S.-based LNG can be available to the market
sooner rather than later. These regulations were developed in an era
where today's abundance of natural gas could not be predicted or
expected, and, as a result, bear reconsideration.
The Impact on Asia
Removing uncertainty from the LNG permitting process would also
benefit Asian consumers, and assist the U.S. as it refocuses a larger
share of diplomatic attention to Asian partners and allies. Natural gas
consumers in Asia pay extraordinarily high prices to secure LNG
supplies, and are actively seeking new supplies abroad. As U.S. natural
gas prices hover around $4.50/mmBtu, Asian LNG benchmarks have at times
exceeded $20.00/mmBtu this year.\16\ Henry Hub-linked U.S. LNG
contracts should thus prove highly competitive in Asia even when one
factors in liquefaction, transportation, and regasification costs,
which are widely anticipated to be around $6-$8/mmBtu. Henry Hub-linked
contracts will provide Asian buyers, including U.S. allies and top
global LNG importers South Korea and Japan, with increased negotiating
leverage and pricing flexibility. This may prove especially crucial to
Japan, which is suffering from record trade deficits stemming from
increased LNG purchases following the 2011 Fukushima Daiichi nuclear
disaster.
---------------------------------------------------------------------------
\16\ Eric Yep, ``Spot LNG Prices Hit Record in Asia,'' Wall Street
Journal, February 14, 2013
---------------------------------------------------------------------------
Other nations are also seeking to develop LNG export capabilities,
some of them closer to Asia geographically. Yet many of these projects
have been plagued by unanticipated cost overruns, while others are
located in areas where scarce infrastructure and government corruption
and rent seeking threaten to delay export timetables. Consumers in Asia
have the same commercial concerns as consumers elsewhere in the world,
and they value competitive costs, reliability and timeliness. The U.S.
is known worldwide as a reliable trading partner, and it can play that
role for Asia as well. Exports of LNG to Asia would be in the U.S.'s
economic and strategic interests. Given recent events, it is worth
mentioning that Russia aspires to double its share of the global LNG
trade by 2020 in large part by meeting large shares of Asian demand
growth. Russia is seeking closer relationships with Asian consumers
like Japan and is negotiating a gas pipeline deal with China that would
provide almost 40 bcm per year to China for 30 years and cost roughly
$50 billion\17\--but not until after 2018. We need to ask ourselves if
we would prefer for Asia to plan to rely on Russian gas or on U.S. LNG
as it builds its strategic alliances. As in Europe, U.S. LNG exports
may one of the few direct tools the U.S. possesses to limit Russian
market share and better ensure the Russian gas that is exported to Asia
is done so at competitive prices.
---------------------------------------------------------------------------
\17\ Jack Farchy, ``Russia looks to sell energy beyond Europe,''
Financial Times, March 20, 2014
---------------------------------------------------------------------------
Conclusion
U.S. LNG exports, while no panacea, provide the U.S. with a
strategic advantage for achieving greater global energy security and
greater stability in natural gas markets. My colleagues at Brookings
concluded in 2012 that the optimal policy regarding LNG exports from
the U.S. would be to allow the market to decide where exports should go
and at what volume, without promoting or restricting them.\18\ I share
that view, and believe that significantly speeding up the national
interest determination process at the Department of Energy would allow
the market to work more efficiently. Unfortunately, that optimal policy
arrangement is unavailable to us today.
---------------------------------------------------------------------------
\18\ Ebinger, 2012
---------------------------------------------------------------------------
As General Martin Dempsey, Chairman of the Joint Chiefs of Staff,
observed in a House Committee on Appropriations hearing less than two
weeks ago, ``an energy-independent and net-exporter of energy as a
nation [sic] has the potential to change the security environment
around the world, notably in Europe and in the Middle East. And so, as
we look at our strategies for the future, I think we've got to pay more
and particular attention to energy as an instrument of national
power.''\19\ A number of influential observers in Washington and
beyond, from both sides of the partisan aisle, concur that LNG exports
are in the interest of the U.S., and have weighed in in favor of
exports as a tool for reducing Russia's dominance in European energy
markets. Several pieces of bipartisan legislation have been introduced
in both Chambers of the Congress that would authorize exports of U.S.
LNG to our allies, be they NATO or WTO members.
---------------------------------------------------------------------------
\19\ ``A Gas Export Strategy: Opponents don't understand energy
markets or price expectations.'' Wall Street Journal, March 19, 2014.
---------------------------------------------------------------------------
The geopolitical imperative is clear. The Russian dominance of
European energy markets and the predominance of high-cost oil-linked
gas prices in both Europe and Asia threaten the energy security of our
friends and allies, and of the U.S. by extension. In an increasingly
globalized world, an insular policy regarding LNG exports is not in the
interest of the U.S. The U.S. consistently supports opening markets
throughout the world to create new opportunities and shared prosperity
with our allies and partners. Our broader policies and goals are at
odds with current restrictions on both LNG and crude oil exports, and
this inconsistency does not go unnoticed by negotiating partners. These
policies, which were developed during an era of energy scarcity, merit
reconsideration given our current energy abundance. In the absence of
the optimal policy arrangement, in which LNG exports would be free to
flow as directed by the market, we should consider unfettering LNG
exports to our friends and allies in Europe as a first step.
I close today as I closed my article for Brookings:
We have spent nearly two decades of intense diplomacy trying
to diversify Europe's energy supply by getting Azerbaijan,
Kazakhstan, Turkmenistan and even Iraq to sell them energy.
Baku-Tbilisi-Ceyhan. Nabucco. The Southern Corridor. The Trans-
Caspian Gas Pipeline. We finally have a tool at our disposal
that can provide direct relief to Europe over time, and
accelerate the competitiveness of that market today. We want
everyone else to help. Shouldn't we?\20\
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\20\ Goldwyn, 2014
The Chair. Thank you very much.
Mr. Chow.
STATEMENT OF EDWARD C. CHOW, SENIOR FELLOW, ENERGY AND NATIONAL
SECURITY PROGRAM, CENTER FOR STRATEGIC AND INTERNATIONAL
STUDIES (CSIS)
Mr. Chow. Madame Chair, members of the committee, it is my
honor to appear before you today to discuss the important
questions you have posed.
First of all, let me congratulate you, Senator Landrieu,
for chairing what I understand to be, your first full committee
hearing and also for being on the Kremlin's sanctioned list.
[Laughter.]
Mr. Chow. You must the envy of your colleagues in more ways
than one.
I understand the committee would like me to focus on the
international impact of the unconventional oil and gas
revolution, particularly in light of the current crises over
Russia's invasion of Ukraine's territory of Crimea and the
potential threat it poses for gas supply disruptions for
Ukraine as well as for Europe. Of course the long term impact
of the unconventional revolution is just beginning to be felt
internationally. Much depends on whether the American
experience can be replicated around the world.
Studies indicate shale plays exist in different parts of
the world. The history of technology makes me optimistic that
this advancement will be transferred to other countries. It
would just take time as the application of new technology is
adapted to local conditions.
Even before spreading to other countries the tight oil and
shale gas revolution has already made important contributions
to the stability of global markets. Thanks to tight oil U.S.
oil production increased by more than 2 million barrels per day
since 2010 partially offsetting global supply disruptions in
recent years. American shale gas already had significant impact
on the global LNG market even before the start of exports.
As you pointed out, Madame Chair, more than 30
regassification terminals were proposed in the U.S. for
imports, not exports, at one time. Imagine what the
international LNG market would be like if the U.S. had become a
major importer rather than expected to become a net gas
exporter by 2018. U.S. LNG exports could lead to important
changes to the global gas market.
Because we have gas on gas competition in North America
natural gas prices are not linked to oil prices as they are in
most of the rest of the world when gas is traded
internationally. Our exports will also contribute to increased
spot LNG cargoes that are not tied to long term contracts.
When the first project for exporting LNG from the lower 48
States is completed Sabine Pass, which I'm sure Madame Chair,
you are very familiar with, will have taken more than 5 years
to complete. It is not merely governmental approval such as
those from DOE or FERC and local permitting that takes time,
but also negotiating purchase agreements with qualified buyers,
securing financing and the standard engineering procurement and
construction work to build the export terminal.
The combined capacity of the projects DOE has already
conditionally approved is higher than the total gas consumption
of Germany. The U.S. will become a major LNG exporter if all
the projects are completed. More export projects are in the
queue for DOE approval.
There are ample domestic economic reasons why restrictions
on oil and gas exports should be relaxed. With oil, the light,
sweet crude being produced from shale plays, like the Bakken,
cannot be run optimally by our sophisticated refineries which
are designed to process less expensive, heavier, sour crudes.
We would maximize the economic benefits of tight oil production
by exporting some light, sweet crudes and condensate while
continuing to import heavier and sour crudes.
With gas, exports would help to sustain the level of
investment in production when priced with price levels that
benefit both producers and long term consumers without
depressed prices choking off the expected growth. These are
complicated issues that deserve full debate in Congress as has
already begun. Decades of perceived energy scarcity informed
our existing oil and gas export policies and it takes time to
reexamine these policies and amend applicable law in a new era
of energy abundance.
A degree of regulatory certainty is important when billions
of dollars are at stake in investments that take years to
complete. Russian aggression against Ukraine has added
geopolitical and foreign policy dimensions to these issues.
Some argue that hastening approvals of crude oil and LNG
exports by the United States would have a deterrent effect on
hostile actions by Russia. Unfortunately this is unlikely to
have much immediate effect.
Russia produces more than 10 million barrels per day of oil
and exports about 7 million barrels in crude and petroleum
products. No amount of increases in U.S. exports can begin to
replace such large volumes. Russian exports of natural gas are
more than twice the combined capacity of DOE approved U.S. LNG
export projects so far.
In order to reduce the influence Russia exerts through oil
and gas Europe plays the crucial role as Russia is more
dependent on Europe as the destination of its exports than
Europe is reliant on Russia for supply. Europe would do well to
focus on developing indigenous energy resources in order to be
less import dependent and fully integrating its gas and
electricity networks so that supply can flow more easily to
countries vulnerable to cutoffs. Unfortunately Lithuania, where
the Minister is from, is one of the few European countries
committed to developing shale gas.
Export of U.S. LNG is not a silver bullet for Europe. In
fact, LNG imports declined significantly in Europe last year as
a result of more favorable pricing terms authored by
traditional pipeline suppliers such as Norway and Russia.
Unlike countries such as Russia, the United States does not
direct commerce and leave it to private companies to operate
freely in the market, except in times of war and other national
emergency. Indeed we have historically taken a stance against
the use of energy as the geopolitical weapon, especially after
the Arab oil embargo of 1973.
Inflating the rhetoric on exports could actually embolden
Russia since it recognizes it's irrelevant and a short run.
More importantly, it can distract us from the critical task of
shoring Ukraine economically.
I know the committee may have more questions on Ukraine. It
is a country I've spent some time working in. I will wait until
the question and answer period to address those.
[The prepared statement of Mr. Chow follows:]
Statement of Edward C. Chow, Senior Fellow, Energy and National
Security Program, Center for Strategic and International Studies (CSIS)
international impact of the u.s. unconventional oil and gas revolution
Madam Chair, Members of the Committee: It is my honor to appear
before your Committee today to discuss the important questions you have
posed.
My fellow panelists have already described very well the
significant impact of the shale gas and tight oil revolution and the
long lasting effects on America's energy supply. Indeed this is the
most important development in energy production in the 21st Century so
far, driven in part by the equally phenomenal increases in oil prices
since the beginning of the century.
I understand the Committee would like me to focus on the
international impact of the unconventional oil and gas revolution,
particularly in light of the current crisis over Russia's invasion of
Ukraine's territory of Crimea and the potential threat it poses for gas
supply disruptions for Ukraine as well as for Europe, and the
possibility for U.S. oil and gas exports to enhance global energy
security.
Of course, the international impact of unconventional revolution in
North America is just beginning to be felt. Much depends on whether the
North American experience can be replicated around the world and how
quickly the new technology can be introduced in countries with
significant unconventional resource potential like China and Argentina.
Numerous studies, including those commissioned by the Energy
Information Administration of the Department of Energy (DOE), suggest
that similar shale plays exist in different parts of the world.
However, even if the geology is similar, the above-ground conditions in
most of the world are so different from those in the U.S. that it will
take some time, at least another three to five years, before we can
know whether and how the American success can be repeated in other
countries.
These non-geological conditions, which are somewhat unique for the
U.S., include private landholders' ownership of subsurface mineral
rights, a geological data base from a century and half of oil and gas
production, a robust and competitive oil and gas industry (especially
the presence of small to medium-size, nimble and innovative producers,
equipment suppliers, and service companies), existing infrastructure to
transport and process production, liberalized market pricing, and well-
established and a transparent regulatory environment, which took
decades to develop.
Most of these conditions do not exist elsewhere in the world.
However, the history of technology transfer makes me optimistic that
this technological advancement will be introduced successfully in other
countries. It will just take time as it did for our country and longer
than some of its eager champions would like. The way it will be
implemented may also differ from how it is done in the U.S., but it
will be adapted to local conditions.
Nevertheless, tight oil and shale gas developments in the U.S. have
already made important contributions to the stability of global energy
markets. Thanks to tight oil, U.S. oil production increased by more
than two million barrels per day since 2010. This is a remarkable
achievement. Without this additional supply, it is difficult to imagine
how global oil prices could have remained around $100 per barrel.
Supply disruptions from Libya, Sudan and Iran, as well as
underperformance in production in Iraq, Nigeria, and Venezuela were
partially offset by the greatest volume increase in the history of oil
production in the U.S.
Even before we start exporting liquefied natural gas (LNG) from the
lower 48 states, the American shale gas revolution has already made a
significant impact on the global LNG market. As recently as 2004, more
than 30 LNG regasification terminals were proposed in the U.S. for
imports, not exports. The long-term impact of natural gas deregulation
under President Carter in 1978 allowed market clearing pricing,
unshackled by state and federal controls, to encourage conservation and
domestic production. Thirty-five years of stable and predictable
regulatory regimes created investment conditions for energy efficiency
improvements and innovation in production, such as hydraulic
fracturing. Of the 30 some LNG import terminals proposed, only five
were actually completed and became operational.
What would the global LNG market be like if the U.S. had become a
major LNG importer rather than expected to become a net gas exporter by
2018? LNG from Qatar, West Africa, Trinidad/Tobago and elsewhere,
slated for the U.S. market, all became available for Europe and, more
importantly, to satisfy increased needs from Japan after the Fukushima
disaster and rising import demand by China and India.
When U.S. LNG exports begin by 2016, in addition to adding more
global supply, they may also lead to evolution of the global gas
market. Because we have gas-on-gas competition in North America,
natural gas prices are not linked to oil prices as they are in the rest
of the world when gas is traded internationally. The U.S. will become a
net gas exporter before the end of this decade. Higher LNG volumes
globally, including those from increased production from Australia,
potential new production from East Africa, Russia and the Eastern
Mediterranean, may contribute to increased spot LNG cargoes that are
not tied to long-term contracts with strict volume commitments by both
buyers and sellers.
In time, the LNG market may look more like the more liquid and
flexible international oil market. However, this will take some time to
develop, particularly since the new liquefaction projects are high-
cost, demanding tens of billions of dollars in investment, which will
continue to require long-term contracts from committed, creditworthy
buyers and predictable gas pricing or tolling charges in order to
secure financing.
An indication of the radical change the shale gas revolution caused
in the U.S. is Cheniere Energy's Sabine Pass LNG project. Sabine Pass
was completed as a receiving terminal only in 2009 and almost
immediately sought to become a bi-directional terminal that can liquefy
and export gas as well. It will become the first LNG export terminal in
the lower 48 states when it is completed by yearend 2015, a journey of
more than five years from conception to completion, which is quick for
a multi-billion project in the oil and gas industry. It is not merely
governmental approvals, such as those from DOE or the Federal Energy
Regulatory Commission (FERC) and local permitting, that take time, but
also negotiating purchase agreements with qualified buyers, securing
financing, and the standard engineering, procurement, and construction
work to build the export terminal.
So far, DOE has granted conditional approvals to six LNG
liquefaction and export projects. (Sabine Pass is the only one that
also has FERC approval.) The last project, Jordan Cove, received its
approval only yesterday morning. In fact, DOE has been remarkably
speedy in granting such conditional approvals in the last year or so,
as confidence grew on the resource base estimates and recovery rates
for shale gas.
The combined capacity of the six projects (9.3 bcf/day or 95 bcma)
is higher than the total gas consumption of Germany. The U.S. will
truly become a major LNG exporter if all six projects are completed.
Another twenty-four export projects are in the queue for DOE approval.
Consequently, the potential impact on the global gas market could be
even greater. Of course, just because a project is proposed does not
mean it will be built, as we discovered with the 30-some LNG receiving
terminal proposed not too long ago.
There are ample domestic economic reasons why restrictions on oil
and gas exports should be relaxed. With oil, the light sweet crude
being produced from shale plays like the Bakken cannot be optimally
utilized by our sophisticated refineries, which are configured to
process less-expensive heavier sour crudes. The U.S. would maximize the
economic benefits of tight oil production by exporting some
domestically produced light sweet crudes and condensate while
continuing to import heavier and sour grades.
With gas, exports would help to sustain the level of investment in
production with market prices that benefit producers and long-term
consumers without depressed pricing choking off the expected growth, as
has happened in the past. This includes gas consumers who are
considering expansion of petrochemical capacity, increased utilization
in power generation, and new uses for gas such as in the transportation
sector.
These are complicated issues that deserve full debate in Congress,
as has already begun. Ever since the end of World War II, the U.S. has
championed free trade around the world and its benefits extend equally
to oil and gas trade. However, decades of perceived energy scarcity
have informed our existing oil and gas export policies and it will take
time to reexamine these policies and amend applicable laws for a period
of relative domestic energy abundance. A degree of certainty in
investment climate is important when billions of dollars are at stake
in projects that take years to complete in order to produce, process,
and consume more domestic oil and gas.
Russia's aggression against Ukraine has added a geopolitical and
foreign policy dimension to these questions. Some have argued that
hastening U.S. approvals of crude oil and LNG exports would have a
deterrent effect on further Russian actions and enhance the energy
supply security of our allies and trading partners in Europe.
Unfortunately, this is unlikely to have much immediate effect.
Russia produces more than 10 million barrels of oil per day and
exports about 7 million barrels in crude and petroleum products. No
amount of increases in U.S. oil exports, including possible drawdown
from the Strategic Petroleum Reserve (at a maximum rate of 4 million
barrels per day for 90 days), can replace such large volumes. Russian
exports of natural gas are equivalent to twice the combined capacity of
the seven DOE-approved U.S. LNG export projects, which may be completed
by the end of this decade. Certainly increased exports of oil and gas
from the U.S. and other countries would reduce over time the
significance of Russian exports, but none of this will happen quickly.
In order to reduce the influence Russia exerts through its oil and
gas exports, it is Europe's role that is crucial. Whereas it is true
that Europe relies on Russia as its major oil and gas supplier, Russia
is even more reliant on the European market as the destination of 80
percent of its oil and gas exports. Oil and gas represent more than 70
percent of Russia's export earnings and more than 50 percent of its
federal budget. So, who is more reliant on whom? This has more to do
with the exercise of political will rather than of economic leverage.
Europe would do well to focus on the development of indigenous
energy resources, including shale gas through hydraulic fracturing
(unfortunately the Lithuanian Minister's country is one of the few
which has committed to do so), and to fully integrating its gas and
electricity networks so that supply can flow more easily to countries
vulnerable to cutoffs.
Export of U.S. LNG is not a silver bullet for Europe. In fact,
imports of LNG declined significantly in Europe last year as a result
of more favorable pricing terms offered by traditional pipeline
suppliers such as Norway and Russia, and as an indirect result of
American shale gas reducing our imports. Operators of European LNG
terminals are hurting financially because of low utilization rates. The
future volumes of U.S. LNG are already contractually committed to
buyers, mostly in Asia where LNG prices are significantly higher than
Europe's. Of course, some of these volumes could be redirected if
Europe is willing to pay equally high prices for LNG.
Unlike countries such as Russia that have oil and gas sectors
dominated by state-owned and controlled companies, the U.S. Government
does not direct commerce and leaves this to private companies operating
in a free market, except in times of war and other national emergency.
Indeed we have historically taken a stance against the use of energy as
a geopolitical weapon, especially after the Arab oil embargo of 1973.
These are principles worth considering before we decide to select
politically the countries with which we trade oil and gas rather than
through internationally negotiated trade agreements.
Since U.S. exports of oil and natural gas would have no impact on
Russia's market position in the short to medium term, there is a danger
that inflating the rhetoric on exports would actually embolden Russia,
which will recognize this as an empty threat, to act even more
recklessly. It can also distract us from the more critical task of
shoring up Ukraine economically. Two years ago, I testified before the
Europe Subcommittee of the Senate Foreign Relations Committee to warn
that for more than twenty years ``Ukraine has been on a dangerous path
toward energy insecurity, which has accelerated'' under the Yanukovych
administration and that at this rate ``Ukraine (will) become an energy
appendage of Russia's.''
The situation has only worsened in the intervening two years.
Ukraine is truly vulnerable to energy blackmail by Russia because of
past leaders, not just Yanukovych, who personally benefited from
pervasive corruption in the sector, especially in the gas trade with
Russia, that led to wasteful consumption, depressed domestic
production, and fed the overreliance on Russia for energy supplies.
Ukraine is one of the most natural gas dependent countries in the
world, with gas supplying 40 percent of primary energy, 60 percent of
which is imported from Russia. Potential economic collapse presents the
greatest long-term threat to Ukraine's national unity and its
territorial integrity beyond Crimea.
Reverse flows of pipelines from Central and Eastern Europe can
supply, at most, less than half of the gas Ukraine currently imports
from Russia. They are also worthless in a true supply cutoff by Russia
lasting for more than a few weeks, since countries like Poland,
Slovakia, Hungary and Romania will then have no gas to spare for export
to Ukraine. Ukraine has no LNG receiving terminal and, even if it had
the wherewithal to build one, which it does not, it would take at least
two years to put a receiving facility in place.
Fortunately more than half of the Russian gas sold to Europe still
transits Ukraine and Russia cannot cut off Ukraine without cutting off
its European customers, upon whom it depends for revenue (as we learned
from the 2006 and 2009 gas crisis). Therefore, unless the security and
political situation deteriorates further between the two countries,
neither Russia nor Ukraine would precipitate a gas supply cutoff.
Unfortunately, the risks have increased in recent days.
Nevertheless, urgent actions are needed to remedy Ukraine's long-
term gas supply vulnerability, which also affects Europe. Fortunately,
the solutions are well known since Ukrainian and Western experts have
recommended sensible reform steps for many years, including two
separate studies by the International Energy Agency, most recently in
2012. Almost all of these reform plans were commissioned by the same
Ukrainian governments that lacked the political will to implement them.
Especially important is gas price decontrol at the burner tip, as
the IMF insists for fiscal and balance of payments reasons, but also at
the wellhead to provide incentives to invest in domestic production.
Current gas price regulations encourage wasteful consumption and
chronic shortage, as well as depress domestic production since domestic
gas price is controlled at a small fraction of imported gas price. This
also has the intended effect of facilitating widespread corruption in
gas trade. This must stop.
All Western financial aid to Ukraine from the U.S., E.U., and
international financial institutions (IMF, World Bank, EBRD, EIB)
should be conditional on the agreement by the interim government of
Ukraine to international monitoring of fundamental reforms of the
energy sector and a sufficient share of the Western aid money devoted
to funding the implementation of reforms, especially in gas pricing, in
order to improve energy efficiency and promote domestic production.
Naftogaz, the state oil and gas monopoly, which is at the center of
energy corruption in Ukraine, must be completely restructured as soon
as possible.
There is no point pretending with the new authorities in Kyiv that
there are solutions, absent fundamental reform, to Ukraine's energy
supply vulnerability, which hangs like a Sword of Damocles over it and
Europe because of Ukraine's central position in energy transit. If the
Ukrainian government commits to such reforms, the U.S. and E.U. must
assist in capacity building for proper execution of reforms steps by
providing teams of technical, financial, business and regulatory
experts to help.
Frankly, $1 billion in loan guarantees is not sufficient to the
challenge at hand if the U.S. is serious about helping Ukraine's long-
delayed transition into a market economy, including modernizing its
energy sector. Ukraine's long-suffering public also has to be prepared
for the short-term pain energy reform will bring in order to reap its
long-term benefits. This will not be easy.
Ukraine's geological endowment for producing more oil and gas is
well known. The fastest way of tapping into this potential is to revive
its conventional oil and gas production, which has stagnated for more
than twenty years in spite of high imported prices, by deregulating
wellhead prices as the U.S. did more than thirty years ago. With
liberalized pricing, Ukraine may even lead the rest of Europe in
replicating American success in shale gas, as it appears similarly well
endowed in potential shale plays and major international oil companies
seem interested to invest under the right conditions. That would be the
best and most realistic way for America's unconventional oil and gas
revolution to contribute to the future of European energy security.
The Chair. Thank you very much. An interesting perspective.
We now will hear from the Minister of Lithuania, the
Honorable Jaroslav Neverovi.
STATEMENT OF JAROSLAV NEVEROVIC, MINISTRY OF ENERGY, THE
REPUBLIC OF LITHUANIA
Mr. Neverovic. Thank you, Madame Chair, members of the
committee, thank you very much for making----
The Chair. Speak into your mic. You have to lean in. It's a
little awkward, sorry.
Mr. Neverovic. Yes.
Thank you very much for making me a part of this hearing. I
will share with you Lithuania's story which I can summarize
with one phrase and which is, ``Freedom is not for free.''
But before I make my point I want to return to May 8th,
2003 when the historic vote happened on the Senate Floor on
enlargement of NATO. One year later we became formal members of
NATO. This year we celebrate tenth anniversary of our
membership. Senators, Senate's role could not be
underestimated. So thank you very much for your leadership
then.
During the past quarter of a century Lithuania emerged from
the ruined Soviet economy to become a free market Nation with a
robust economy, stable political system. We have become a
trusted international partner. We are cooperating closely with
the United States including fighting terrorism in places such
as Afghanistan. We are very proud of our achievements.
I'm honored to appear here before a such distinguished
group of American officials led by chairwoman of this
committee, Senator Mary Landrieu, the respective of political
affiliation you individually and collectively stand proudly for
the principles of free and fair trade and understand implicitly
that unrestricted flow of good services and energy resources
benefits both the United States and your trading partners.
Madame chairwoman and committee members we have common
vision for democratic system which are same values in
international relations. But despite our unwavering commitment
to those principles and ideals a law enacted in your country
some 75 years ago denies us access to your abundant energy
resources. Let's change that situation in the spirit of allies,
let the energy strengthen and deepen our strategic cooperation.
At present we are completely 100 percent dependent upon
single supplier of natural gas. As a result are forced to pay a
political price for this vital energy resource. Lithuanian
families and businesses pay 30 percent more for natural gas
than citizens in other European countries. This is not fair.
That's abuse of monopoly position.
I'm here today to tell you that Lithuania is taking steps
to achieve energy independence and thereby strengthen our
national security. But let me also be 100 percent transparent.
I am also here to plead with you and your colleagues to do
everything within your power to expedite the release of some of
your abundant natural gas resources into the world market,
especially to those Nations beholden to monopolistic supplier.
The United States, with your enormous natural gas resources and
highly developed infrastructure, has the kind of liquid market
that Europe is trying to build right now.
So what is the potential in Europe to receive U.S. LNG?
There are currently 22 operating LNG import facilities
within the EU with total combined capacity of 6.7 trillion
cubic feet per year and another 6 terminals with additional
capacity of over one trillion cubic feet per year under
construction. However, the actual import of LNG into Europe
fell about almost half between 2010 and last year. Because LNG
prices are generally pegged to the global price of oil, current
prices are just too high to supplant natural gas produced in
Russia and elsewhere on the continent.
As a consequence LNG terminals across Europe are
functioning near their minimum technical capacities.
However, America's entry into the global natural gas market
can change this situation completely. Last week Vice President
Biden visited Vilnius, Lithuania. During his visit the Vice
President said, ``We have learned the hard way that protecting
the sovereignty of Nations depends on having more than one
supplier of energy.'' Vice President Biden expressed support to
our efforts by encouragement for further energy cooperation.
Indeed Baltic States are working successfully to overcome
``energy island'' situation.
I'm pleased to tell you that in just 250 more days
Lithuania will have an instrument, our own LNG import terminal
in our seaport, Klaip.da. The newly built, floating storage and
regassification vessel has been symbolically named,
``Independence.'' Also its primary goal is to satisfy our
national needs, the terminal will operate under so-called third
party access regime. That means that our neighboring countries
could use terminal's capacity to meet their own needs. Thus our
terminal, the first, large scale LNG import facility on the
Baltic Sea will be the ice breaker for the region, helping to
ensure alternative gas supply.
While the United States appears positioned to be a key
player in the global LNG marketplace there is, as you know, a
sticking point. The majority of your LNG exports are subject to
a public interest review. We understand that the U.S. President
has the authority to deem all of the pending applications to
export LNG to non-FTA Nations to be in public interest. We hope
that this Administration will do just that by opening the doors
to LNG exports to non-FTA countries.
But if they don't act in a timely way we urge Congress to
step in and amend the law. Accelerating America's entry into
the global natural gas market is a win/win/win situation.
America wins through job creation, economic growth, more
avenues for the government.
Customers in Europe win by access to more competitively
priced gas from U.S.
Strategic operation of NATO allies would be strengthened.
Consequently stability on the European continent wins when
monopolistic levers of influence are reduced or eliminated.
The present situation in Ukraine has taught us one lesson.
No Nation should be able to use its monopolistic energy
supplies to punish any other Nation.
So in conclusion, we should work together to let
competition in, to keep the monopoly out and to bring natural
gas prices down for customers in America and in Europe.
Thank you.
[The prepared statement of Mr. Neverovic follows:]
Prepared Statement of Jaroslav Neverovic, Minister of Energy, The
Republic of Lithuania
Madam Chairwoman and members of the committee. Thank you for the
opportunity to appear before you this morning to tell Lithuania's
story, which I would summarize in a simple phrase: Freedom Isn't Free!
Just eleven years ago-on May 8, 2003-the historic vote of the
Senate occurred, unanimously ratifying the accession of Lithuania and
six other European democracies to NATO. As a result during these days
we are celebrating the 10th anniversary of our membership at the
Alliance.
During the past quarter century, Lithuania emerged from the ruined
Soviet economy to become a free market nation with a robust economy,
stable political system. We've become a trusted international partner,
we are cooperating closely with the United States. We've put our own
soldiers shoulder-to-shoulder with yours to fight terrorism in places
such as Afghanistan. And, we're very proud of that.
So, I am humbled and honored to be here today as the energy
minister of the free and independent state of Lithuania!
I am also honored to appear here because this body-the United
States Senate-always stood beside us, never once recognizing the
illegal and immoral annexation of the Baltic States by the Soviet
Union.
And, finally, I am honored to appear before such a distinguished
group of American officials, led by the chairwoman of this committee,
Senator Mary Landrieu from the great state of Louisiana. Irrespective
of political affiliation, you individually and collectively stand
proudly for the principles of free and fair trade and understand
implicitly that the unrestricted flow of goods, services, and energy
resources benefits both the United States and your trading partners.
Madam Chairwoman and committee members, the Lithuanian message is
simple. We have common democratic vision; we share the same values in
international relations. But, despite our unwavering commitment to
those principles and ideals, a law enacted in your country some 75
years ago denies us access to your abundant and affordably priced
energy resources.
Let's change this strange situation. In the spirit of allies let
the energy strengthen and deepen our strategic cooperation.
At present, we are completely-100 percent-dependent upon single
supplier of natural gas and, as a result, are forced to pay a political
price for this vital energy resource. Lithuanian families and
businesses pay 30 percent more for natural gas than citizens in other
European countries. This is not just unfair. This is abuse of
monopolist position.
Madam Chairwoman and committee members, I am here today to tell you
about the steps Lithuania is taking to achieve energy independence and
thereby strengthen our national security. But, let me also be 100
percent transparent. I am also here to plead with you and your
colleagues to do everything within your power to help us achieve that
objective by expediting the release of some of your abundant natural
gas resources into the world market, especially to those nations
beholden to a monopolistic supplier.
The United States, with your enormous natural gas resources and
highly developed infrastructure, has the kind of liquid market that
Europe is trying mightily to achieve.
What is the potential in Europe to receive US LNG? There are
currently 22 operating LNG import facilities within the EU with a total
combined capacity of 6,7 trillion cubic feet (Tcf) per year and another
six terminals with an additional capacity of 1,06 trillion cubic feet
per year are under construction (one of those new facilities, as I
shall explain, is located in Lithuania's Port of Klaipeda on the Baltic
Sea).
However, the actual import of LNG into Europe fell by almost half
between 2010 and 2013, from 3 trillion cubic feet per year to 1,6 Tcf
per year. The reason for this decline is simple. Because LNG prices are
generally pegged to the global price of oil, current prices are just
too high to supplant natural gas produced in Russia and elsewhere on
the continent. As a consequence, LNG terminal across Europe are
functioning near their minimum technical capacities.
However, America's entry into the global natural gas market can
change this situation completely.
Last week Vice President Biden visited Lithuania. During his visit,
the Vice President said: ``We have learned the hard way that protecting
the sovereignty of nations depends on having more than one supplier of
energy''. Vice President Biden expressed support to our efforts by
encouragement for further energy cooperation.
Lack of gas and electricity interconnections with other EU members
and extremely high dependency on energy from a single monopolistic
supplier, makes us highly vulnerable. Fortunately, the Baltic States
are working successfully to overcome this ``energy island'' situation.
I am pleased to tell you that in just 250 more days, Lithuania will
have an instrument-our own LNG import terminal in our seaport Klaipeda-
and once this facility is operational, we will have a functional
natural gas market at last.
I cannot overstress the strategic importance of the LNG terminal to
Lithuania. The newly-built floating storage and regasification vessel
has been symbolically named ``Independence'' and although its primary
goal is to satisfy our national needs, the terminal will operate under
a so-called ``third party access'' regime. That means that our
neighboring countries could use terminal's capacity to meet their own
needs. Thus our terminal-the first large-scale LNG import facility on
the Baltic Sea-will be the ice-breaker for the region, helping to
ensure an alternative gas supply and create a functioning gas market.
While the United States appears positioned to be a key player in
the global LNG marketplace, there is, as you know, a sticking point.
The majority of your LNG exports are subject to a ``public interest''
review conducted by your Department of Energy. At present, only exports
destined for nations with which you have a free trade agreement are
automatically deemed to be ``in the public interest.''
However, the U.S. President has the authority to deem all of the
pending applications to export LNG to non-FTA nations to be ``in the
public interest''. We hope that his administration will do just that by
opening the doors to LNG export to non-FTA NATO members. But, if they
don't act in a timely way, we urge Congress to step in and amend the
law.
Accelerating America's entry into the global natural gas market is
a win-win-win situation. America wins through job creation, economic
growth, more revenues for government. Customers across Europe win by
access to more competitive, clean-burning U.S. natural gas. And,
strategic cooperation of NATO allies would be strengthened-consequently
stability on the European continent wins when monopolistic levers of
influence are reduced or eliminated.
The present situation in Ukraine has taught us all one lesson-no
nation should be able to use its monopolistic energy supplies to punish
any other nation. So, in conclusion, my message to you is simple. Let's
work together to let competition in, push the monopolists out, and
bring natural gas prices down in Europe as they have come down in
America.
Thank you for the opportunity to make this statement. I look
forward to your questions.
The Chair. Thank you very much.
We'll begin with a round of questioning.
Senator Murkowski, welcome. She's going to forego her
opening statement on the matter, for the matter of time. But
will join me in an opening round of questions.
Then the order will be Senator Wyden, Senator Scott,
Senator Udall and then I'll come back to the list.
Thank you all for being present.
Let me ask this first, I think, to Mr. Chow and then Dr.
Montgomery and then to the Minister.
It's, I think, should be better known in the United States
that Russia's budget, it's national budget, is 52 percent made
up of energy revenues. I'm going to ask our staff to get
information about the U.S. budget which is, I'm sure,
considerably less. It's been written over the course of several
years that Russia has continued to use what has been termed,
it's not my term, but someone else termed this, energy
blackmail, to ensure they keep their State coffers full.
Foreign policy reported over the last 20 years Russia has
used this energy blackmail more than 40 times including
countries such as Lithuania, who testified.
You know, Mr. Chow, you said that there's no silver lining,
our, you know, our actions today might not take immediate
effect.
Dr. Montgomery, you were a lot more bullish on your
position.
So I'd like to ask you all what are the steps that, in your
opinion, the U.S. should take to reduce Russia's influence, to
reduce their quick access to cash, to promote policies that are
not in our interest and not in the interest of Europe and
democracies around the world?
Starting with you, Dr. Montgomery.
What are the 1 or 2 things that we should do?
Mr. Montgomery. Thank you, Madame Chair.
I will stick to energy things that we could do.
The Chair. Yes.
Mr. Montgomery. Because I don't----
The Chair. Right, energy.
Mr. Montgomery. Offer myself as an expert on others and I'm
sure there are many others that could accomplish what you're
talking about as well.
I make it that based on your numbers revenues from natural
gas are probably somewhere around 20 percent of energy
revenues, 10 percent therefore of the Russian budget. If we
could take out half of that well, that would be about 5 percent
of their budget. I know what the budget committees and Congress
would feel about that if it happened to the United States.
So I think that would be effective.
I agree with Mr. Goldwyn that it's the potential
competition that is really important. It is. We see this in
industry after industry where a monopolist restrains themselves
because they know that if they go much above competitive
pricing there are others who are not in the market now, but are
ready to leap in. That's the position the United States needs
to be in.
I agree with the Minister that the critical part for that
is some form or another of removing the--of moving past the DOE
process of making it clear that there is a policy commitment
not to cap natural gas exports, not to stop that, not to
prevent, you know, trades being made that are the advantage of
both of our allies and ourselves. But also dealing effectively
with potential problems with natural gas production, dealing
with issues of shale gas and potential regulations that could
hurt its production.
The Chair. OK.
Mr. Goldwyn, would you like to add anything?
Mr. Goldwyn. Yes, please.
The Chair. Or disagree with anything that was said?
Mr. Goldwyn. I don't disagree with what's said. I think
there--I have a short list of 5 things I think the U.S. could
do that could really reduce Russia's influence.
The first is diplomatic. We have a big agenda with Europe.
If they integrate their gas market then they'll be able to move
gas around and we'll be able to help more.
The second is I started a program called the Global Shale
Gas Initiative when I was at the State Department. It's now
called the Unconventional Gas Technology Program. We could do a
lot more to provide technical assistance to other countries to
help them develop their shale gas resources safely and
efficiently.
I think the third thing, as we've talked about, obviously,
would be to accelerate our ability to connect to the global
market on gas.
I think we could encourage the Europeans to provide credit
support to a lot of these projects in Europe. A lot of these
economies are in bad shape as Dr. Montgomery and Dr. Chow know
very well. They have a lot of work to do before people want
to--before they can get prices right so people want to invest
there. But I think the European Union could give credit support
to a lot of those countries to enable them to build these
interconnectors and projects.
I think we should, as we have for decades, encourage oil
production both here at home and overseas because the more
supply there is coming from Mexico or other places or even our
own exports, if we get to a point where we can do that. We
drive the global price of oil down. When the price of oil goes
down, Russia's revenues are reduced and other countries have
other choices of supply.
The Chair. Dr. Chow.
Mr. Chow. Thank you, Madame Chair.
I actually don't disagree too much with what my colleagues
have to say except in terms of timing and to be a little bit
modest as to how much immediate impact that we can make while
not perhaps attending to more urgent matters such as shoring up
Ukraine.
In addition to what my colleagues have already said, I
would emphasize the fact that our European allies are the ones
with leverage over Russia on oil and gas imports, not us.
Eighty percent of Russia's oil and gas exports go to Europe.
They don't have many alternatives in the short to medium term.
The pipelines to China are not built yet. Although Mr. Putin
may be trying to do that when he visits China in May.
A number of the allies we met with, President Obama met
with yesterday and today, have shale gas bans. We should send
David back to Paris where there is an effective ban on even
looking at exploring the resource that might be in France.
Germany has an effective ban on fracking. Germany, forty
percent of Germany's gas demand comes from Russia.
So getting together with our allies to talk about what they
can be doing in Europe to improve their own situation, as well
as lessen their dependency on Russia, would be a very good
thing in my mind.
The Chair. Thank you.
Senator Murkowski.
Senator Murkowski. You'll get used to it.
[Laughter.]
The Chair. I like both of you so much.
Senator Murkowski. Thank you.
The Chair. I work with both of you so closely.
Senator Murkowski. I thank you madame chairman. It's good
to have you as chair here next to my friend and our former
chair, Senator Wyden.
To those on the panel, good morning and welcome. I
apologize that I was tardy this morning, not because I wasn't
anxious to hear the wisdom and the opinions of each of you. I
thank you for your leadership in so many different areas.
I think it was you, Mr. Goldwyn, that mentioned that it's
not whether in terms of exports, but whether we act in time to
help. As I know some of you are aware I have really, a series
of white papers after my energy 20/20 report from last year. We
just released one about this narrowing window when it comes to
our opportunities for export.
So when we talk about these issues I do think it is
important to keep it in the context of timing.
I also recognize that we are in an enviable position as a
Nation. The fact that we are having a hearing of this nature,
talking about our energy opportunities for export from a
position of abundance rather than one of scarcity which we so
often seem to focus on. To be able to discuss our natural gas,
our oil, our other resources as truly a strategic asset is
something that, I think, is a remarkable story coming out of
the United States. Our ingenuity that's driven by technologies
is allowing us to access amazing resources in this country.
So it is a fabulous conversation to be having today.
I want to drill down a little bit here on the discussion of
what we can do today to make a difference over in the Ukraine,
have influence on Russia. The proposal or the discussion that
we've been having about well, if in fact we were to accelerate
the permitting process through DOE. In fact, that doesn't get
gas to Ukraine or anywhere, at least for a couple years.
So therefore, if we can't do something by gosh, today to
get our gas over across the water, then it's not worth doing.
I have suggested that it is about the signal that is sent,
about the United States' role, our leadership role from a
geopolitical perspective that is as instrumental as anything.
Mr. Chow, I think you used the term that it's irrelevant in
the short run.
What I'd like to hear from each of you is how important is
that signal that is sent if we are to accelerate our permitting
through the DOE process?
Mr. Sieminski, if you can, kind of, speak to it from the
pricing perspective? What does it mean, not only in Europe, but
in Asia if we are to act more aggressively with the signals
that come out of this Administration saying we're serious about
being a player on the world scene? If we can truly just go down
through the panel and each give your observations as to how
significant a signal is as opposed to actual gas into our
friends' and our allies' systems.
Mr. Sieminski, we'll start with you.
Mr. Sieminski. Senator Murkowski, I think signals could
certainly be important. They have to be followed up by concrete
action to have, ultimately have, the impact, not be temporary.
Senator Murkowski. By concrete action does it need to be
more than an expedited process?
Mr. Sieminski. For example the gas actually entering into
the marketplace in some way. I think you could argue that the
increase, the very strong increase in domestic production in
the U.S. has already had some impact because our imports of
natural gas are much lower now than they were projected to be
just 5 years ago. So that's freed up other gas in the global
markets to be available to other consumers like Europe and
Asia.
The possibility that the U.S. would enter into the global
markets with LNG exports after the completion of the LNG
facility at Sabine Pass, I think has already had some impact on
the psychology of long term contracts. There have been
companies who have indicated that they have felt that they had
more successful opportunities to negotiate with large gas
suppliers for better contract terms than they would have had
had the facility in Louisiana not already be under
construction.
Senator Murkowski. Let's quickly go down.
Minister Neverovic, how has--how would signals be received
over in Lithuania and other Nations?
Mr. Neverovic. Yes, thank you very much for this question.
It's absolutely important signal which you can send. I can
bring your attention to the fact that there are companies which
trade in gas which already are moving to basically a pricing on
more sport market model. But majority of the contracts are
still being done on the basis of long term contracting, long
term pricing.
So this is where it is important that any signal which is
there, which is sent to the market, it could strengthen the
buyers. They could feel more comfortable knowing that there
will be more gas in the market. Then their position would be
much stronger vis-`-vis the especially monopolist suppliers.
That we don't have to attach ourselves to these long term
contracts knowing that there will be gas on the market and
possibly it will be more competitive.
So this signal would be very important I would say.
The Chair. If the 3 of you all would answer really quickly
for the Senator. Just take 30 seconds each. Is it important?
How important is a signal? Really quickly.
Mr. Montgomery. Yes, I believe it's important. It's my
opinion that we see evidence across economic markets that
signals work. It's also important that they be credible. I
think that's a great advantage of this kind of a signal because
it's actually in our narrow economic interest to do, to
facilate exports as well as strategic.
The Chair. Mr. Goldwyn.
Mr. Goldwyn. I think from a diplomatic point of view, a
signal is important for diplomatic, strategic reassurance. We
spent decades trying to get other countries to provide gas to
Europe. If we actually do it ourselves I think that would be
powerful.
It impacts financing if you're accessing Henry Hub prices
opposed to high priced Qatari. It's cheaper to provide, to get
financing for those projects overseas.
Third, I think it would impact the market cap for Russian
companies right now because if they have a lower market share
or they're getting lower revenues than their prices on global
markets will be lower.
I think it impacts price formation. Even Asian buyers, as
Dr. Sieminski has indicated, are waiting to see if U.S. LNG
will come into the market so they can get lower prices rather
than oil linked prices.
So it's, you know, buy the rumor, sell the fact, whatever
you're aphorism is, when we do things in the market today,
those signals have immediate impact even if the end game is
long term.
The Chair. Dr. Chow, really quickly and then I'm going to
turn to Senator Wyden.
Mr. Chow. I think the most important signal we can give
right now in response to Russia's aggression in Ukraine is to
strengthen Ukrainian economy. The Ukraine could be self
sufficient in gas in a faster period of time than you can build
a LNG terminal in Ukraine.
Ukraine, until the 1970s exported gas to the Russian
republic. It is the corrupt, pervasive corruption, and
inefficiency in the Ukrainian energy system that makes Ukraine
vulnerable. Ukraine continues to transit more than 50 percent
of Russia's gas to Europe.
If we strengthen Ukraine, that would be the most important
signal to the Kremlin, it would seem to me.
Frankly, Senators, a billion dollar loan guarantee is a
pretty feeble response to what has already happened.
The Chair. Senator Wyden.
Senator Wyden. Thank you, Madame Chair.
Madame Chair I want to congratulate you. I think you're
going to do a first rate job chairing the committee. I think
the Landrieu/Murkowski team, colleagues, all of us are going to
be well served by having the 2 of them lead us.
Colleagues, in my view, yesterday's decision to approve the
Jordon Cove facility in my home State reinforces my view that
there is a sensible place between no energy exports and
approving every application on offer. Now a year ago in this
room that was called finding a sweet spot, where you factored
in the needs of our manufacturers and our consumers and
environmental questions and national security. My view is there
still is a sweet spot recognizing that the geo-political and
national security considerations have certainly changed in the
last year.
Now yesterday's decision with respect to Jordan Cove shows
the kind of considerations that need to go into this mix. For
example, Jordan Cove is the only West Coast facility that is
now on track for approval for exports. Also there will be less
impact on American gas supply which is going to be important to
our consumers. Senator Stabenow and others made this point
because a portion of the gas for Jordan Cove will come from
Canada, not going to be American supply.
So let me enlighten that. Kind of pick up on what Senator
Murkowski was talking about with respect to the situation in
Eastern Europe. In looking at the range of events surrounding
Ukraine, I was struck by how the mention of potentially
significant shale formations is coming up more often with
respect to Eastern European countries. Poland and I'm sure
there's going to be discussion of it in Lithuania.
Now everything I have learned and you touched on this, Mr.
Chow, is that it's going to take a look of money and it's going
to take a lot of time to build a LNG terminal. We're talking
about years. We're not talking about months. We're talking
about years to build one.
So my question and perhaps for you, Mr. Goldwyn and you,
Mr. Chow. Wouldn't it be faster to export more of our knowledge
more quickly to these countries in terms of how we can help get
them, help them shake free of Russian oil and gas? Wouldn't
that be the fastest way to move in a manner that really would
help them shake free of Russian oil and gas? I think I really
heard you touch on this, Mr. Chow.
Maybe you could amplify it and maybe we'll start with you,
Mr. Chow and Mr. Goldwyn because exporting our knowledge could
really make a difference quickly. I compare that to the years
that it would take for a terminal and the expense.
Mr. Chow, first.
Mr. Chow. Thank you, Senator.
It's not just shale gas. Actually you can increase
conventional gas production faster in Ukraine. You don't have
to wait for shale gas.
It's not only knowledge, but also of course, investment as
well as managerial expertise. But before you can do that
Ukraine needs to clean up its act in terms of its energy
sector.
Today Ukraine imports gas from Russia around $300 per
thousand cubic meters. It may go up to 400 by April 1st. It
provides $40 per thousand cubic meter for the same gas but to
domestic production.
So this incentivizes domestic production. All that needs to
change. The reason is there. It's not an accident, as they say
in that part of the world because it facilitates corruption.
For 20 years the Ukrainian energy sector have been hampered
by corruption from the very, very top. So if we do anything at
all we should condition our aid that we're considering giving
Ukraine for both the IMF and other Western donors on
fundamental structure reform of the energy sector.
Senator Wyden. I heard you touch on this too, Mr. Goldwyn,
in terms of what we could do in addition to what we're doing
now to help these countries shake free of Russian oil and gas.
Your comments?
Mr. Goldwyn. Great. Thank you, Senator Wyden. Thank you for
your leadership on this issue.
I think we need to do both. There's no question that
providing technical assistance to countries like Ukraine but
also Romania, Bulgaria, Poland, Lithuania which has shales
also, will help them develop those over time.
But Europe actually has a number of existing LNG importing
terminals that have not used their maximum capacity. In fact
Spain is kind of an island to the rest of Europe.
So that's why I think the process of interconnection in
creating a unified gas market will enable countries like
Ukraine to get gas from LNG imports before they need to build
new terminals. You can do a lot with interconnection and more
pipelines, reverse flows into places like Ukraine. So I think
they need to do both.
I think the time scale for getting more LNG into Central
and Eastern Europe can happen much more quickly than the time
it takes to build a new import facility and the floating
facility----
Senator Wyden. My time is up. But I'm very interested in
this speed question because it is fine to talk about this in
the abstract. If you could get that to the Chair and the
ranking minority member so it could be shared with all of us.
For me the question is speed.
Thank you, Madame Chair.
The Chair. Thank you.
Senator Barrasso, I think or Senator Flake.
Senator Scott, yes, but Senator Barrasso?
Senator Barrasso. OK. Thank you, Madame Chairman and
congratulations to you and your new role leading this
committee.
I appreciate your willingness to hold this hearing today.
We have an excellent panel of witnesses and happy to hear from
each of you and very much value your opinions.
I must point out that today's hearing on this is the third
committee we've had hearing on liquefied natural gas exports in
the last 2 and a half years. So we've had 3 of those, yet since
our first hearing on LNG exports in November 2011 the
Administration has continued to move, I believe, at a snail's
pace. The Administration has used its discretion to approve
only 7 applications to export LNG.
Meanwhile the Administration continues to sit on 24 pending
applications. 13 of these applications have been pending for
more than a year. I believe that the delays have been
inexcusable.
So I think that we need hearings like this, but more
importantly we actually need to vote. I think the Senate needs
to take action on LNG exports.
Yesterday I filed an amendment to the Ukraine bill which
would expedite LNG exports to Ukraine and to members of the
North Atlantic Treaty Organization. These Nations are pleading
for American natural gas. They want the Senate to actually act,
to do something.
What we have heard from the Majority Leader is one excuse
after another for why the Senate shouldn't act. Two weeks ago
the Chairman of the Foreign Relations Committee arbitrarily
blocked my amendment to the Ukraine bill. Other members of the
majority have said the Administration should stop approving LNG
exports altogether.
If my colleagues on this committee are serious about
promoting LNG exports than we should call on the Majority
Leader to actually let the Senate do its job. We should call on
the Majority Leader to allow the Senate to vote on expediting
LNG exports. This is one way that we can make progress on this
issue.
Two days from now, on Thursday, this committee is going to
be asked to vote on the nomination of Rhea Suh, to be Assistant
Secretary of the Interior. She has called natural gas
production, ``easily the single greatest threat to the
ecological integrity of the West.'' I believe if she is
confirmed she could block access and would block access to our
Nation's vast natural gas resources.
It's very difficult for me to understand why this committee
would hold a hearing in support of LNG exports today yet be
asked to vote to approve a natural gas opponent on Thursday. So
I would urge you, Madame Chairman and our colleagues on this
committee, to reject this nominee. The committee needs to send
a strong message that we are all in support of natural gas not
one in opposition to it.
Mr. Neverovic, in your testimony you explained that
Lithuania is totally dependent on Russian natural gas.
Lithuania, along with 3 other NATO allies and 3 other European
Nations, is 100 percent dependent on Russian gas. You explained
that you were here today, you say, to plead with Congress to do
everything within our power to expedite release of our abundant
natural gas resources into the world market.
You say that you hope the Administration will expedite LNG
exports.
However, you also state that if the Administration fails to
act then Congress should work to expedite the LNG exports.
Has the Administration given you, given Lithuania, any
indication that it's actually going to expedite LNG exports?
Mr. Neverovic.. Thank you very much for this question. I
had very good meetings also planned in a very short time, but
still good meetings in Department of Energy and Department of
State. We had a very good discussion where my interlocutors
introduced their position on whether realizing LNG export.
As I understand their main preoccupation needs to find this
sweet spot which Senator previously has mentioned and
understanding the current situation, geo-politically in Eastern
Europe. They are looking into ways to expedite this process of
approving licenses.
However, I argued that it should made faster. These signals
are important for countries like us which specifically are
developing infrastructure which would allow us to bring gas
from alternative supply. Then American gas which would appear
on the world market would make a difference.
So I would continue to encourage both the Administration
and Congress to do anything possible to speed up these
processes here.
Senator Barrasso. So they talked nice to you, but in fact
they failed to give you the assurance that you hoped for that
we would actually get the action. I would think that if the
Administration isn't ready to make that commitment today that
it is then dependent upon the Congress to act.
Mr. Goldwyn, in your testimony you stated that a clear
signal from the U.S. that LNG exports will be available to
European allies would put immediate pressure on Russia's market
share. You explained some respected analysts have been too
quick to dismiss the connection between U.S. LNG exports and
increased European energy security. You've talked to that and
answered questions related to that.
You go on to say that in dismissing that connection they
make a number of mistakes. Would you please explain these
mistakes to members of the committee?
Mr. Goldwyn. I think some analysts say it won't matter to
have U.S. LNG exports because they'll go to Asia and not
Europe. I think that's a premature assumption to make.
For one, we don't know if Russia were to restrict gas
exports to Europe might, no doubt, European gas prices would go
up. European buyers, like other buyers, often put a premium on
diversity of supply or security. So I think it's premature to
make that judgment.
The second, I think, they downplay the impact on price
formation because LNG buyers buy long term. Right now they're
not buying for next year, they're buying for the 2016 or 2018
to 2022 period. So they're negotiating now for projects that
will come online then and for long term projects.
So they're negotiating today for delivery in the future,
like anything else that has a futures price. So when you
increase future supply you provide certainty that U.S. supply
will reach the market in a certain time. They're going to
calculate that into global supply and adjust prices.
I think the third thing they underestimate is this impact
on financing because, you know, like for all the projects the
U.S. has approved only one has reached final investment
decision. So who knows which of these are actually going to get
financed? But if you're going to try and finance a project and
you've got oil at Qatari prices or you're going to finance a
project with Henry Hub, the cost of your project is lower if
the cost of your gas is cheaper and the amount of money that
you need is cheaper. So I think it impacts the finance ability.
Last, I think, it--the markets score prices for equity
investment today based on future performance. If there is a
clear signal that Russia's future market share will be less
than as anticipated, then the price of Rosneft and, you know,
after the price of Lukoil, the price of any of these companies
which have publicly traded shares which are calculated in
future income from gas or from oil into their projections will
be impacted. Those scores happen today as long as we create
certainty about tomorrow.
Senator Barrasso. Thank you, Madame Chairman.
The Chair. Thank you very much.
Senator Udall.
Again, thank you for the bill that you've introduced along
with Senator Begich.
Senator Udall. Thank you, Madame Chair.
I want to start out by acknowledging and welcoming our new
Chair, Senator Landrieu. She has a vast amount of energy
expertise and a vast amount of energy.
[Laughter.]
Senator Udall. She'll bring both of those to the committee.
I wanted to also acknowledge Minister Neverovic . and
forgive me if I didn't get your name pronounced properly. But I
did want to acknowledge that your country is small
geographically, but it's an enormous country when it comes to
your courage and resolve. America is proud to be your ally and
we're well aware of the history of the Baltic States and all
its various iterations.
So thank you for being here today.
I, too, want to acknowledge that I'm really pleased that
Chairman Landrieu has focused her first hearing on such an
important issue. Our Nation's clean burning and job creating
natural gas should and can play an important role in
strengthening global security. The ongoing crisis in Ukraine
which we're discussing here today and of course, around the
world, and Russia's threat to use its natural gas exports as a
weapon shows why we need to responsibly develop our own natural
gas reserves and expand our capacity to export this resource
abroad.
I do share the frustration of many of my colleagues like
Senator Barrasso that the Department of Energy has moved
slowly. I can put it another way, has not moved more quickly to
approve exports to non-FTA countries. That's why I introduced a
bill just a few weeks ago that would end the current log jam at
the Department of Energy by deeming export to all WTO countries
to be in the public interest, in effect, approving the pending
application queue.
This bill is bipartisan and bicameral. In fact shortly
after introducing my legislation, my home State colleague,
Representative Gardner, presented a virtually identical measure
in the House which will be marked up soon. I welcome him in
joining me in this effort.
I've made this point publicly and with the Secretary
numerous times over the last few weeks. The crisis in Ukraine
has refocused on how U.S. natural gas exports can stabilize
global security. That's why I also will file my bill that will
allow immediate DOE approval for the WTO countries as an
amendment to the pending Ukraine Sanctions bill.
I do think the Department of Energy is finally heeding the
calls that I put forth and others have put forth to approve
additional LNG permits. As Senator Wyden mentioned yesterday,
the Department approved a permit for the Jordan Cove facility,
something that I've been pushing for. A real signal that we've
made a difference in demanding action.
I'd like to thank the Department and Secretary Moniz for
putting additional emphasis on global energy security and the
importance of our allies as a part of their rationale for
approval.
So in sum, I'm hopeful that this refocused emphasis on the
energy security of energy exports will lead to even more
movement from the Department of Energy in the coming weeks and
months. After all there are still 24 permits pending.
With that let me turn to the witnesses. I want to direct
this question to the panel.
Much of the focus of LNG exports has been at the DOE's
review of applications. But isn't it true that even with DOE
approval the volume of natural gas to be exported is dependent
on many other economic and financial considerations as well as
FERC approval for environmental and other considerations?
Would it be fair to say that the DOE approval simply gives
the green light for a market driven process?
I would welcome comment from any of you on the panel.
Mr. Chow, you've, I think, shed some important light on
some of the broader dynamics at play and maybe we'll start with
you.
Mr. Chow. Senator, thank you for your question.
As I said in my testimony there are lots of good reasons
why we should proceed with serious consideration and maybe
speeding up the process for licensing of crude exports as well
as more LNG facilities.
I think one point that I would make is that in not only
does it send a signal to the market, but the fact of the matter
is that sweet spot that Senator Wyden mentioned, grows as the
resource base estimates grow, as our ability to recover more
from gas from the shale grows. So I imagine that it also sends
a message to the market that the Department of Energy's
confidence that we have sufficient resource to both entertain
exports as well as meet domestic demand.
Senator Udall. Mr. Goldwyn.
Mr. Goldwyn. I would say the answer to your question is yes
really. The DOE license is really just a license to market. It
just says that you're able to go to customers who we don't have
free trade agreements with and say that you can sell gas to
them.
It's not an indication that you've made environmental
clearance. That comes from FERC.
It's not an indication that you have got community assent
to build a project where you want.
It doesn't mean you've got financing.
I think that's probably the challenge of the process right
now is people score these DOE approvals like they're real
projects, but they're not. All you need for the DOE approval is
a letter and a stamp. You know, to get FERC approval you've got
to have, you know, millions of dollars of environmental
assessment and you have to have credible financing.
If I could, actually, I've written an alternative proposal
at Brookings if I could enter for the record, called, ``A
Modest Proposal for Improving the Department of Energy Non-FTA
LNG Export Application Process.''
Mr. Goldwyn. But essentially if you just let projects which
had cleared FERC. They had a formal FERC application go to the
head of the line then you would be accelerating projects which
are not just licenses to market, but projects which have--are
ready and are commercially mature.
I think that would solve a lot of this confusion about
whether or not we're going to have 18 BCF a day in projects.
We're not going to by just getting the DOE to give its approval
to projects that are ready to go.
Senator Udall. Mr. Sieminski, let me turn to you for a
follow on question, the seasonality of natural gas prices.
LNG exports might be able to stabilize these fluctuations
for consumers and producers. Of course in my home State of
Colorado and across the Nation you see a surge in the winter.
Would exports create an opportunity to maintain production
levels during seasons of high demand?
Mr. Sieminski. It's certainly possible. The availability of
the storage that's associated with LNG export facilities might,
some of that gas, might be available domestically. If prices
got higher in the domestic markets than what the gas could get
in the global markets that could have been a useful thing for
example if there had been some way to get LNG quickly into
Boston during the polar vortex.
Senator, back to your earlier question.
EIA believes that there are lots of factors that enter into
the LNG export calculation including what oil prices are in the
global markets, how quickly oil and gas prices converge, what
the pace of growth in supply and demand is outside. So yes, I
would also agree that there are many factors, both in the
energy markets and in the financial markets that would come
into play in determining whether an LNG export facility
actually got built and used.
Senator Udall. Thank you for that.
Madame Chair, thank you. Let's find this sweet spot that
seems to be the phase.
The Chair. Thank you very much for bringing up the queue
process.
Senator Murkowski and I are really focus on that because
there are a lot of questions. Thank you, Mr. Goldwyn, your
report will be submitted for the record, the one that you
referenced in response to that question.
Alright, I think we have Senator Flake. I hope I'm not
going out of order here.
I'm sorry, Senator Manchin is next. I'm going in order. I'm
sorry, go ahead Senator Flake and then Senator Manchin.
Thank you.
Senator Flake. If he's changed sides that's alright.
[Laughter.]
Senator Flake. I mean, I'll take it.
The Chair. We will never allow that.
[Laughter.]
The Chair. Although he has tried on occasion. We will never
allow it.
Senator Flake. Just checking.
Mr. Sieminski, give me a sense of the world market here for
LNG. I visited, several years ago, a facility in Trinidad and
Tobago. At that time most of that LNG was coming to the States.
Now we're almost no longer a net importer, just barely a net
importer.
Where is that going? What kind of margin do they operate
under? Is some of that going back to South America or is it
elsewhere in the Caribbean or is some of that going to Europe?
What is the price point needed where existing natural gas
facilities like this can export to Europe?
Mr. Sieminski. I don't have those numbers right in front of
me, but my guess is that gas from Trinidad and Tobago is going
to European markets. There is also--there are a couple of
terminals, LNG terminals, one in Chile, one in Mexico, that
might be available. The LNG markets are developing very
rapidly, but even with the estimates that EIA has made for U.S.
LNG exports, it's still a fairly small portion of the global
LNG market. There are many other competitors in that market
including Australia, Indonesia, some of the West African
countries and others who are entering the markets.
Senator Flake. I'm just wondering, somebody, maybe Dr.
Goldwyn, if you could tell me how will Russia react if we were
to start permitting process, the signal was sent, prices drop.
Will Russia act much like OPEC did earlier or does or any
cartel in this fashion that they will lower prices to
discourage investment in other facilities elsewhere?
How will Russia react here? At what point, how much lower
will their prices have to be in order to discourage investment
that needs to happen in these other countries including the
U.S.''
Mr. Goldwyn. Thank you for the question, Senator.
I only went to law school, I didn't get my PhD. My wife
did, so I can't claim the doctor.
But I think, well first, Russia has not shown any ability
because it doesn't control enough of world supply to try and
lower its prices to impact other's investments. But Russia has
had to lower its prices in order to save its market. So as Dr.
Sieminski and Dr. Montgomery both explained, the surplus of LNG
when we stopped importing it forced Russia to renegotiate a lot
of its long term contracts with Europe because they were able
to buy spot.
So that was one impact.
They also had this famous Shtokman project where they
thought they were going to be a major LNG export. The fact that
they didn't have our market anymore made their project too
expensive. So it wasn't so much they're deciding that they were
going to kill investment elsewhere by lowering prices and
getting more market share. It's that they were going to lose
market share to the spot market, you know, if they didn't lower
their prices.
So we're about to see, with Russia's negotiation with
China, whether in fact they will lower their prices or lower
their correlation between gas and oil prices in order to save
market share. They've been negotiating for China for a huge
pipeline, 40 BCM. Frankly in terms of China's dependence,
something we need to worry about a little bit.
But they've been at loggerheads for years over price. This
June, we're going to see if the Russians are going to cave. My
guess is that they will. They will lower their correlation.
They will agree to a better price deal, not because they're
trying to kill our investment, but because they have no other
choice.
That's the trend that we want to drive further because that
just squeezes their cash-flow.
Senator Flake. Right. That's important. I just wondered how
big their market share is or how--what ability they have to
actually lower prices and undercut investment elsewhere but not
as much.
Dr. Montgomery or somebody else, Ukraine, itself, because
of corruption and Mr. Chow you mentioned their inability to
produce their own whether it's shale gas or traditional gas. If
they were to ramp up production significantly can they become--
how quickly could they become completely independent of Russian
gas or could they?
Yes.
Mr. Chow. I don't think it's the aim necessarily is to be
completely independent of Russian gas, but not to be so
dependent on Russian gas. They're currently 60 percent
dependent on Russian gas in an economy that's very gas heavy.
Fourty percent of primary energy in Ukraine comes from natural
gas. So that dependency on Russia is very significant.
I think to get about a 50 percent self sufficiency level
Ukraine can probably do it within 2, 3 years with the right
kind of policies and the right kind of investments.
Senator Flake. That's likely a combination of production
increases and conservation measures that are highly
inefficient, I understand, in terms of the use of gas.
Mr. Chow. Certainly efficiency would help.
Right now their demand has come down mainly because of the
collapse of the domestic economy not because of efficiency
improvement. So when the economy grows some of that demand will
come back, although creating greater GDP with the use of the
same amount of gas.
Senator Flake. Thank you.
Thank you, Mr. Chair.
The Chair. Thank you very much.
Senator Manchin.
Senator Manchin. Thank you, madame chairman and thank all
of you for your presentations today.
I want to thank first of all, Senator Landrieu and
congratulate her on her first hearing as our new chairman of
this committee. Look forward to working with her on truly
creating an all of the above national energy policy.
Also I brought, at the time Chairman Wyden and Ranking
Member Murkowski, to the State of West Virginia to see an all
of the above energy policy that we use in our State. We try to
use everything we have, our coal, our gas, our wind, our solar,
everything. We think it's most needed as far as a policy for
this country also.
My home State of West Virginia has been blessed, as you
know, to have a little bit of everything. We use everything
that we have also. I believe that we need to do that more in
this country and look at a way to be more energy independent by
using all and not writing one off against the other.
So what I would do, as I would like to ask a question to
Mr. Sieminski.
Sir, with the Polar Vortex that we just had and basically
the EIA saying that we're going to be needed fossil coal for
the next 2, 3, 4 decades. You know the problems that we're
having with EPA as far as producing that coal here in America.
Are you concerned about the mix that we're having right now,
the utilities are having, the mix of their portfolio and the--
I'm told that we were very critically close to having some real
serious black outs or brown outs during this Polar Vortex
because of the coal fired plants that are going offline.
Mr. Sieminski. There were some electricity issues in New
England, mainly because of the growing dependence of New
England on natural gas to fire their plants and the pipeline
constraints getting gas into New England. Some of that was
dealt with by the switching to fuel oil.
In EIA's longer term projections we actually have coal
consumption just coming off a little bit. That is on the basis
of existing law and regulation which does include things like
the mercury air toxic rule and so on.
One of the interesting things, Senator, that you brought up
and I might just add since we're talking and the question was
asked, is there something that Europe could do? As you know the
U.S. has been exporting coal to Europe.
Senator Manchin. If it wasn't for the export market we'd
have no market in West Virginia.
Mr. Sieminski. Right.
In fact the all of the above strategy that you indicated
that the Administration is pursuing here in America is one that
probably makes sense for many countries.
Senator Manchin. Do you truly believe that we are pursuing
an all of the above energy policy?
Mr. Sieminski. I'm going to stay out of the policy.
Senator Manchin. OK, I figured you would.
[Laughter.]
Mr. Sieminski. But EIA, back to your question of the energy
mix.
Senator Manchin. You've been pretty straight forward on
EIA. What is it going to take to run this country?
Mr. Sieminski. EIA's--what we see is natural gas and
renewables growing faster than some of the others.
Senator Manchin. But natural gas and coal, even for the
next 2 to 3 decades, is going to be----
Mr. Sieminski. Right.
Senator Manchin. Seventy, 75 percent of the energy
production that we need. Anyone that doesn't think that's true
they are deniers.
Mr. Sieminski. Right.
But the overall mix of fuels in the U.S. changes somewhat,
but we're still, even in 2040 going to be very reliant on
fossil fuels for our energy consumption.
Senator Manchin. You've got to tell some of our friends
that truly don't want to hear the facts of what we're dealing
with in the country and how we can do it much better. There's
more demand around the world than ever before, right, for
fossil?
Mr. Sieminski. Demand.
Senator Manchin. It's growing, yes?
Mr. Sieminski. Demand in general is rising very rapidly. We
think overall energy demand between now and 2040 is going to be
up by more than half. A lot of that growth, half of that growth
is going to be in 2 countries, China and India alone. So it's
going to be a challenge, Senator, to fill that----
Senator Manchin. A little bit better policy for global
climate if we basically were using the technology that we have
been able to reduce to particulates in this country and make,
through our trade policies being used in other countries that
are polluting more.
Mr. Sieminski. One of the things that I've been asked in
the past is when you look back at EIA's forecast 3 or 4 years
ago and back to 2011, you know, had we seen demand increases
for natural gas and how does that relate back to the export
question.
Yes, we do see higher demand, but our supply numbers look
even more robust. What that suggests is that there is ample gas
for both domestic and exports.
Senator Manchin. I could, Mr. Neverovic, if I may ask you,
do you all believe that you have the, I mean, geological
deposits to where we could explore more and do more, more
development, in your country and other European countries that
would give you more freedom as far as from Russia's grip?
Mr. Neverovic. Thank you very much for your question.
I certainly believe that we should investigate. Then if we
have such gas deposits we should explore them.
I had learned that in U.S. for shale gas revolution to
happen it took many support from Department of Energy to
investigate how to get out this shale gas. It took 30 years for
this revolution to happen. So it's hard to expect that in
Europe or for this matter in Lithuania it could be possible to
do this very quickly, even considering that we can have the
possibility to use your know how.
We need to have this learning process both on the level of
Administration and also on the level of local communities where
unfortunately usually some groups which are presenting shale
gas investigation or exploration as a threat, major threat, to
local communities which is usually not the case. With
appropriate protection for the environment it's possible to
investigate.
So I think after we get through all this legal environment
adjustment so that investment is encouraged it will be possible
to do it in Lithuania. It's already happening in other European
countries.
Senator Manchin. Thank you.
The Chair. Thank you. Thank you so much.
Senator Stabenow and then Senator Baldwin and we'll be
wrapping up about 12 o'clock.
Senator Stabenow. Thanks very much and congratulations,
again, on chairing the committee. Looking forward to working
with you.
I do want to take a few moments because it's a perspective
not represented here today on the committee to talk about not
only the U.S. energy revolution, but the fact that we also need
to make sure it's coupled with U.S. manufacturing revolution.
We note, we've been talking a lot about signals today, sending
signals overseas. It's also important to send a signal to
American manufacturers who are looking at bringing jobs home
because of low energy prices to make sure that there's a signal
for them as well because the low energy prices, Madame Chair,
that you've been talking about, really are making a difference
in terms of creating jobs here at home in manufacturing.
I welcome each of you and to have our Minister of Energy,
welcome to each of you.
But I think it is important to put, for the record that
last month there was a study by the Charles River Associates.
They found that using our own low cost natural gas to increase
American manufacturing output is twice as valuable to our
overall economy and creates 8 times as many jobs as sending
this important American resource overseas.
I'm not suggesting that we should cap or end exports. What
I am advocating for is a thoughtful, balanced approach, as
others have said, to make sure we find the sweet spot. We've
still got 10 million people out of work in this country. People
know that manufacturing jobs are good jobs for us.
So I think we have an important balance to do.
With Monday's announcement the DOE has now approved 6
export facilities with a capacity of over 9 billion cubic feet
per day. I think it's really important that we move forward
with the right kind of analysis about the impact on prices. We
don't know for sure. I'm concerned that as we've looked at
updating studies that the company building an export facility
actually funded the update of the NERA study. So I think there
are other perspectives that are important.
We have a study from Purdue University that found that LNG
exports between 6 and twelve billion cubic feet a day result in
declining American GDP and higher energy prices for consumers.
The Purdue study concludes that while the natural gas sector
benefits from more exports. Other industries and residential
consumers lose out due to high energy costs.
I think it's important. We can debate that. That may be
true, that may not be true. It may be it's not true. It may be
that as we move forward we will find that we can do both as the
panel has talked about which would be the best of both worlds
to be able to do that.
But I do believe that the DOE should conduct a new study on
the economic impacts of exports and move forward in a
thoughtful way because of the impact on the American economy.
I'm deeply concerned about what's happening in Ukraine. I do
not underestimate what is happening around the world. But I
also know what is happening here at home, what is happening
here at home with 10 million people out of work and a
renaissance in manufacturing leading our recovery that is so
very important.
The Boston consulting group concluded that affordable
natural gas prices could lead to 5 million more manufacturing
jobs by the end of the decade.
The American Chemistry Council has identified 120 newly
announced chemical and plastics manufacturing projects with
over 100 billion investment. This is great news for us.
Yet NERA's study did not include these projects nor does
the EIA's 2013 Annual Energy Outlook which NERA used to update
its study.
So I just think it's important to say that for the record.
Will get in a question.
That is, all of you talk greatly about this being long term
as we look at developing export potential. So first I think it
is important to talk about it will take several years to get
something online. Once they're approved it's up to private
companies to decide where to send the gas. They'll decide based
on market pressures.
So it seems to me when we look at the fact that in Asia
right now prices are nearly $16 million per million BTUs verses
Europe where prices are $10 per BTUs. I'm sorry, per million
BTUs.
I would ask Mr. Chow wouldn't you think a company would
want to go to the highest bidder? Chances are our natural gas
will be going to Asia?
Mr. Chow. While that may be true, Senator, I also think
that we will continue to maintain a level of competitiveness in
this country because we have the advantage of being sitting at
the source of that gas rather than having to spend $4 to $6 per
million BTUs just to liquefy and transport that gas and
regassification. So some level of competiveness edge will be
retained in the U.S.
The other point I would want to make to you is that to
consider that long term investors in manufacturing also need to
know that there will be a stable supply of gas that's
available.
Senator Stabenow. Absolutely.
Mr. Chow. We have had times in this country when the
natural gas price dropped so low as to make us concerned about
long term viability of sustaining that supply when it dropped
below $3 per million BTU. Where that sweet spot is is for
elected officials and policymakers to make, not for foreign
analysts.
Senator Stabenow. Thank you.
Madame Chair, I know my time is up. I look forward to
working with you, but I do think, you know, this is not easy. I
don't support stopping exports or capping exports, but I do
think it's important that we move forward in a thoughtful way.
The Chair. Thank you, Senator. I appreciate that. We will
get to the bottom of these facts.
Senator Scott, who was here first, we will recognize you,
then Senator Baldwin and Senator Hoeven and then Senator
Murkowski and I will do some closing questions. It's been an
excellent hearing so far.
Thank you, Senator Scott for being here so early. I know
you had to slip out so we're happy for your questions now.
Senator Scott. Thank you, Madame Chairwoman. Thank you for
holding this hearing today and thank you to the panelists for
being a part of the conversation which is, obviously, a very
timely conversation as we look at this as a geopolitical tool
using our resources in an effective way.
I think it's also important to note that later this week
the committee will hold an important vote for the future of
American natural gas production with the nomination of Ms. Rhea
Suh to become the Assistant Secretary for Fish, Wildlife and
Parks. In fact it's almost hard to ignore the dichotomy that
exists between the strong support for natural gas and
production and the LNG exports that have been displayed at this
hearing and Ms. Suh's stated opposition to increase natural gas
production.
My first question to Dr. Montgomery or Mr. Goldwyn is that
in both of your testimonies you've essentially said that an
immediate announcement of unlimited LNG exports by the U.S.
would signal competition to Russia that could impact their
contract prices with Europe. Do you think the same could be
said or is true if the U.S. immediately allowed crude oil
exports as well?
Dr. Montgomery.
Mr. Montgomery. Thank you, Senator Scott.
I think that both crude oil exports and natural gas exports
can serve to diminish Russia's revenues and therefore would
have an effect. I think that it's less a matter of immediacy in
terms of crude oil verses natural gas than of magnitude. I
think in both cases, yes, the importance of the announcement is
that it establishes expectations over the longer term, as Mr.
Goldwyn was saying about what terms natural gas would be
available over the, you know, the long term contracts that
people are now signing. Over that term we can look at pretty
substantial LNG exports being possible and having substantial
effect on Russia.
At this point our issue with crude oil exports appears to
be more one of the mismatch between the light crudes that we
are producing----
Senator Scott Shale.
Mr. Montgomery. In our complex refineries.
I'm not sure whether--and so I think an announcement of
crude oil exports that, you know, a policy toward crude oil
exports would certainly have a signaling effect. We're just
starting to work on the subject to try to understand how large
a magnitude that might have. It has to go in the right
direction.
If we allow crude oil exports it will mean more crude
production in the United States. If there's more crude
production in the United States that tips the balance, more
supply, less demand, lower world oil prices, that has benefits
in many ways in depriving strategic rivals and clearly declared
enemies of revenues.
Senator Scott. Yes, it's a consistent formula that produces
a consistent result it seems.
Mr. Goldwyn.
Mr. Goldwyn. Yes, I agree with Dr. Montgomery.
Directionally the more we export crude oil or condensate we
will increase global supply and put pressure particularly on
brand prices and that's what a lot Russian crudes are priced
to. Right now at Brookings we have a task force on accessing
crude oil exports. In fact we've commissioned NERA and Dr.
Montgomery to do the econometric study, much as was done on LNG
exports because everyone is asking this question about whether
there will be a day of reckoning.
I think it's clear that there will be a day of reckoning
when we will maximize how much we can use light, tight oil in
our refineries or to Canada or topping. Then it will start to
impact production negatively.
The question of when that day of reckoning is is a
complicated answer that we need some serious analysis. We hope
by June that we'll have that study from NERA and a Brookings
Task Force report to address exactly that question.
Senator Scott. I only have about a minute left so I'll skip
to my last question for Dr. Montgomery.
Would you call natural gas production the single greatest
threat to the ecological integrity of the West and if the Obama
Administration or any Administration held that view how could
that mindset impact natural gas production in the future of
U.S. LNG exports?
Mr. Montgomery. I do not think it is that natural gas
production is a major ecological threat. I think that natural
gas production can be carried out in an environmentally
sensitive way that avoids harm to ecologically important
regions that's consistent with wildlife preservation.
My son lives in Colorado too. He's an avid
environmentalist. He works doing oil and gas exploration.
I think there is a great deal of misinformation and sheer
fear mongering about the effects of shale gas production, many
of the claims being completely untrue. I've tried to study the
geology here is just expert opinion is quite clear that
fracking does not produce ground water problems. The problems,
if they exist, are because of waste water disposal practices.
But anyway, without getting into the details, it is clear
industry wants to solve this problem. They've worked closely
with the Governor of Colorado to develop a set of regulations
that they agree, in a bipartisan way. I'm sorry Senator Udall
isn't here to take credit for this too.
It can be done without--I mean, everything we do has a
risk. But it can be done with nothing more than manageable
risks to the environment.
Senator Scott. Thank you, Dr. Montgomery.
Madame Chairwoman----
The Chair. Thank you very much.
Senator Baldwin, thank you for your extraordinary patience.
You've been here early the whole morning. Just in order of
seniority we find you toward the end. But thank you very much
for being attentive.
Senator Baldwin. Thank you.
Let me start out by congratulating you, Chair Landrieu, on
your new role. It is great to see you in the Chair. I look
forward to our work together in the years to come.
I want to associate myself with some of the comments made
by Senator Stabenow before she had to depart because, you know,
they say all politics is local. When you think about it this is
obviously a large country and I think it's fair to say that, as
with other energy issues, the polices that we're discussing
today don't necessarily affect all of our States in an even
manner.
Like Senator Stabenow's State, Wisconsin is one of the
leading manufacturing States in the United States. In fact I
think right now it can boast the role of No. 1 manufacturing
State as a percent of our overall economy. I note because of
the focus of today's hearing that we don't have a witness
that's representing consumer voices today. Obviously they are a
very important part of this weighty discussion. So I look
forward to future opportunities to hear from those witnesses
also.
Mr. Sieminski, I'd like to ask you a few questions this
morning. Or--well, no, it is still this morning.
[Laughter.]
Senator Baldwin. Just checking.
The paper industry is a major part of Wisconsin's
manufacturing and economy. Our paper companies are working hard
to compete in a very trade sensitive, trade impacted industry
while also complying, obviously, with environmental quality
standards that some of their, well most of their foreign
competitors do not face. Paper mills that would like to switch
over to natural gas have been unable to secure a supply of fuel
because of inadequate infrastructure.
Many companies don't have adequate access to natural gas.
Yet today we're, of course, talking about increasing our
exports of natural gas.
So my first question for you is how will increased exports
impact the construction of gas infrastructure for companies,
that companies in Wisconsin might be able to rely on?
Mr. Sieminski. Senator Baldwin, let me just start off by
saying that in EIA's reference case forecast we have natural
gas consumption in the paper industry overall nearly doubling
between 2010 and 2040. In general we have very strong growth in
industrial natural gas consumption. I don't think that there is
a shortage of gas in a sense that would lead to problems in the
manufacturing industries.
On the issue of infrastructure----
Senator Baldwin. Yes.
Mr. Sieminski. Which you asked about. You know, there is
the Secretary of Energy's, Secretary Moniz, has a big and the
President have a quadrennial energy review underway that
intends to directly address these infrastructure issues.
Let me back up just a second and start with on the issue of
natural gas production in the U.S. there is no dispute that I
can find in the economic literature on either, you know, side
of this that the positive impacts on jobs and GDP from the
production activity are really strong.
On the jobs impact of exports the literature is somewhat
mixed. But interestingly it seems to be relatively minor.
So the impacts on GDP and the impacts on jobs from exports
are small because the exports are a small proportion of the
overall production in the U.S. and the overall global markets.
The--one of the things that I think Mr. Chow said that I'd
like to come back to is that U.S. manufacturers are always, you
know, anybody that's an industrial consumer of gas or even
electric utility consumer of gas is always going to have an
advantage over a global LNG market which is going to tend to go
into--it's going to be 2 or 3 times higher in price than the
average price for gas at the well head in the U.S.
So then if we come back to the question of well, what is
the difficulty that you're having in your State of Wisconsin
with the paper industry being able to get gas. I think it's
really not so much a question of the overall availability of
gas. It's how do you get those pipelines built to take the gas
from where it is to get it into those companies?
That's something that the utilities and the companies
themselves are going to have to work out. I think that the
intent of the quadrennial energy review is to try to see if
there are any policy bottlenecks that could help in that area.
Senator Baldwin. I would, if I might, Chair Landrieu, my
time has run out and I did want to ask some other questions.
But on that comment, you have perhaps a deep skepticism
this particular year. I'm going to switch fuels for a second.
But having been told that there were adequate supplies of
propane at a time when there were incredible increases in
exports we had a dire emergency where a quarter million people
were having trouble heating their homes in Wisconsin. A lot of
it had to do with that transfer, that infrastructure and being
diverted for more profitable fuels so that they could, you
know, even change directions and put other fuels in them.
So, you know, being able to respond to this need in
manufacturing is going to be real critical to our domestic
employment, our domestic economy.
Thank you. I note my time has run out.
The Chair. Thank you very much.
Senator, I've committed to you and Senator Franken who
continually have raised this issue. It's very important to the
people of Wisconsin, of course and Minnesota. We don't heat our
homes the same way that you do. We normally don't have to. This
winter has been an exception. But we will be doing some kind of
hearing on that to help you all, to help us figure that out.
Senator Hoeven.
Senator Hoeven. Thank you, Madame Chairman. Also, I want to
congratulate you on your new position as chairman of this
committee and express that I look forward to continuing to work
with you.
To the good Senator from Wisconsin, we're flaring off huge
amounts of natural gas in my State. We would love nothing
better than to bring more of it to you and to others.
My question to our panelists starting with Mr. Sieminski is
right now the European Union gets about a third of its natural
gas from Russia. I would like each of you to tell me how you
think we can help the EU reduce its dependence on Russian gas.
Mr. Sieminski. Again Senator, EIA is a statistical agency
and not a policy agency so I'm not going to offer policy
prescriptions other than to say that the all of the above
energy strategy seems to make sense for the United States. It
might make sense for other countries.
One thing that I can say in terms of EIA's data is that the
growth in supply that we're seeing over the last few years is
extraordinary and it leaves an opportunity for both growth in
domestic consumption of natural gas as well as exports.
Senator Hoeven. Sir.
Mr. Neverovic. Thank you for the question.
The problem that we have is that we have a fragmented and
closed markets in some of the EU countries. Lithuania is one of
those countries. As I said, we are dependent 100 percent on
supply from Gazprom.
So what we have to do at our home to address this problem
is to diversify, to create alternative routes of supply. That
is our LNG floating ship which will help to bring gas from
alternative direction.
But then there is a question of where do we get the gas
because, of course, diversification would serve already the
purpose of having more objective price than to for monopoly not
being able to charge this margin of a closed market. But on the
other hand increased and newly created global gas market would
definitely help to bring down those prices, globally.
So this would be definitely the direction which all actions
on the part of the U.S. Government and Congress could help and
specifically liberalizing LNG exports.
Senator Hoeven. Thank you, Minister.
Dr. Montgomery.
Mr. Montgomery. Yes, I think that U.S. exports of LNG,
wherever they go in the world, will help to reduce Europe's
dependence on Russia even if our exports go to Asia and are
competing with exports that Russia might be sending through a
pipeline to China. That frees up other gas to move to Europe so
that, you know, it, you know, we look in the long run in the
global market where if we put gas into it, it is going to be
benefiting Europe eventually.
That Europe would then be facing either a chase into Russia
who has to accept lower prices for gas or be less physically
dependent on the Russian gas. I'm not quite sure which way it
will play out.
Senator Hoeven. Thank you, Doctor.
Mr. Goldwyn.
Mr. Goldwyn. Six steps, Senator.
First we should encourage the European Union to complete
the integration of a gas market so you can move gas from Spain
all the way to Kiev.
Second we should encourage----
Senator Hoeven. They have a fair amount of that in place
already, don't they?
Mr. Goldwyn. A fair amount. But actually it's very hard to
move gas from point to point. Although they've eliminated the
destination clauses there's enough pipeline capacity to move
from the Iberian Peninsula into the rest of Europe. So they
need more pipelines there.
You have to negotiate the entry and exit price at each
point along the pipeline. So it's, you know, it can be up to 10
steps to figure out where it is. They're not transparent about
capacity of those pipelines either. So there's more work that
they could do which would really make it easier for LNG to get
into that system from whatever terminal it comes into.
So the gas market is No. 1.
Interconnections, I would say, are No. 2.
Getting prices right internally which the hedge I always
talked about at length is important both to control demand and
also to attract investment.
Promoting indigenous gas, shale gas, in countries in
Europe.
Enhancing energy efficiency and renewables in places where
that's appropriate in Europe.
Accelerating the consideration of applications to export
U.S. LNG.
The Chair. Mr. Chow, before you answer. Would you all put
that graph up because this will explain some things that you
all are talking about? This is the pipeline system in Europe.
Both of you all are commenting on it.
Senator Hoeven. I think that's an interesting point
particularly with the Energy Minister's meeting now.
The Chair. Would you please, yes.
Senator Hoeven. In is it April on this very issue?
The Chair. Could you all explain? Just, that's fine. Just
hold it up there.
The blue are the already constructed gas pipelines,
correct?
Staff? Yes.
The red are proposed oil, gas.
Mr. Goldwyn and Mr. Chow, look at this map and just comment
1 minute in answer of Senator Hoeven's question which I think
is important. Is Europe integrated with its gas pipeline?
Go ahead, Dr. Chow.
Mr. Chow. It is not and for 2 basic reasons.
One, the infrastructure is not necessarily connected as
well as it needs to be.
Two is market practices. The fact that you have incumbents
in some of these countries while also trying to protect their
own monopoly power and not let gas and electricity flow freely
across the continent is a big problem in Europe.
You're right, Senator. The U.S./EU Energy Council will be
meeting next month, I believe in Europe.
Senator Hoeven. Right. So this is certainly an area where
they can do some substantive work.
Mr. Chow. I would add one more, Madame Chair, if am I
allowed, which is they really need to look at developing
further their own energy resources in Europe beyond renewables
which they do a good job in.
But why not look at the resources, particularly in oil and
gas, but also coal that is in Western Europe already that
they're not taking advantage of rather than importing those
resources from faraway places. That's something they can do to
help themselves very much.
I think I have a sense of irony that it is the Central and
Eastern European countries who are most dependent on Russia for
its oil and gas today who wants to take the strongest position
on Russia because of the aggression that it has caused in
Ukraine as opposed to the Western European countries who are,
by definition, more diversified, who are reluctant to respond
to Russia's aggression.
So something that we can do to get our allies and ourselves
on the same page in that area is certainly something that's
worth doing in the coming days and weeks.
Senator Hoeven. Madame Chairman.
The Chair. A very important insight.
Senator Hoeven. I apologize I know I'm over my time, but if
I could beg your indulgence.
On that point, Mr. Chow and maybe Mr. Goldwyn wants to
weigh in here as well. I visited with companies like Exxon,
Chevron, Shell and others that are willing to do more both
onshore but also offshore in the Black Sea as well as companies
like Statoil that are doing a lot of oil and gas development,
obviously, in the North Sea and so forth.
What about their ability in the near term here to provide
more natural gas to these counties? Is there something we can
do to help make that happen?
Mr. Goldwyn. I would say with respect to the Norwegians,
they do have search capacity to move more gas. At times over
the last year and a half or so they have been the larger
supplier of gas over Gazprom. So they have the ability. There's
really nothing we need to do in order to help them capture that
market.
But on the other 2 points something I would echo what Ed
Chow has said. We could be a lot more forthright in, you know,
and less timid about encouraging unconventional and
conventional gas development in Europe.
I've been to 8 of those countries trying to teach safe
shale gas practices to regulators over there. They don't have
private ownership. They don't have access to infrastructure. In
places like Bulgaria, you've got Gazprom actively undermining
development there.
So technical assistance, getting regulators comfortable,
those are things we are doing, but we could do a lot more of.
The second one I think is the point Ed made and that Chair
Landrieu has made with the map is really important. The
European story is that we eliminated destination clauses. We're
done. We have an integrated gas market. It's just not the case.
There's much more work that needs to be done. I've talked
to my colleagues at the State Department and encouraged them to
put that at the top of their agenda because you get that market
unblocked you get more connections between there. You don't
strand Iberian gas. You get connections between Lithuania and
Latvia.
You can move a lot more gas around that continent a lot
faster than it takes to build a new LNG export terminal. You
can use the ones that they've got.
The Chair. This has been an excellent hearing. We're going
to have to bring it to a close.
I have just one or 2 comments and questions and turn it
over to Senator Murkowski for final remarks.
But I want to thank you all for your patience, you
excellent testimony. Of course, everything will be submitted to
the record.
But let me just bring this back locally, to the U.S. and
particularly to Louisiana and the energy coast. Designing an
energy policy, which this committee will be focused on,
promoting America as an energy super power will create
thousands and thousands of jobs here at home and abroad and
will help us promote democracy which is one of the central
principles of the existence of our Nation.
I know that we've spent a lot of time talking about Europe
and the Ukraine. But we've also started this hearing by talking
about the 37,000 jobs in Louisiana and Texas and the Gulf Coast
that can be created right now with the production and opening
up of exports for liquefied natural gas.
Let me also assure my colleagues, mostly Senator Stabenow
and Senator Baldwin, who were very respectful and appropriate
in their comments. I want to be the same. Louisiana is the
second largest producer of gas in this country, offshore and
on. But we're also the third largest consumer of gas.
It is certainly not in this Senator's interest to promote a
policy where the prices would skyrocket and put our consumers
at a disadvantage. We have industrial consumers, commercial
consumers, residential consumers.
But the facts are and I think the case has been made
overwhelmingly by a variety of different reports that opening
up export markets helps to increase domestic supply, not close
it down, increase it, of gas and natural gas.
It also will help to create jobs here at home and abroad.
The price, as you all said, Louisiana, Louisiana--the U.S.
because it's North Dakota production, Texas, Oklahoma,
Colorado, will always have an advantage because we are the
source of the product.
Now, yes, does thought have to go into it? Is it the silver
bullet, you know, the silver bullet? No. But it's part of, I
think, the equation of how to create jobs at home, promote
America's strength abroad.
The 3 questions I have and we're not going to take time. I
may just ask you all to submit these in writing for the
committee.
One other thing that we can export and Alaska is proud of
this. Louisiana and Texas are proud of this, is our technology.
It's not just our gas and oil that we can export, both refined
and crude, but our technology.
What could we do better as a country? We're going to do
these answers in writing. To encourage technology, not just
from the big oil companies that, of course, have their own
ability to do that. But the thousands of small, independent
producers that sometimes find it difficult to work overseas.
How could we assist them to, you know, to promote and export
their technology which is value added to American inventors,
etcetera?
That's one question for the writing.
The other is we've talked a lot about America. I'd like to
talk about North America. I'd like to talk about the power of
Canada, America and Mexico as a major energy producer and
supplier. What's recently happened is a game changer with the
government of Mexico moving for the first time to privatize
their energy sector.
So they're reducing their corruption, opening up the
private market. Mexico is a really big place with a lot of big
promise. It sits very close to us. I'd like our country to
start thinking about Mexico.
Of course, building the keystone pipeline, in my view, and
using Canada and Mexico, the North American alliance of energy
is a powerful, powerful tool.
Finally I don't want to underestimate my colleague that's
Senator Barrasso, you know, says that if we would just
streamline these processes. Yes. I'm for streamlining. I'm for
expediting.
But I also hope that critics of the Administration will
focus on what can we do to help the Ukraine minimize its
corruption. What can we do to, you know, enhance the $1 billion
that you said, Mr. Chow, was just a drop in the bucket.
For the record you should submit what you think a
significant investment to the Ukraine would be that would send
the most positive signal.
So while there's a lot of criticism going around from one
side to the Administration. I would also like to go on record
saying for my colleagues and this is not Senator Murkowski, but
others on the Republican side, put your money where your mouth
is. You want to help, let's step up with some additional
funding to help the Ukraine and not just blame somebody else
because permits are going a little slowly.
I'll let you have the last word.
Senator Murkowski. Thank you, Madame Chairman.
This has been, I think, a great hearing. Certainly a good
way to kick off your first full committee hearing as chair on
an issue that is clearly timely and I think holds so much
promise for America's position in the world as an energy
leader.
Again, an opportunity for us as a Nation to wield some
influence in a positive way and a way, you started off the
questioning talking about Russia and energy blackmail. I don't
think that the U.S. would ever assert that they would come at
it from that kind of a dictatorial type of a position, but one
where we can help our friends and allies. One where we can
engage in an environment where as we seek to increase
production domestically how that influences and positively
impacts those around the globe, all things being equal, you
know, all are benefited by the U.S. and our increasing role,
our increasing presence in this market.
I wanted to ask one very, very quick question. This relates
to the issue that Senator Barrasso brought up with the
amendment that he had attempted to advance in foreign
relations. As you know, we have the Ukraine legislation on the
Floor in front of us and the push from Senator Barrasso and
others to extend the FTA fast tracking to NATO and WTO members.
There has been the issue raised of potential trade
violations based on this expedited treatment to NATO members
and other specific countries like Japan, but not to all WTO
members.
Can anybody speak to that issue in terms of whether or not
you believe that it does present a trade violation?
Mr. Goldwyn.
We all look to you, so you get to step up.
Mr. Goldwyn. I'm the lawyer and not----
I confess to not having, being familiar with all the text
to the bill. But I think to the extent that we have a trade
agreement with a country and we adopt a practice which excludes
anybody that we have that kind of a trade agreement with then
we could be accused of discriminatory practice and violation of
it.
Now I don't know when you looked at which version of the
bill whether it covers everybody that we have a trade agreement
with. But if it doesn't than I think that's an issue. I would
also worry, a little bit, that even if it covers everybody we
have a trade agreement with Ukraine, I don't think, is a WTO
member and they're not a NATO member.
They are WTO? OK. So I worry, I would make sure that we
want to capture all of the countries that we want to help and
make sure they're not excluded as well.
It's the challenge with picking winners.
Senator Murkowski. Madame Chairman, thank you. Again, I
think that this has been very, very beneficial, very timely and
thank each and every one of the witnesses, your leadership as
well. Looking forward to working with you.
The Chair. Thank you. Meeting adjourned.
[Whereupon, at 12:16 p.m. the hearing was adjourned.]
APPENDIXES
----------
Appendix I
Responses to Additional Questions
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Responses of Jaroslav Neverovic to Questions From Senator Landrieu
Question 1. The focus of our hearing was on LNG exports and the US'
role as a global energy power, but I believe we can export more than
just LNG. We can also export our technical expertise, which is
substantial, to help our allies develop their own resources. Louisiana,
Oklahoma, Colorado and Texas, just to name a few, have world class
energy service industries. Do you have any specific ideas about how
their expertise may be better developed to assist other countries?
Answer. The U.S. can ``export'' a vision and share technological
know-how in the LNG sector and unconventional oil & gas production with
countries in Europe. Energy consumers in Eastern Europe are still
locked not only in a technical lockout of gas supplies from one source,
but also in a notion that there is no alternative to ``pipelines'',
``Russian gas'' and ``Gazprom''.
Message about shale gas and oil revolution, clean and
environmentally production, liquefaction and transportability of LNG
should be delivered to broader Eastern European constituencies. The
U.S. could not only liberalize LNG export to Europe, but also share the
notion that through technological advance and innovations more and more
alternative gas and other energy resources will be available for
``energy islands'' like the Baltic States or other European countries.
More specifically that would assist Lithuania and other Russian-gas
dependent countries in countering the Russian-inspired propaganda
campaign to stop any local or alternative energy resource development
in these countries that undermine Gazprom's market interests, but meet
those countries' strategic energy independence goals. Support to those
countries should be voiced by the U.S. Government and company officials
at all levels and as frequently as possible.
Lithuania has good examples of the U.S. technical expertise in
developing hydrocarbon resources and providing energy advisory services
in nuclear energy, LNG terminal construction in our country. During the
recent years Lithuania has been successfully cooperating with a number
of the U.S. energy companies in implementing strategic energy
projects--Fluor (Klaipeda LNG terminal), General Electric, Exelon
(Visaginas Nuclear Power Plant), Science Applications International
Corporation.
The U.S. expertise in utilization of municipal waste or biomass
(wood, straw, short rotation coppice, etc.) for energy (electricity and
heat) generation, exchange of know-how in technological solutions of
utilization of municipal waste could also be useful for Lithuania as
well as for other countries.
Question 2. What can the US do now to help our friends in Ukraine
develop their own energy resources?
Answer. Being heavily dependent on gas imported from Russia (in
2010, 68 percent of gas came from Russia), Ukraine needs both short-
term and long-term solutions. The U.S. administration and U.S. business
could help Ukraine to diversify its imports and develop its own natural
gas production capacity.
Firstly, in the short run, the EU and the U.S. could pull together
their efforts to supply gas into the Ukrainian gas transmission system
from Europe via Slovakia as well as fill Ukrainian underground gas
storages with gas other than from Gazprom. We highly support efforts
led by the U.S. diplomats and EU officials. We are hearing encouraging
statements from the Slovakian leadership. Besides the diplomatic
efforts, investments into infrastructure of reverse supplies and
additional capacities of gas are necessary. At least 13 percent of
annual Ukrainian gas needs could be imported from Europe via Slovakia,
given that the price of gas is competitive and amounts are available.
Therefore, more liberal gas exports from the U.S. to Europe definitely
would make a change.
Secondly, in the long term, the U.S. and Europe (including private
capital) could work together in helping Ukraine in 4 areas: 1) build
its own LNG import facility on the shores of the Black Sea (as we have
entered the final stage of completing our own LNG terminal in Klaipeda,
our project management team is very well experienced on swift and
``state of the art'' project implementation and it can be used for
similar purposes in Ukraine); 2) increasing natural gas production in
Ukraine from conventional and unconventional gas fields, supporting
Ukraine's switch from ``net energy importer'' to ``net energy
exporter'' (it is expected that Ukraine can be rich of shale gas); 3)
modernizing and jointly with Western investors exploiting Ukrainian gas
transportation system (Ukraine has the biggest gas storage capacities
in Europe); 4) substantially increasing energy efficiency in Ukraine
(currently energy intensity in Ukraine is 11 times higher than the EU
average). All these efforts will need long-term commitments from the
U.S. and the EU, substantial financial support and technical expertise,
but if successful, will transform the energy landscape in Ukraine.
Question 3. Also please outline what kind of investment from the
U.S. you believe would make a significant impact in Ukraine?
Answer. The U.S. Government and businesses can work closely with
the Ukrainian Government in creating favorable investment climate. This
would attract more foreign investors in increasing gas and oil
production in Ukraine, which has been falling from 68 bcm in 1975 to 20
bcm in recent years.
Question 4. Can you discuss what role the North American energy
alliance of the United States, Mexico, and Canada, can play in helping
not only Ukraine but the rest of our allies around the world?
Answer. Global gas market is only at creation stage. Global players
like the U.S. and Canada could become global exporters of gas and
substantially push forward the creation of a global gas market.
Contemporary technologies are already enabling energy companies to
transport gas at a relatively low cost. Energy islands like the Baltic
States or other heavily dependent Eastern European countries like
Ukraine would benefit greatly and immediately. Europe and the U.S.
should act together and speedily.
Question 5a. I believe that a strong case has been made for the
U.S. to have a measurable impact on the global LNG market. We must
allow export terminals to enter the market quickly enough to seize a
piece of the growing global demand for LNG. It would seem, then,
accelerated approval for those projects most likely to be built would
have the greatest positive impact on our allies and our most reliable
trade partners-what is your opinion on:
Separating those projects that have spent considerable time and
money to file with FERC into a separate approval queue?
Answer. Lithuania is currently 100 percent dependent on Russian gas
and will start importing LNG as an alternative to pipeline gas from
2015 onwards. Adding extra export capacities to the global LNG market
would directly or indirectly impact LNG importing countries such as
Lithuania that are aiming to secure LNG supply under the current LNG
market conditions of growing demand and limited supply.
Therefore, we consider increasing demand in LNG market as very
important and we prefer this happening sooner rather than later.
Question 5b. Separating those projects under the jurisdiction of
United States Maritime Administration (MARAD), which currently has
jurisdiction over two projects, into a separate queue in order to
better reflect their different approval process and timeline?
Answer. See the answer 5 (a) above.
Response of Jaroslav Neverovic to Question From Senator Barrasso
Question 1. In your testimony, you discuss the Independence. You
say that: ``you cannot overstress the strategic importance of the LNG
terminal to Lithuania.'' You explain that the Independence will be:
``the ice-breaker for the region, helping to ensure an alternative gas
supply and create a functioning gas market.'' Would you please expand
upon your comments for the Committee?
Answer. The Baltic States and Finland are compared to an ``energy
island'' in the context of the EU internal energy market due to the
absence of gas interconnections with any other EU Member States (see
the map* below) and a 100 percent dependency on gas supply from Russia
when the EU average is around 25 percent.
---------------------------------------------------------------------------
* All maps have been retained in committee files.
---------------------------------------------------------------------------
This isolation and lack of gas pipeline interconnections with other
EU Member States was largely determined by the historical circumstances
of the Post--WWII period. This creates potential energy security
threats thus leaving the Baltic States and Finland gas consumers and
national economies vulnerable to gas supply interruptions and
fluctuations of gas prices compared to countries with more diversified
(better connected) or self-sufficient energy systems.
The Baltic States together with Finland have annual gas consumption
of around 325 bcf (Lithuania alone--117 bcf) with a potential to grow.
So far this whole demand is being covered by a single gas supplier--
Gazprom. Due to the absence of competition in gas supply, the Eastern-
Baltic region is paying one of the highest prices for gas among EU
Member States. Lithuania, in fact, in the 2nd Q of 2013 was paying the
highest price for natural gas among all EU Member States (around 14$/
million Btu).
Even a small increase in the already high energy price creates a
painful spill-over effect on Lithuania's economy, which is based on
exports, by hindering the ability to compete in the EU and global
markets. In this context, enhancement or assurance of energy security
and development of competition through alternative gas supply sources
are urgently needed.
Klaipeda LNG Terminal project in Lithuania is seen as the most
effective way for creating an alternative source of natural gas supply,
eliminating the dependence on the sole external gas supplier, providing
coverage of emergency demand, creating conditions for national and
regional gas markets, and enabling the country to access gas spot
markets.
Lithuanian LNG terminal will have up to 141,2 bcf annual import
capacity and that will be a key game changer for the three Baltic
States with total annual gas consumption of 194,2 bcf.
The newly-built FSRU for the Lithuanian LNG terminal has been
symbolically named ``Independence''. Although the primary goal of the
Lithuanian LNG terminal is to satisfy national needs, the terminal will
operate under the so called ``third party access'' regime, which means
that our neighbors and partners will also have a possibility to use the
spare terminal's capacity for their own needs. Klaipeda LNG Terminal
will be the first large scale LNG terminal in the Baltic Sea with a
capability to provide bunkering opportunities from all year round ice-
free port. FSRU ``Independence'' will be ``the ice-breaker'' for the
region, helping to ensure an alternative gas supply and create a
functioning gas market.
______
Responses of Edward C. Chow to Questions From Senator Landrieu
Question 1. The focus of our hearing was on LNG exports and the US'
role as a global energy power, but I believe we can export more than
just LNG. We can also export our technical expertise, which is
substantial, to help our allies develop their own resources. Louisiana,
Oklahoma, Colorado and Texas, just to name a few, have world class
energy service industries. Do you have any specific ideas about how
their expertise may be better developed to assist other countries?
Answer. Ukraine has well-known geological potential to produce
indigenous energy, including oil and gas. However, resource development
and modernization of the energy sector have been blocked by pervasive
corruption involving the highest levels of Ukrainian government which
siphoned off billions of dollars every year since independence in 1991.
This negatively affects equity investors as well as oilfield service
and equipment suppliers. Until a new Ukrainian government commits to
reform of the energy sector and actually implements concrete steps,
outside assistance can make very little impact beyond bailing Ukraine
out of an immediate crisis, only to have the same problem return a
couple of years later as it has for more than two decades.
Question 2. What can the US do now to help our friends in Ukraine
develop their own energy resources?
Answer. All Western assistance should be strictly conditional on
real energy sector reform, with regular monitoring of the performance
of the Ukrainian government by the donor community. This should apply
to direct U.S. assistance, as well as those from international
financial institutions such as the International Monetary Fund, World
Bank, European Bank for Reconstruction and Development in which the
U.S. holds major voting shares. Reform must start with pricing reform
at both the burner-tip as well as the wellhead. Naftogaz, the Ukrainian
national oil and gas company which is at the center of energy sector
corruption, must be completely restructured and ultimately broken up
and privatized. In order to do this in a proper and transparent way,
Ukraine will need a lot of capacity building help including teams of
technical, business, and regulatory experts. The U.S. must be prepared
to do this if we are serious about helping Ukraine on energy.
Question 3. Also please outline what kind of investment from the
U.S. you believe would make a significant impact in Ukraine?
Answer. Provision of aid without capacity building help and close
supervision would be a total waste of taxpayers' money. Once the
business climate is fundamentally improved, private-sector investments
will flow to take advantage of the tremendous economic opportunities
available in Ukraine, including in the energy sector.
Question 4. Can you discuss what role the North American energy
alliance of the United States, Mexico, and Canada, can play in helping
not only Ukraine but the rest of our allies around the world?
Answer. Both the U.S. and Canada possess the capability, including
by independent producers and service providers, which can benefit
Ukraine and other Central and Eastern European countries on energy
innovation, such as shale gas and tight oil. Mexico is a country which
is finally opening up its oil and gas sector to private investment as
part of an overall modernization program for its economy in spite
decades of political roadblocks. It offers an example Ukraine should
follow.
Question 5. I believe that a strong case has been made for the U.S.
to have a measurable impact on the global LNG market. We must allow
export terminals to enter the market quickly enough to seize a piece of
the growing global demand for LNG. It would seem, then, accelerated
approval for those projects most likely to be built would have the
greatest positive impact on our allies and our most reliable trade
partners-what is your opinion on:
a. Separating those projects that have spent considerable time and
money to file with FERC into a separate approval queue?
b. Separating those projects under the jurisdiction of United
States Maritime Administration (MARAD), which currently has
jurisdiction over two projects, into a separate queue in order to
better reflect their different approval process and timeline?
Answer. A LNG export terminal project takes 3 to 5 years to finish
from conception to completion. The DOE-approval is just the initial
step in that process. There are good domestic economic reasons to
remove restrictions from energy trade which were formulated decades ago
in a much different environment. However, American LNG is unlikely to
have much impact on the global market in the short to medium term.
Question 6. What, in your opinion, is the likelihood that Russia
will continue to raise prices of its natural gas exports?
Answer. Russia has actually provided more contract flexibility and
lowered its exported gas prices in the last couple of years to all its
major West European customers in order to meet market prices and
protect market share. As a result, West European LNG import terminals
are severely underutilized. Russia has not provided similar contract
flexibility and pricing discounts to Central and East European
customers because they have not developed alternative sources of gas
imports and Russia is often their only supplier.
Question 7. What other ways does Russia have to raise revenue?
Answer. Actually natural gas contributes a much smaller portion of
Russia's export earnings and budget revenue than oil, which is ten
times more important. Russia is propped up economically by historically
high global oil prices. Gas has a bigger impact politically. Together
oil and gas represent more than 50 percent of Russia's federal budget
and 70 percent of export earnings.
Responses of Edward C. Chow to Questions From Senator Murkowski
Question 8. Is the deployment of floating LNG facilities to the
Black Sea a practical way of delivering gas to Ukraine?
Answer. No, not in the short to medium term and not without
structural reform of Ukraine's gas market. Importing LNG will certainly
be more expensive than increasing domestic gas production and pipeline
imports. A LNG import terminal for Ukraine would not be economically
viable and will be difficult to finance. Turkish objection over LNG
transit via the Bosphorus is another practical obstacle.
Question 9. In your opinion, are there reasons for expediting the
build-out of U.S. liquefaction capacity that are separate from the
situation in Ukraine?
Answer. Yes, as I stated in my testimony, there are ample domestic
economic reasons to revisit the policy of restricting U.S. gas and
crude oil exports. With gas, it has to do with ensuring investment
conditions exist to sustain shale gas production at a level that is
beneficial to domestic producers as well as to long-term consumers of
gas. With crude oil, it has to do with maintaining the competitive
advantage of our highly-sophisticated refineries to process cheaper,
heavy and sour, imported crudes while gaining maximum economic benefits
for the country by exporting light, sweet crudes.
______
Responses of David Montgomery to Questions From Senator Landrieu
Question 1. The focus of our hearing was on LNG exports and the US'
role as a global energy power, but I believe we can export more than
just LNG. We can also export our technical expertise, which is
substantial, to help our allies develop their own resources. Louisiana,
Oklahoma, Colorado and Texas, just to name a few, have world class
energy service industries. Do you have any specific ideas about how
their expertise may be better developed to assist other countries?
Answer. I believe oil and gas E&P companies and oil field service
companies are ready to move anywhere in the world where there is a
demand for their services. For them to do so in particular countries
requires manageable levels of corruption, sound geology, property
rights that favor development, fair taxation, and a secure investment
climate. Oil service companies have been able to work in many dangerous
and risky countries. To expand those opportunities the best role for
the U.S. government is to aid in resolving conflict situations and
provide incentives for institutional change toward a more favorable
investment climate.
Question 2. What can the U.S. do now to help our friends in Ukraine
develop their own energy resources?
Answer. In previous work (available at http://www.iccfglobal.org/
pdf/APPsummary.pdf), I have studied the role of institutional reform
and strategies to overcome barriers that are common across developing
countries (including Ukraine in this case) in a different context
(climate and economic growth nexus), never the less the message still
remains the same. To develop efficient market in Ukraine there are
certain fundamental reforms that are necessary and my research in the
past has highlighted that.
The critical enabling actions need to be taken by the Ukraine
government. Under the previous regime, the Ukraine was rated as one of
the most corrupt countries in the world. This has to change before
there can be an investment climate favorable to energy development.
Providing whatever aid the Ukraine can use to root out corruption in
its bureaucracy and establish open procedures for governance of energy
activities is probably the best direct action we could take now. But
the U.S. could help Ukraine indirectly if it were to remove barriers to
exporting energy of all kinds. U.S. natural gas supplies won't make a
big impact in the near-term, but lifting the crude oil export ban could
affect the world oil market and lessen Russia's grip.
Question 3. Also please outline what kind of investment from the
U.S. you believe would make a significant impact in Ukraine?
Answer. If the new government can suppress corruption and create a
more open economy, investment will flow into development of its energy
resources with no other action by the U.S. government. As a response to
Russian aggression, the U.S. could acquire floating LNG regasification
barges for use by Ukraine and grant emergency clearance for floating
liquefaction plants to begin operation off the U.S. Gulf Coast. The
purpose of this short run strategy would be to break Russia's ability
to extort higher prices for natural gas. This would have to be done for
strategic reasons, since it likely would not provide an economic
return. This step could be part of a broader strategy to signal to the
world that the U.S. is open to exporting its gas, and therefore if
Russia wants to maintain sales it will have to give Ukraine more
favorable terms when it renegotiates its long-term gas contracts.
Question 4. Can you discuss what role the North American energy
alliance of the United States, Mexico, and Canada, can play in helping
not only Ukraine but the rest of our allies around the world?
Answer. Maximizing production and freeing up exports will have a
long term effect of reducing Russia's energy export revenues, economic
power, and ability to reconquer the former Soviet Republics and
intimidate Eastern Europe. Approval of the Keystone pipeline and
removing the crude oil export ban would be two concrete actions that
would free up exports.
Question 5. I believe that a strong case has been made for the U.S.
to have a measurable impact on the global LNG market. We must allow
export terminals to enter the market quickly enough to seize a piece of
the growing global demand for LNG. It would seem, then, accelerated
approval for those projects most likely to be built would have the
greatest positive impact on our allies and our most reliable trade
partners-what is your opinion on:
5a. Separating those projects that have spent considerable time and
money to file with FERC into a separate approval queue?
5b. Separating those projects under the jurisdiction of United
States Maritime Administration (MARAD), which currently has
jurisdiction over two projects, into a separate queue in order to
better reflect their different approval process and timeline?
Answer. Yes, both would speed up the process. Neither would
constitute a complete signal of our willingness to be an effective
potential competitor to Russia because neither eliminates the
possibility that politics could change and place a limit on exports
sufficiently low to prevent them from reducing Russia's market share
and/or price. A much stronger signal would be sent by the declaration
that all LNG exports are in the public interest.
Question 6a. You make the case in your study that exports will
drive additional production levels, and that additional production will
fill a majority of the increased demand for natural gas in the U.S.
associated with export. What is your estimate of the employment impact
of this increased production.
Could you explain the scale of the impact that unconstrained export
would have on the most gas intensive manufacturing sectors?
Specifically, why ethylene and polyethylene industries are predicted to
grow even in the case of unconstrained exports?
Answer. There clearly will be increased employment in natural gas
production as a result of LNG exports, since natural gas production
will increase by almost the amount of exports. We did not make a
separate calculation of increased employment in natural gas exploration
and production attributable to LNG exports in our updated study.
LNG exports would have very little effect on even the most gas
intensive manufacturing sectors, because LNG exports cannot change U.S.
natural gas prices nearly enough to erase the built in advantage of
domestic manufacturers over their rivals in countries that import
natural gas. Even with the maximum LNG exports projected in our
scenarios, The price of natural gas for U.S. manufacturers will remain
about half the natural gas prices faced in countries that import LNG.
This is because the cost of liquefying, transporting and regasifying
LNG from the U.S. to the most attractive importing region is
approximately equal to the wellhead price of natural gas in the U.S.
(*See Exhibit ). 1 Adding this cost to the wellhead price in the U.S.
implies that Asian manufacturers will continue to pay at least twice as
much for natural gas as U.S. manufacturers.
---------------------------------------------------------------------------
* All exhibits have been retained in committee files.
---------------------------------------------------------------------------
The impacts of LNG exports on natural gas prices in the U.S. are
likely to be modest, and in no case do they come close to the
differential between U.S. natural gas prices and those paid by rivals
to U.S. manufacturing in other countries. Exhibit 2 below shows that
when we base the international demand for LNG on EIA's reference case
from the most recent International Energy Outlook (indicated by red
icons in the Exhibit), we find that the increase in natural gas prices
is about 25 cents per Mcf with EIA Reference Case assumptions about
U.S. oil and gas supply from AEO2013. The largest price impact
attributable to LNG exports is about $1.00 per Mcf in a case that is
constructed to incorporate a very unlikely level of global demand for
U.S. LNG. Even this highly unlikely impact would not come close to
closing the cost advantage for U.S. manufacturing of about $6.00 per
Mcf.
It is incorrect to label the $.75 to $1.06 maximum price impacts
seen in Exhibit 3 as price forecasts. They occur in cases that were
constructed as stress tests, to determine impacts on the U.S. economy
if global natural gas markets were severely disrupted by widespread and
permanent shutdown of nuclear power and cancellation of even currently
planned LNG export projects in major exporting countries. Leaving aside
questions of whether global demand for LNG could remain as high as
projected at these prices, it is highly likely that the high global
natural gas prices projected in the supply and demand shock cases would
lead to appearance of other projects and supplies to get around the
assumed constraints on global production. Even in these cases, LNG
exports provide net benefits to the U.S. and the net benefits of LNG
exports are greatest with no limits placed on those exports.
Exhibit 3\1\ displays global supply curves for ethylene, a major
chemical product and export, before and after the shale revolution. The
curve labeled 2005 shows the relative position of the U.S. before the
shale revolution. At that time, the U.S. was the highest cost producer
and highly vulnerable to expanded production in other regions. The
shale revolution reversed all that, and put the U.S. in a virtual tie
with the Middle East as the lowest cost producer of ethylene. Moreover,
the next lowest cost producer, China, has a cost at least 50 cents per
pound greater than the U.S. cost of manufacturing ethylene. Western
Europe and Japan, the highest cost producers and therefore relevant
competitors to the U.S., have costs 90 cents to $1.00 per pound greater
than the U.S.
---------------------------------------------------------------------------
\1\ American Chemistry Council, Shale Gas, Competitiveness, and New
US Chemical Industry Investment: An Analysis Based on Announced
Projects, May 2013, p. 21
---------------------------------------------------------------------------
We calculated the amount that even the highly unlikely maximum
price increase of $1 per Mcf would make in the cost of producing
ethylene. It amounts to about 5 cents per pound, or about 5 percent--10
percent of the current cost advantage that the U.S. has over rivals in
countries that import natural gas.
With this wide a cost advantage, LNG exports do not threaten the
competitive position of U.S. manufacturing. Moreover, ethylene and
polyethylene benefit from the excess supply of its specific feedstock,
ethane, that will grow with increased exports. Ethane used to sell for
about $2 per Mcf more than pipeline quality natural gas, but that has
changed because shale formations produce much wetter gas than
conventional formations. Ethane is a large component of this wetter
gas, and the ratio of ethane to dry gas production exceeds the level
that is allowed to be shipped in interstate pipelines due to safety
risks. This has stranded ethane, driving its price down to rough parity
with natural gas. Producing more natural gas for export will increase
the amount of stranded ethane, and likely keep its price depressed from
historical levels for some time. This is one of the primary reasons
that ethylene and polyethylene production in the U.S. increase as LNG
exports increase.
Responses of David Montgomery to Questions From Senator Murkowski
Question 1. U.S. natural gas exports via pipeline are at record
high levels. Have you observed any detrimental impact on the U.S.
economy, either in terms of supply availability or price volatility?
Would you expect liquefied natural gas exports to be any different?
Answer. No. From an economic perspective LNG exports and pipeline
exports are the same. They involve investment in infrastructure, open
markets to goods (natural gas) where we enjoy a global competitive
advantage, and improve our balance of payments. Regarding price
volatility, short-term price upsets like those experienced this winter
will not go away if we prohibit exports. These rapid changes in price
are caused by local supply/demand factors. More storage would alleviate
price spikes, but storage is expensive and may not be economic on a
long term basis.
Exports of any kind add to natural gas infrastructure and have
created a larger and better connected market that is able to move
natural gas to wherever increased demand exists. This is also true of
LNG exports, which could lead to creation of additional natural gas
infrastructure in certain regions, which has the potential to alleviate
some existing bottlenecks, increase supply availability and reduce
price volatility. For example, if additional pipeline capacity had been
built to move natural gas through New England to Atlantic LNG export
terminals, that gas could have been bid away from exports and added to
New England supply during the price spikes that developed last winter.
Moreover, LNG exports would likely be served by increased production
from shale gas formations, these sources are in locations where they
are not as vulnerable to the extreme weather events that threaten Gulf
Coast production. This increase in geographical diversity will reduce
the impact of weather related events on natural gas prices.
Question 2. How sensitive is your analysis to unexpected domestic
consumption of natural gas? In other words, if the industrial,
transportation, or electricity sectors end up consuming more than
forecasted, would that force a reappraisal of your views on LNG
exports?
Answer. No. It would lead to a different forecast of exports, but
would not change my view that market-determined levels of exports
provide the largest economic benefits whatever the level of
consumption. Higher levels of demand than contained in our scenarios
would be accompanied by increased supply; if that led to upward
pressure on prices, LNG exports would expand less rapidly because the
U.S. would be a less competitive supplier in global markets. Thus
higher demand in the U.S. could lead to higher prices than in scenarios
with lower demand, but those price increases would be ameliorated by
lower export levels. I am confident that it would remain true that a
policy of placing no limits on exports would even in these cases
provide larger benefits than any restrictive policy. My opinion is
based on our examination of scenarios in which we did assume reference
levels of supply and higher growth in demand. In none of these
alternative high demand baselines did domestic natural gas prices rise
as high as they did in the low supply cases; therefore the impacts of
LNG exports in high demand cases would fall within the range of cases
we did examine.
Question 3. How real is the possibility that LNG exports would
divert domestic gas away from domestic consumers?
Answer. Our analysis shows that most LNG exported from the U.S.
will come from increased production, and very little will be diverted
from domestic customers. This is simply a matter of the relatively flat
supply curve for shale gas that is found by most independent studies,
and the high value in use of natural gas in U.S. manufacturing.
The chart below (Exhibit 1) shows the sources from which exports
are drawn in a relatively high export case, our reference case with
unconstrained exports and a global demand shock. Increases in natural
gas production equal about 80 percent of the volume exported plus
losses and consumption in liquefaction. The largest demand reduction
occurs in the electric power sector, where renewables and, to the
extent allowable under EPA rules, coal substitute for natural gas.
Changes in residential, transportation and energy-intensive
manufacturing uses of natural gas are negligible compared to the level
of exports.
Question 4. How real is the possibility that LNG exports would harm
other sectors of the U.S. economy by raising natural gas prices
domestically and/or becoming linked with worldwide energy markets? Is
``parity'' a threat?
Answer. LNG exports are not a threat to other sectors of the U.S.
economy. LNG exports are unlikely to affect U.S. natural gas prices
nearly enough to erase the built in advantage of domestic manufacturers
over their rivals in countries that import natural gas. Even with the
maximum LNG exports projected in our scenarios, The price of natural
gas for U.S. manufacturers will remain about half the natural gas
prices faced in countries that import LNG. This is because the cost of
liquefying, transporting and regasifying LNG from the U.S. to the most
attractive importing region is approximately equal to the wellhead
price of natural gas in the U.S. (See Exhibit 2). Adding this cost to
the wellhead price in the U.S. implies that Asian manufacturers will
continue to pay at least twice as much for natural gas as U.S.
manufacturers.
The impacts of LNG exports on natural gas prices in the U.S. are
likely to be modest, and in no case do they come close to the
differential between U.S. natural gas prices and those paid by rivals
to U.S. manufacturing in other countries. Exhibit 3 below shows that
when we base the international demand for LNG on EIA's reference case
from the most recent International Energy Outlook (indicated by red
icons in the Exhibit), we find that the increase in natural gas prices
is about 25 cents per Mcf with EIA Reference Case assumptions about
U.S. oil and gas supply from AEO2013. The largest price impact
attributable to LNG exports is about $1.00 per Mcf in a case that is
constructed to incorporate a very unlikely level of global demand for
U.S. LNG. Even this highly unlikely impact would not come close to
closing the cost advantage for U.S. manufacturing of about $6.00 per
Mcf.
It is incorrect to label the $.75 to $1.06 maximum price impacts
seen in Exhibit 3 as price forecasts. They occur in cases that were
constructed as stress tests, to determine impacts on the U.S. economy
if global natural gas markets were severely disrupted by widespread and
permanent shutdown of nuclear power and cancellation of even currently
planned LNG export projects in major exporting countries. Leaving aside
questions of whether global demand for LNG could remain as high as
projected at these prices, it is highly likely that the high global
natural gas prices projected in the supply and demand shock cases would
lead to appearance of other projects and supplies to get around the
assumed constraints on global production. Even in these cases, LNG
exports provide net benefits to the U.S. and the net benefits of LNG
exports are greatest with no limits placed on those exports.
Exhibit 4\2\ displays global supply curves for ethylene, a major
chemical product and export, before and after the shale revolution. The
curve labeled 2005 shows the relative position of the U.S. before the
shale revolution. At that time, the U.S. was the highest cost producer
and highly vulnerable to expanded production in other regions. The
shale revolution reversed all that, and put the U.S. in a virtual tie
with the Middle East as the lowest cost producer of ethylene. Moreover,
the next lowest cost producer, China, has a cost at least 50 cents per
pound greater than the U.S. cost of manufacturing ethylene. Western
Europe and Japan, the highest cost producers and therefore relevant
competitors to the U.S., have costs 90 cents to $1.00 per pound greater
than the U.S.
---------------------------------------------------------------------------
\2\ American Chemistry Council, Shale Gas, Competitiveness, and New
US Chemical Indstry Investment: An Analysis Based on Announced
Projects, May 2013, p. 21
---------------------------------------------------------------------------
We calculated the amount that even the highly unlikely maximum
price increase of $1 per Mcf would make in the cost of producing
ethylene. It amounts to about 5 cents per pound, or about 5 percent--10
percent of the current cost advantage that the U.S. has over rivals in
countries that import natural gas.
With this wide a cost advantage, LNG exports do not threaten the
competitive position of U.S. manufacturing. Moreover, ethylene in
particular benefits from the excess supply of its specific feedstock,
ethane, that will grow with increased exports. Ethane used to sell for
about $2 per Mcf more than pipeline quality natural gas, but that has
changed because shale formations produce much wetter gas than
conventional formations. Ethane is a large component of this wetter
gas, and the ratio of ethane to dry gas production exceeds the level
that is allowed to be shipped in interstate pipelines due to safety
risks. This has stranded ethane, driving its price down to rough parity
with natural gas. Producing more natural gas for export will increase
the amount of stranded ethane, and likely keep its price depressed from
historical levels for some time. This will be a further benefit to U.S.
chemicals producers from LNG exports that we did not include in our
calculations.
Question 5. Please discuss the differences between the NERA
analysis and the Charles River Associates' report on the same subject.
Where do you diverge on price impact, reference cast forecasts, and
other important areas?
Answer. There is almost no relevant point of comparison between the
statements found in CRA's report and NERA's analysis of the impact of
LNG exports.
1. CRA does not discuss the impact of LNG exports on prices,
but rather compares current prices to its own forecast of
future prices. Most of the increase in prices forecasted by CRA
occurs in their reference case, and LNG exports have no greater
impact on prices than in our study. The statement in their
report that LNG exports will make prices nearly triple is
grossly misleading. CRA makes that happen by choosing to label
as a ``reference case'' a forecast that is at or above just
about every other independent production of natural gas prices
with continued production of shale gas.
2. NERA did not make a ``reference case forecast'' as claimed
by CRA; rather, we developed scenarios based on EIA's high oil
and gas resource, reference, and low oil and gas resource cases
from AEO2013. Both EIA and NERA recognize that there is great
uncertainty about future natural gas prices, and that any
specific forecast has only a slim chance of turning out to be
correct. Therefore, we use a scenario approach and ask whether
the consequences of a policy change, such as removing limits on
LNG exports, are similar across all scenarios.\3\ We find that
in all the scenarios, unlimited LNG exports provide greater
economic benefits than any lesser level constrained by DOE,
U.S. consumers are not ``deprived'' of gas by exports, and U.S.
natural gas prices never rise to oil parity levels or to levels
seen in gas importing countries. For what it is worth, even
CRA's price forecasts fall within the range of the scenarios we
considered, and therefore their efforts to create an issue out
of forecasts are pointless.
---------------------------------------------------------------------------
\3\ I have written previously on the topic of the problems of
forecasting natural gas prices and the need for scenario analysis for
robust decisions (see http://www.regulations.gov/
#!documentDetail;D=EPA-HQ-OAR-2011-0660-9966) and our approach to
scenario analysis is consistent with those opinions.
---------------------------------------------------------------------------
3. CRA does no integrated economic analysis of the impacts of
LNG exports on energy supply and demand and the overall
economy. Instead, CRA makes a series of calculations unrelated
to the actual effects of exports on the economy, and uses these
to conjure up images of disaster. Their images of disaster
arise from three fundamental errors:
a. No analysis of global supply and demand to determine
whether any importer would be willing to buy the amount of LNG
exports claimed by CRA at the prices calculated by CRA
b. The false assumption that there will be no response of
domestic gas production to LNG export demand, creating the
false dichotomy of gas going either to manufacturing or to
exports
c. Misuse of input-output data to support the impossible
conclusion that more GDP will be created if the government
rather than the market allocates energy, and does so in a
manner that gives the largest allocation to those industries
that use the least amount of energy relative to their cost of
production.
d. Failure to compare current data on the relative cost of
chemical production in the U.S. to costs in other countries. As
shown in Exhibit 4, U.S. producers are now able to produce
basic chemicals like ethylene at cost far below those of global
competitors. There has been a surge of investment in capacity
for producing ethylene in the U.S. since natural gas prices
fell. According to the ACC, ``the mix of projects announced
thus far has been heavily slanted toward bulk petrochemicals,
mainly steam crackers for ethylene . . . ''\4\ and these are
not in any way at risk from LNG exports, which at most could
erode 5--10 percent of U.S. manufacturers cost advantage. Thus
CRA's dire warnings of the loss of nearly $100 billion in
chemical investment are a fiction.
---------------------------------------------------------------------------
\4\ American Chemistry Council, Shale Gas, Competitiveness, and New
US Chemical Industry Investment: An Analysis Based on Announced
Projects, May 2013, p. 25
Several absurd conclusions follow from the claims that CRA makes
about the benefits of allocating natural gas to manufacturing and away
---------------------------------------------------------------------------
from exports.
1. CRA assumes that there is an infinite supply of capital and
labor, so that the additional amount of labor and capital needed to
turn 1 Bcf of natural gas into manufactured products does not have to
be taken away from any other productive enterprise (no opportunity cost
for capital and labor). At the same time, CRA assumes that there is a
fixed supply of natural gas, and that no matter how much capital and
labor is added, it is impossible to produce any larger quantity. These
are the only circumstances in which their hypothetical comparison of
using 1 Bcf in manufacturing versus exporting 1 Bcf could have any
relevance in the real world.
2. The recommendation based on this irrelevant calculation that
exports of natural gas should be limited does not go far enough. Value
added is nothing more or less than payments to labor and capital made
out of the revenue of an industry. CRA calculates the ratio of value
added to natural gas used in manufacturing and the ratio of value added
to natural gas used for exports.
a. The ratios their argument rests on are not comparable. CRA
calculates the ratio of value added to natural gas inputs for
manufacturing and natural gas outputs for natural gas
production. This is foolish. A consistent definition for NAICS
211, natural gas (and oil) production, would calculate the
ratio of value added in NAICS 211 to the use of natural gas as
an input to natural gas production. This ratio is in fact very
high--around 98 percent. [If we look at natural gas production
and export as an integrated operation, we see that there is
very little natural gas used as an input to production of
natural gas. Thus on CRA's argument, we should be putting more
resources into natural gas exports in order to make production
as high as possible.
b. CRA claims that natural gas should be allocated to
chemical production rather than exports because there is more
value added in chemical production than in exports. But CRA
stops too soon. Value added per Bcf of natural gas use in
chemicals is greater than in manufacturing as a whole, and in
manufacturing as a whole, less than in services. Therefore, if
CRA is correct about how to maximize GDP, we should first stop
exporting any chemicals, so as to make the natural gas embodied
in those chemicals available to the rest of manufacturing. But
then we should go further and kill off the manufacturing
renaissance itself, which is taking gas away from the service
sector that has even higher value added per Btu of gas used.
c. A moment's reflection on these absurd results would have
revealed how foolish CRA's argument for limiting exports really
is. There is not a fixed supply of natural gas, nor an infinite
supply of capital and labor. Making it the overriding goal of
economic policy to expand the industries that have the highest
value added per Bcf of natural gas used leads to obviously
undesirable outcomes.
d. Thus, CRA has added nothing to the rent-seeking claim of
chemical manufacturers that government should favor them by
reducing their cost of production, and theirs alone, by
preventing suppliers of their inputs from selling them to
others. The logic of their argument should have forced CRA to
conclude that the industry with the value added per Bcf of gas
input should be allocated all the natural gas we produce.
Likewise, the logic of the Dow claim could also be adopted by
U.S. users of polyethylene and other bulk chemicals, who could
equally well argue to prevent exports of bulk chemicals because
there is more value added in manufacturing plastic components
and finished goods from polyethylene than in exporting it.
NERA finds that there is no conflict between exporting natural gas
and using it at home, except at the level of rent-seeking and attempts
to enhance profits through favoritism by regulators. In a market with
unrestricted natural gas and chemical exports, U.S. chemical producers
would be able to purchase all the natural gas feedstocks they can
profitably use. U.S. manufacturers would be able to choose between
obtaining chemicals from U.S. or foreign producers depending on price,
and would largely find that U.S. chemical producers could give a better
deal because even with unlimited exports their natural gas costs would
be far below competitors in importing countries. Natural gas producers
would supply enough gas to satisfy export demand and all the gas that
domestic consumers want to buy. The result is a higher level of GDP
than could be achieved through any combination of restrictions on
exports at any level.
Question 6. What does economic history tell us, if anything, about
the real world consequences of government policies that constrain
exports of energy (or other analogous commodities)?
Answer. The policy of constraining commodity exports in order to
subsidize domestic processing and manufacturing industries has been
uniformly rejected in the literature of economic development.\5\
---------------------------------------------------------------------------
\5\ See, for example, Angus Deaton, Commodity prices and growth in
Africa, Journal of Economic Perspectives--Volume 13, Number 3--Summer
1999--Pages 23-40
---------------------------------------------------------------------------
Ghana provides a good example of the consequences of policies
intended to shift income from producers of basic commodities to
industries that use those products to create more value added. A
government dominated by elites with an economic interest in development
of industry adopted policies to keep prices of agricultural products
low. These price controls made exports a much more attractive outlet
for agricultural commodities, and to prevent this the government
established marketing boards with exclusive rights to buy commodities
from farmers and resell them. The outcome of depressed prices to
farmers, contraction of a previously successful agricultural sector,
and no success in creating sustainable industries with subsidies.\6\
---------------------------------------------------------------------------
\6\ Robert Bates, Markets and states in tropical Africa: the
political basis of agricultural policies, Univ of California Press,
1981
---------------------------------------------------------------------------
Question 7. Do exports of ``finished products'' add to GDP more
than exports of so-called ``raw materials''? Should one category be
more restricted than the other, or restricted at all?
Answer. No. The market test is which category of exports obtains
the most revenue per dollar of resources devoted. Value added is a
cost, not a benefit, as it is the payment made for labor and for
capital services. If an hour of labor and 1 million of capital are put
to work in one industry, they are no longer available for another. So
the idea is to get as much revenue as possible for the capital and
labor employed, not to employ as much labor and capital as possible per
dollar of revenue.
The contention that there is a choice is also false. There is
enough gas for both.
Question 8. Can U.S. LNG exports solely to Asia still affect the
Europe-Russia dynamic in any meaningful way?
Answer. Yes. The LNG market is a global market so the more LNG
supplies that are added to the market the more the world price of gas
will be driven down . By virtue of there being a world gas market, any
supplies that the U.S. sends to Asia will eventually back out some of
the suppliers to Europe since the suppliers that lose market share in
Asia because of being displaced by the U.S. will likely shift some of
their supplies to Europe thus possibly displacing some Russian supplies
and certainly lowering the price of gas in Europe. Already see it in
U.S. demand for LNG imports disappearing, reducing Russian exports and
prices. Now if the U.S. becomes a significant exporter, it will
increase the pressure on Russia to lower its prices. Doesn't matter
where our gas goes, it will send gas to Europe by displacement
Question 9. When did NERA submit a complete draft of its 2012 LNG
study to the Department of Energy? Were substantive edits required?
Answer. NERA delivered a final complete draft of its report to DOE
on July 11, 2012. No substantive edits were requested, and except for
changing the date and removing the ``draft'' labels, the identical
report was released by DOE in December 2012.
Response of David Montgomery to Question From Senator Cantwell
Question 1. NERA's statistics and analysis of the economic impacts
of liquefied natural gas exports differ quite a bit from statistics and
analysis from some other institutions that are studying natural gas
export issues, such as Charles River Associates and Purdue University.
Could you please explain the differences between Purdue University,
Charles River Associates and NERA data and analysis?
Answer. There is almost no relevant point of comparison between the
statements found in CRA's report and NERA's analysis of the impact of
LNG exports. CRA does not
1. CRA does not discuss the impact of LNG exports on prices, but
rather compares current prices to its own forecast of future prices.
Most of the increase in prices forecasted by CRA occurs in their
reference case, and LNG exports have no greater impact on prices than
in our study. The statement in their report that LNG exports will make
prices nearly triple is grossly misleading. CRA makes that happen by
choosing to label as a ``reference case'' a forecast that is at or
above just about every other independent production of natural gas
prices with continued production of shale gas.
2. NERA did not make a ``reference case forecast'' as claimed by
CRA; rather, we developed scenarios based on EIA's high oil and gas
resource, reference, and low oil and gas resource cases from AEO2013.
Both EIA and NERA recognize that there is great uncertainty about
future natural gas prices, and that any specific forecast has only a
slim chance of turning out to be correct. Therefore, we use a scenario
approach and ask whether the consequences of a policy change, such as
removing limits on LNG exports, are similar across all scenarios.\7\ We
find that in all the scenarios, unlimited LNG exports provide greater
economic benefits than any lesser level constrained by DOE, U.S.
consumers are not ``deprived'' of gas by exports, and U.S. natural gas
prices never rise to oil parity levels or to levels seen in gas
importing countries. For what it is worth, even CRA's price forecasts
fall within the range of the scenarios we considered, and therefore
their efforts to create an issue out of forecasts are pointless.
---------------------------------------------------------------------------
\7\ I have written previously on the topic of the problems of
forecasting natural gas prices and the need for scenario analysis for
robust decisions (see http://www.regulations.gov/
#!documentDetail;D=EPA-HQ-OAR-2011-0660-9966) and our approach to
scenario analysis is consistent with those opinions.
---------------------------------------------------------------------------
3. CRA does no integrated economic analysis of the impacts of LNG
exports on energy supply and demand and the overall economy. Instead,
CRA makes a series of calculations unrelated to the actual effects of
exports on the economy, cherrrypicks data to create an unrealistically
gloomy picture of the vulnerability of chemicals production to foreign
competition, and uses these to conjure up images of disaster. Their
images of disaster arise from four fundamental errors:
a. No analysis of global supply and demand to determine
whether any importer would be willing to buy the amount of LNG
exports claimed by CRA at the prices calculated by CRA
b. The false assumption that there will be no response of
domestic gas production to LNG export demand, creating the
false dichotomy of gas going either to manufacturing or to
exports
c. Misuse of input-output data to support the impossible
conclusion that more GDP will be created if the government
rather than the market allocates energy, and does so in a
manner that gives the largest allocation to those industries
that use the least amount of energy relative to their cost of
production.
d. Failure to compare current data on the relative cost of
chemical production in the U.S. to costs in other countries. As
shown in Exhibit 4, U.S. producers are now able to produce
basic chemicals like ethylene at cost far below those of global
competitors. There has been a surge of investment in capacity
for producing ethylene in the U.S. since natural gas prices
fell. According to the ACC, ``the mix of projects announced
thus far has been heavily slanted toward bulk petrochemicals,
mainly steam crackers for ethylene . . . ''\8\ and these are
not in any way at risk from LNG exports, which at most could
erode 5--10 percent of U.S. manufacturers cost advantage. Thus
CRA's dire warnings of the loss of nearly $100 billion in
chemical investment are a fiction.
---------------------------------------------------------------------------
\8\ American Chemistry Council, Shale Gas, Competitiveness, and New
US Chemical Industry Investment: An Analysis Based on Announced
Projects, May 2013, p. 25
Several absurd conclusions follow from the claims that CRA makes
about the benefits of allocating natural gas to manufacturing and away
---------------------------------------------------------------------------
from exports.
1. CRA assumes that there is an infinite supply of capital and
labor, so that the additional amount of labor and capital needed to
turn 1 Bcf of natural gas into manufactured products does not have to
be taken away from any other productive enterprise (no opportunity cost
for capital and labor). At the same time, CRA assumes that there is a
fixed supply of natural gas, and that no matter how much capital and
labor is added, it is impossible to produce any larger quantity. These
are the only circumstances in which their hypothetical comparison of
using 1 Bcf in manufacturing versus exporting 1 Bcf could have any
relevance in the real world.
2. The recommendation based on this irrelevant calculation that
exports of natural gas should be limited does not go far enough. Value
added is nothing more or less than payments to labor and capital made
out of the revenue of an industry. CRA calculates the ratio of value
added to natural gas used in manufacturing and the ratio of value added
to natural gas used for exports.
a. The ratios their argument rests on are not comparable. CRA
calculates the ratio of value added to natural gas inputs for
manufacturing and natural gas outputs for natural gas
production. This is foolish. A consistent definition for NAICS
211, natural gas (and oil) production, would calculate the
ratio of value added in NAICS 211 to the use of natural gas as
an input to natural gas production. This ratio is in fact very
high--around 98 percent. [If we look at natural gas production
and export as an integrated operation, we see that there is
very little natural gas used as an input to production of
natural gas. Thus on CRA's argument, we should be putting more
resources into natural gas exports in order to make production
as high as possible.
b. CRA claims that natural gas should be allocated to
chemical production rather than exports because there is more
value added in chemical production than in exports. But CRA
stops too soon. Value added per Bcf of natural gas use in
chemicals is greater than in manufacturing as a whole, and in
manufacturing as a whole, less than in services. Therefore, if
CRA is correct about how to maximize GDP, we should first stop
exporting any chemicals, so as to make the natural gas embodied
in those chemicals available to the rest of manufacturing. But
then we should go further and kill off the manufacturing
renaissance itself, which is taking gas away from the service
sector that has even higher value added per Btu of gas used.
c. A moment's reflection on these absurd results would have
revealed how foolish CRA's argument for limiting exports really
is. There is not a fixed supply of natural gas, nor an infinite
supply of capital and labor. Making it the overriding goal of
economic policy to expand the industries that have the highest
value added per Bcf of natural gas used leads to obviously
undesirable outcomes.
d. Thus, CRA has added nothing to the rent-seeking claim of
chemical manufacturers that government should favor them by
reducing their cost of production, and theirs alone, by
preventing suppliers of their inputs from selling them to
others. The logic of their argument should have forced CRA to
conclude that the industry with the value added per Bcf of gas
input should be allocated all the natural gas we produce.
Likewise, the logic of the Dow claim could also be adopted by
U.S. users of polyethylene and other bulk chemicals, who could
equally well argue to prevent exports of bulk chemicals because
there is more value added in manufacturing plastic components
and finished goods from polyethylene than in exporting it.
As to the Purdue analysis, we have reviewed in detail their
published articles and the model code that they have made available.
The model that they use to evaluate impacts of LNG exports does not
appear to include a complete accounting of the costs and benefits of
exports. Costs are fully represented, but we are unable to find
anywhere in their model code a term that represents the benefits of LNG
exports as the difference between the cost of producing the incremental
production that supports exports and the revenues received for those
exports. When the market determines supply and demand for exports, as
it would if exports are not limited, that difference must be positive.
When exports are restricted, the difference is still positive but
smaller. In other words, the revenues from selling a quantity of
natural gas overseas must exceed the cost of producing it or no one
would be willing to sell. This component of the gain from trade appears
to be missing from Purdue's calculation of GDP impacts.
______
Responses of David L. Goldwyn to Questions From Senator Landrieu
Question 1. The focus of our hearing was on LNG exports and the US'
role as a global energy power, but I believe we can export more than
just LNG. We can also export our technical expertise, which is
substantial, to help our allies develop their own resources. Louisiana,
Oklahoma, Colorado and Texas, just to name a few, have world-class
energy service industries. Do you have any specific ideas about how
their expertise may be better developed to assist other countries?
Answer. The U.S. oil and gas industry is world-class, and has
extensive experience with energy development in the U.S. and abroad.
U.S. companies routinely bid on and develop resources abroad, and U.S.
based service companies provide foreign oil companies (be they national
oil companies or privately-held companies) with experienced labor and
cutting edge technologies. The industry is already active abroad in
developing indigenous supplies of oil and gas, including shale and
other unconventionals, in ways that are beneficial to both the host
companies and the companies themselves. Greater involvement of U.S.
industry in oil and gas development abroad will raise the likelihood
that indigenous resource development will be successful, and that the
advanced technologies and best practices that have been perfected over
time in the U.S. will be safely and efficiently implemented abroad.
Industry can also help by participating in and/or helping to shape
vocational education programs to help train skilled labor abroad,
another effort that benefits the host government, local communities and
U.S. companies that may later need that skilled labor to complete its
projects in that country.
Industry can also assist by encouraging foreign nations interested
in shale oil and gas development to participate in the Unconventional
Gas Technical Engagement Program run by the Department of State.
Intended to help nations abroad set legal, regulatory and fiscal
frameworks that will both ensure safe development and encourage foreign
investment, UGTEP connects foreign countries with multiple U.S.
Government agencies that work in tandem to share the U.S. experience
and lessons learned. Both the industry and the host government will
benefit from strong legal, regulatory and fiscal frameworks that will
protect investments and the environment.
Question 2. What can the US do now to help our friends in Ukraine
develop their own energy resources?
Answer. Today, the U.S. can continue to engage Ukraine on a
bilateral basis to encourage the prudent development of its domestic
resources, but the prospects for short-term success are limited so long
as there is a high risk of civil war or Russian intervention in
Ukraine. Such security challenges and political uncertainty raise the
risks for any company interested in investing in Ukraine, and it is
important that the resolution of those security concerns is the first
priority.
In the long run, it is likely that U.S. companies will remain
interested in the prospect of developing Ukraine's energy resources.
The U.S. government can work with the new Ukrainian government to
ensure that the legal and fiscal frameworks that it puts in place
respect and protect foreign investments, providing a measure of
certainty to companies interested in investing.
Question 3. Also please outline what kind of investment from the
U.S. you believe would make a significant impact in Ukraine?
Answer. U.S. investment in energy efficiency technologies, offshore
and unconventional gas, and energy transportation services would be
helpful to Ukraine. All of these technologies would help to reduce
Ukrainian dependence on gas imported from Russia, either by reducing
the gas demand (through energy efficiency), or by reducing the need for
Russian imports by increasing domestic production or creating new
connections to European gas infrastructure.
Question 4. Can you discuss what role the North American energy
alliance of the United States, Mexico, and Canada, can play in helping
not only Ukraine but the rest of our allies around the world?
Answer. North America is growing increasingly more self-sufficient
in energy production, a trend that has huge implications for our allies
around the globe. While I focused on the growth of oil and gas
production in the U.S. in my testimony, Canada has also seen its
domestic production grow significantly and Mexico is currently
undertaking major energy reforms that may change the outlook for their
production as well. The benefits of increased self-sufficiency for
North America are numerous: increased energy security, limited exposure
to global price fluctuations, and even climate benefits from the
production of natural gas. Our allies will also benefit, and in fact
already have- Europe benefitted from the availability of LNG cargoes
that were no longer needed by U.S. consumers after the beginning of the
shale gas boom. The availability of North American energy on
international markets will give our allies, many of who are dependent
on imported energy, greater power when it comes to negotiating
contracts for imports. The U.S. is considering energy exports today,
and so is Canada. Like the U.S., Canada is viewed as a reliable global
trading partner, and the availability of its energy resources on the
global market would have a similar effect as exports of U.S. oil and
gas. Our allies will benefit from reliable, competitively priced
supplies of oil and gas, as well as from increased negotiating power.
Question 5. I believe that a strong case has been made for the U.S.
to have a measurable impact on the global LNG market. We must allow
export terminals to enter the market quickly enough to seize a piece of
the growing global demand for LNG. It would seem, then, accelerated
approval for those projects most likely to be built would have the
greatest positive impact on our allies and our most reliable trade
partners- what is your opinion on:
5a. Separating those projects that have spent considerable time and
money to file with FERC into a separate approval queue?
5b. Separating those projects under the jurisdiction of United
States Maritime Administration (MARAD), which currently has
jurisdiction over two projects, into a separate queue in order to
better reflect their different approval process and timeline?
Answer. Accelerating approval of commercially mature projects would
provide an additional measure of certainty to the companies seeking to
develop those projects, as well as to the foreign consumers that seek
to contracts supplies of U.S. LNG. The Department of Energy has been
diligently completing the national interest determinations it is
statutorily required to complete, and there have been few complaints
about the agencies ability to successfully complete that process.
Unfortunately, the chronological queue set by the Department does not
take issues of commercial maturity into consideration. As such, mature
projects that have spent considerably more time and money to attain
their FERC approval may be forced to wait for DOE approval, in line
behind projects that may not have even filed with FERC yet. I believe
that there are ways to improve this process and provide commercially
mature projects with some level of certainty that they will receive
their export permits in time to complete their financing obligations
and sign contracts with consumers. One option would be for DOE to make
it clear that it will consider the applications of projects that have
completed the FERC process or the MARAD process in advance of projects
that have not. I explained more about this idea, which I have referred
to as `jump the queue,' in a piece for the Brookings Institution last
year. It is my understanding that such a policy would within the
Department's jurisdiction, and could even fall within the requirements
of the Natural Gas Act that the agency should complete its national
interest determination within 90 days of a final decision by FERC or
MARAD.
Question 6. During the hearing we discussed the need for America to
become an energy super power and ensure our allies have the ability to
secure contracts and access natural gas free from fear of price gouging
from non-democratic and anti-free market nations.
6a. With the current situation in Ukraine much has been made about
Russia's long term gas contracts in Europe. Can you go into further
detail about how many contracts Russia has in place with what countries
and when they are set to expire?
Answer. Russia has long-term contracts with German and other gas
consumers. The details of these contracts are not easily available and
some of those contracts may be the subject, at least in part, of the
European Union's anti-trust case against Gazprom. Russia has already
renegotiated some of its long-term contracts to reflect more
competitive prices, but they will have little impetus to renegotiate
more contracts in the absence of competition for the European market
from the U.S. and other alternative suppliers.
Responses of David L. Goldwyn to Questions From Senator Murkowski
Question 1. Please briefly describe your involvement in the
creation of State Department's unconventional gas technical engagement
function.
Answer. While serving as Secretary Clinton's Special Envoy for
International Energy Affairs, my team and I evolved bilateral shale gas
initiatives with China and India into the Global Shale Gas Initiative.
We invited over 23 countries to a two-day workshop and site visit in
August 2010 to learn how to develop their shale resources safely and
efficiently. We subsequently began bilateral engagement under this
rubric with Poland, Jordan, Morocco and Ukraine.
Question 2. Is expediting LNG exports from the U.S. still warranted
even if the State Department technical engagement program is enhanced?
Answer. Yes, I believe that expedited LNG exports from the U.S.
would be warranted even in the light of enhanced State Department UGTEP
activity. Both increased availability of U.S. LNG and increased
production of indigenous European natural gas would serve to help
diversify Europe's gas supplies and provide the continent with greater
negotiating power vis-a-vis Russia and other major exporters of natural
gas. Both of these are long-term strategies in that neither will
immediately provide additional gas to European consumers, but both
could still provide immediate relief in the form of price negotiating
power because of the importance of expectations in price-setting. The
expectation of future supplies of gas, be they indigenous production or
U.S. LNG, will help to push down prices of gas today.
Question 3. Is expediting LNG exports from the U.S. still warranted
even if structural reforms are needed in Ukraine?
Answer. Yes, I would argue that the expedition of LNG exports from
the U.S. is warranted regardless of the need for structural reforms in
Ukraine, or in other countries. Access to competitively priced LNG
supplies will benefit the economies of our allies significantly, even
before structural reforms are complete. Structural reforms will remain
important in the long run, in order to ensure that European energy
markets operate efficiently and accurately price valuable goods like
natural gas, but these reforms will take time. Market reforms are
particularly important in Ukraine, which has long had disputes with
Russia over the pricing of natural gas. If the price at which natural
gas is sold internally in Ukraine continues to not reflect the true
international market price of that commodity, then the nation will have
significant difficulty meeting the terms of contracts for natural gas
with suppliers other than Russia as well. While expedited LNG exports
from the U.S. will be beneficial regardless of the status of structural
reform, because they will put downward pressure on prices, Ukraine and
many of its European neighbors will be unable to take full advantage of
those benefits until reforms are fully implemented.
Response of David L. Goldwyn to Question From Senator Barrasso
Question 1. In your testimony, you state that: ``[e]xports of LNG
to Asia would be in the U.S.'s economic and strategic interests.'' You
go on to explain that: ``Russia aspires to double its share of the
global LNG trade by 2020 in large part by meeting large shares of Asian
demand growth.'' You note that Russia is seeking closer relationships
with Japan and China. Finally, you ask whether: ``we would prefer for
Asia to plan to rely on Russian gas or on U.S. LNG as it builds its
strategic alliances.''
a. Would you explain how U.S. LNG exports are one of the few direct
tools we possess to limit Russian market share in Asia?
Answer. As you noted from my testimony, Russia is moving
aggressively to increase its market share in Asia. Asian buyers,
including U.S. allies, will make decisions to enter into supply
contracts largely on the basis of commercial interests rather than
geopolitical concerns. Geopolitical issues will be taken into account
only to the extent that they affect the competitiveness and reliability
of the supplier. With these issues in mind, it is clear that one of the
few tools the U.S. can utilize to directly limit Russia's market share
is to allow U.S. firms to offer LNG at competitive prices in a way that
is responsive to the commercial interests and needs that are preeminent
in the minds of Asian buyers.
b. Would you explain how U.S. LNG exports will ensure that any
Russian gas that is exported to Asia is done so at competitive prices?
Answer. In recent years LNG supplies made surplus by the US shale
gas boom created a spot market for LNG that put downward pressure on
Russian prices, forcing Gazprom to renegotiate contracts with several
Western and Central European customers. In that case, the shale gas
boom freed up LNG cargoes initially destined for the U.S. to European
customers. Henry Hub-linked U.S. LNG contracts, even after accounting
for liquefaction, transportation, and regasification costs, could
render similar impacts in Asia. Like other consumers, Asian buyers
value competitive costs, reliability, and timeliness. Russia has a
history of expensive oil-linked contract prices, and ongoing events in
Ukraine may bring into question whether it is a reliable, competitive
supplier. To gain market share in Asia and obviate buyer concerns,
Russia will therefore have to offer customers incentives--including
concessions on price--if it is forced to compete with U.S. suppliers.
c. How does ensuring that Russian gas is sold at competitive
prices-whether in Asia or Europe-serve U.S. strategic interests?
Answer. Continued high oil and gas export revenues are crucial to
Russia's economy. The U.S. Energy Information Administration (EIA)
estimates they account for over 50 percent of total Russian federal
budget revenues. Declining oil and gas revenues may force Russia to
diversify its economy and gradually embrace a model of broader, market-
based economic growth, where new industries emerge whose leaders are
less dependent on the largesse and goodwill from the authorities in
Moscow. Lowering natural gas prices for allies in Asia and Europe helps
their balance of trade, promotes growth in important export markets for
the U.S. strengthens the economies of struggling allies, and makes
natural gas more cost competitive versus coal, which advances US
climate goals.
______
Responses of Adam Sieminski to Questions From Senator Landrieu
Question 1. What are the prospects for increased production in the
Haynesville shale? As you know, rig counts have been going down for
some time, but your testimony seems to indicate it could be due for a
comeback. What is driving this resurgence and could increasing exports
expand it further? And why?
Answer. The number of drilling rigs in the Haynesville has risen
from 45 in late 2013 to 54 as of March 2014. Recent increases in
drilling activity and the high productivity of the wells currently
being drilled has stemmed the decline in natural gas production from
the Haynesville, which peaked at 10.5 billion cubic feet per day (Bcf/
d) in November 2011 and has now stabilized around 6.5 Bcf/d in the
first quarter of 2014. Natural gas production in the Haynesville is
expected to increase in the coming months.
The Haynesville is currently an attractive and resurgent play for
four reasons.
Higher prices: With Henry Hub natural gas futures prices
above $4.00, producers see an opportunity to drill profitable
wells even outside of the most productive acreage.
Below-average natural gas storage levels: After a very cold
winter, working natural gas inventory is below normal levels
going into the April through October injection season.
Increased natural gas storage demand is supporting higher
prices, and producers in the Haynesville may deploy more rigs
to meet this demand.
Pipeline capacity: With ample pipeline capacity to bring
natural gas to nearby markets, producers do not experience long
delays to tie new wells into takeaway infrastructure, as can be
the case with new wells in the Marcellus.
Proximity to proposed LNG export facilities: The Haynesville
shale play is located in relative close proximity to the Sabine
Pass LNG export terminal project, of which the first 1.1 Bcf/d
of capacity is expected start operations during the fourth
quarter of 2015, with another 1.1 Bcf/d of export capacity from
that facility expected to become operational within the
following two years. There are other proposed LNG export
facilities in the Gulf region, which, if built, would also
support demand for natural gas from the Haynesville.
Question 2. Concerns around exports have often been based on
concerns around long term U.S. supply. Since you have been
Administrator, estimates of U.S. gas supply have consistently gone in
only one direction-up.
2a. Is EIA confident in the long term stability of natural gas
supply?
2b. How have recent advances in technology and other factors
contributed to this?
Answer. The U.S. has a relatively abundant supply of dry natural
gas with technically recoverable resources at over 2,200 trillion cubic
feet (Tcf) as of January 1, 2012. The growth in domestic natural gas
production is supported primarily by increases in shale and tight gas
investment and development, which is, in turn, supported by continual
improvements in technology. Continued investment in the development of
shale and tight gas is expected given the healthy demand growth for
natural gas. In addition, further technological improvement and the
continued application of `best practices' in current developing plays
will contribute to the economic viability of domestic natural gas
supply. However, growth potential and sustainability of domestic
production hinge around uncertainties in key assumptions, such as well
production decline, lifespan, drainage areas, geologic extent, and
technological improvement-both in areas currently being drilled and in
those yet to be drilled. EIA reviews well-level production performances
on a regular, on-going, basis and revises assumptions accordingly. The
Low Oil and Gas Resource and High Oil and Gas Resource cases in the
AEO2014 explore the effects of changes in Reference case assumptions
about resource size and quality and technology advances. In all three
cases, domestic natural gas production is projected to increase from
the 2013 level of 24 Tcf. In the Reference case and the High Resource
case, total natural gas production grows to 38 Tcf and 46 Tcf per year
in 2040, respectively. In the Low Resource case, total natural gas
production plateaus at just under 29 Tcf per year from 2027 through
2036, then declines to 28 Tcf in 2040.
An article in the Issues in focus section, ``U.S. tight oil
production: Alternative supply projections and an overview of EIA's
analysis of well-level data aggregated to the county level,'' provides
more information on the alternative resource cases.
Responses of Adam Sieminski to Questions From Senator Murkowski
Question 1. Has the Energy Information Administration noticed any
supply disruptions or price dislocations resulting from increased
natural gas exports via pipeline to Mexico and Canada in recent years?
Answer. EIA has not noticed any supply disruptions or price
dislocations resulting from increased natural gas exports via pipeline
to Mexico and Canada in recent years. U.S. natural gas exports via
pipeline have grown 46% between 2010 and 2013.
U.S. natural gas pipeline exports to Canada accounted for 58% of
total U.S. pipeline exports in 2013. The 911 billion cubic feet (Bcf)
that was exported in 2013 is a 23% increase over 2010 export levels.
Most U.S. natural gas exports to Canada occur at St. Clair, Michigan,
which accounted for about 64% of total exports to Canada, although some
of the gas exported at St. Clair originates in Canada. While exports
have risen and imports have decreased in recent years, the United
States was still a net importer from Canada in 2013.
In 2013, U.S. natural gas exports to Mexico were nearly double the
level they were in 2010. In 2013, the U.S. exported a record 658 Bcf to
Mexico. Exports to Mexico are largely used to supply electric power
plants. As such, natural gas exports to Mexico show levels of
seasonality counter to the majority of U.S. gas, peaking during the
summer rather than winter months, when electric demand in Mexico is
higher due to increased air conditioning load.
Question 2. The EIA forecasts certain levels of LNG exports from
the U.S. in its reference case. Do you expect these export levels to
have any impact on global LNG markets (e.g., on price, contract
negotiations, etc.)?
Answer. EIA expects that introducing new lower priced supplies from
the United States into the LNG market will place downward pressure on
LNG prices and provide some additional leverage for buyers during
contract negotiations, particularly in Asia. The degree that prices
actually fall will also depend on additional supply, as well as demand,
in the rest of the world. EIA is projecting U.S. LNG exports to reach
3.7 trillion cubic feet (Tcf) by 2030, with world LNG volumes at 20.6
Tcf. For perspective, in 2012, LNG supplied 12 Tcf or 10% of world
consumption, imports via pipelines supplied 21%, and domestic
production supplied the remaining.
While EIA has not studied the current or potential impact of U.S.
LNG exports on contract negotiations, there is some anecdotal evidence
and expert opinion that having potential U.S. LNG exporters negotiating
with potential buyers around the world is influencing other contract
negotiations, even before the United States has started to export LNG.
Question 3. Does the Department of Energy's Office of Fossil Energy
have access to the latest EIA data and analysis pertaining to U.S.
natural gas production and consumption, and forecasts of both?
Answer. All of EIA's data and analyses pertaining to U.S. natural
gas production and consumption, and forecasts of both, are published on
EIA's website. Staff within EIA and the Office of Fossil Energy have
productive working relationships and regularly interact on both data
and analysis issues, but there are no special access arrangements.
Response of Adam Sieminski to Question From Senator Cantwell
Question 1. During the hearing, there was much discussion of the
analysis and forecasting of the effects of different levels of
liquefied natural gas exports. I note that considerable government
resources have been spent, and will continue to be spent, to ensure
that our natural gas export policy remains in the public interest.
I am concerned that no such analysis yet exists to consider the
effects of a potential reversal of the long-standing ban on crude oil
exports. On February 3rd (over seven weeks ago), then-Chairman Wyden
and I requested that your Administration look into potential market
impacts of such a major policy change. While I understand that this
kind of analysis requires considerable time and attention, I am
concerned that it is not yet clear what kind of analysis EIA plans to
undertake on this issue.
Our constituents would feel the impacts of any market changes that
would be associated with such a major policy change, both in terms of
prices that they would pay at the pump and the increased quantities of
oil that would be finding new export transit routes, potentially via
rail through Washington State.
How can we assure our constituents that their federal government
will consider this issue thoroughly and thoughtfully?
Answer. The potential reversal of the long-standing ban on crude
oil exports is one of a number of issues related to the implications of
the dramatic rise in domestic oil production that the Energy
Information Administration (EIA) is considering and about which EIA has
already published information (see list that follows). EIA is
continuing to analyze and address these issues and implications and
intends to publish a series of focused analyses that will address
effects of a possible relaxation of current limitations on U.S. oil
exports as well as the following topics and issues related to the
implications of the dramatic rise in domestic crude oil production:
growth in U.S. oil production and trends in liquid fuels
consumption
impacts on oil logistics and refining
crude oil and petroleum product prices
crude oil and petroleum product trade patterns
Because of the dynamic nature of the U.S. crude oil and petroleum
products markets, EIA intends to publish its findings in stages over
the course of 2014. This will ensure that the most up-to-date data is
incorporated in its work.
Short Term Energy Outlook
3/11/2014 STEO: EIA expects net import share to decline to 25% in
2015, lowest level since 1971
Annual Energy Outlook
12/16/2014 Slide 10: U.S. maintains status as a net exporter of
petroleum products
Today In Energy
3/24/2014 China is now the world's largest net importer of
petroleum and other liquid fuels
2/25/2014 Oil net imports have declined since 2011, with their
value falling slower than volume
1/30/2014 Americas are an important market for liquid fuels and
natural gas trade
1/22/2014 Oil and natural gas import reliance of major economies
projected to change rapidly
1/9/2014 U.S. crude oil production growth contributes to global oil
price stability in 2013
10/4/2013 U.S. expected to be largest producer of petroleum and
natural gas hydrocarbons in 2013
This Week in Petroleum
3/12/2014 U.S. crude oil production in 2013 reaches highest level
since 1989
1/23/2014 Crude oil imports continue to decline
1/8/2014 Strong U.S. crude oil production growth forecast through
2015
1/3/2014 Shifting production, demand patterns alter oil markets in
2013
10/30/2013 Recent decline in Gulf Coast crude oil imports mainly
affects lighter grades
9/18/2013 Rail is Likely Supplying an Increasing Share of East
Coast Crude Oil
8/14/2013 New Traffic Patterns Emerge to Supply Crude Oil to West
Coast Refiners
7/10/2013 U.S. crude oil increasingly moves by barge, truck and
rail
5/30/2013 Eastern Canadian refineries are increasing their use of
U.S.-sourced crude oil
5/1/2013 Absorbing Increases in U.S. Crude Oil Production
4/3/2013 Mid-Continent Crude Oil Markets Continue to Adjust to
Rapid Rise in Bakken Production
3/20/2013 Total U.S. crude oil imports continue to decline in 2012
but regional differences persist
1/16/2013 Upcoming Pipeline Capacity Additions Will Facilitate
Continued Growth in Crude Oil Shipments from Midwest to Gulf Coast
1/9/2013 Strong U.S. Crude Oil Production Growth Forecast Through
2014
11/28/2012 Market Implications of Increased Domestic Production of
Light Sweet Crude Oil
10/26/2012 The Impact of U.S. Crude Oil Production on Gulf Coast
Crude Imports
Appendix II
Additional Material Submitted for the Record
----------
Statement of Anita Orban, Ministry of Foreign Affairs, Hungary Before
the House Subcommittee on Energy and Power of the Energy & Commerce
Committee of the United States House of Representatives Geopolitical
Implications of LNG Export Liberalization March 25, 2014
Thank you Chairman Whitfield, Ranking Member Rush, and Members of
the subcommittee. I appreciate the opportunity to be here today to
provide my perspective on the importance of LNG export liberalization
for the Central Eastern European region. I applaud the leadership of
this Committee to look at the geostrategic aspect of US natural gas
exports, which along with my colleagues from the Visegrad Group
(currently chaired by Hungary), the Baltics and Eastern Europe we have
been long advocating.
Mr. Chairman, we are in the middle of the largest security crisis
that Europe has seen since the end of the Cold War. And energy
dependence, especially that of Central Eastern Europe and Ukraine, is
once again on everybody's mind. With every new Russo-Ukrainian crisis,
US awareness about the strategic vulnerability of our region, and the
determination to mitigate it, should only grow. Energy import
dependence is one of the key factors that limit the political options
available to these countries as US allies and adherents of a rules-
based international order. Russian ambitions in the former post-
Communist space are very clear and energy security is at the heart of
this.
The European Union's dependence on external energy sources is
massive. Today, Europe covers over 64 percent of its natural gas demand
from imports. Approximately four-tenth of this import, i.e. 28 percent
of Europe's total gas consumption, comes from Russia via three
different routes--the Brotherhood pipeline via Ukraine, the Yamal
pipeline via Belarus and the North Stream pipeline under the Baltic
Sea. Sixty-two percent of Russia's natural gas exports to the EU go
through the first route, i.e. via Ukraine.
The import dependence of EU member states varies widely, in the
most extreme cases reaching 100 percent of their total gas consumption
(Baltic States, Slovakia). But there is no country on the eastern side
of the EU where the share of Russian gas imports is lower than 70
percent of its total gas import. One can contrast these figures with
the situation in the United States, which in 2007, before the onset of
the shale gas revolution, imported only 16 percent of its natural gas
needs and U.S. unconventional gas explorations could make America the
largest natural gas exporter by 2015.
The popular interpretation of energy dependence, and natural gas
dependence, in particular, is widely associated with supply cut-offs
which wouldn't be without precedent in Central Europe. Supply cut may
indeed happen again with unpredictable consequences for countries along
the Eastern border of the European Union, as well as for Ukraine. Yet,
if used, it would seriously hurt the supplier as well: in the short
term with loss of revenue, in the mid-term with loss of its markets.
Supply cut-offs are so dramatic and so obviously political that they
invariably trigger actions on the receiving end to ease the dependency.
Moreover, one cannot cut off the supply for one country only--everybody
along the pipeline route will suffer. A supply cut-off mobilizes and
unites the dependent parties and results in decreasing dependency in
the medium term. It is an absolute last-resort measure that ultimately
undermines the very dependence that enabled it in the first place.
The best example to illustrate this point is the natural gas crisis
of 2009. Then, Russia wanted to teach a lesson to Ukraine and cut off
the gas going into the country. With it, Moscow discontinued the supply
to most of Central Eastern Europe, as well. The crisis itself lasted
for less than two weeks, but its most important impact was the ensuing
cooperation and diversification efforts among the affected countries. A
new approach emerged, whereby these countries connected their
pipelines' North-South direction and enhanced their storage capacities,
ultimately making each of them more crisis-resistant. Even more
importantly, energy security came to the forefront of security
considerations and became a flagship topic within the European Union.
The Hungarian Visegrad Presidency also put this on top of the group's
agenda for 2013-2014. Looking back, it would be hard to deny that the
2009 supply cut off was the single most important trigger event for
improving the Central Eastern European region's energy security.
It is prices that provide the best economic and political tool for
the monopoly supplier. Whoever has the monopoly, calls the shots:
higher prices afflict a very tangible cost on the dependent country's
economy and population, while stuffing the supplier's coffers and
allowing it to reap the economic rents to finance further political,
economic or military actions. Hiking prices can always be presented as
pure business action as opposed to a foreign policy measure. Most
importantly, it can be applied in a discriminatory manner. The supplier
can raise the price for the non-cooperative and lower it for the
friendly. Price movements, especially price discrimination, lead to
asymmetrical negotiations and side-deals as opposed to transparency
and, ultimately an affordable and secure energy supply for Europe.
The example of Ukraine is the most telling of all. The country
currently imports about 26 billion cubic meters, or half of its
consumption, of natural gas. All of its imports 4 come from Russia.
Consequently, Moscow has been free to use price discrimination as it
saw fit. Although the cost of gas grows linearly with the distance it
travels, Germany pays less for the same Russian gas than any country on
the route between the two. In fact, Russian gas in Germany was so much
cheaper than the price paid by Ukraine that traders resold 2 billion
cubic meters of this Russian-German gas to Ukraine in 2013.
In December 2013, Russia rewarded the former leaders of Ukraine
with a 33 percent discount in natural gas prices for not signing the
Association Agreement with the European Union. The new price of 268.5
dollars per thousand cubic meters is about 30 percent lower than the
lowest price in the EU. As recent events in Ukraine have gone against
the interests of Russia, Moscow is now raising the price to 400
dollars. Such a price would exact a massive toll on the already heavily
indebted Ukrainian state. The only way to limit the monopoly supplier's
ability to exact damage and sow discord through the deployment of the
price weapon is to establish alternative supply routes. Once they are
in place, the monopoly supplier can no longer use the price
discrimination tool freely, as it needs to consider how its actions
affect the viability and attractiveness of alternative supply channels.
The recent deal between Gazprom and the Greek gas company DEPA is a
case in point. In February this year, Gazprom agreed to a 15 percent
price cut for Greece to be applied retroactively for about 7 months.
Experts claim that Greece's LNG terminal and the recent developments in
the Southern Gas Corridor, which will bring Azeri gas to Greece, among
other countries, in the medium term factored into the negotiations.
Simply put, the mere existence of a credible alternative supplier
exerted significant downward pressure on the natural gas prices set by
the dominant supplier.
We are well aware of the fact that alternative pipeline gas won't
reach Europe before 2019 the earliest. Azeri gas coming in via the
Southern Gas Corridor will benefit Western Europe via Italy rather than
Central and South Eastern Europe. Consequently, for Central Eastern
European countries, the most important task is to create a credible
prospect for alternative natural gas imports.
To do that, Central Eastern Europe needs to ensure both the
capacity and the volume to receive alternative gas. The first is our
homework, which only we can do to build up capacities internally which
allow gas-to-gas competition, create access to different supply options
and create a robust internal European energy infrastructure. In Central
Eastern Europe we need to overcome the dependency inherent in the
traditional East-West pipeline infrastructure in the former Soviet
satellite states by constructing North-South and South-North
interconnectors with the aim to have a robust North-South and South-
North pipeline infrastructure from the Agean to the Baltic Sea. Another
important aspect is enabling the reverse flow of natural gas on these
newly built, as well as older interconnections especially from the West
to the East to ensure that regional markets become truly integrated.
However, Europe has been much less successful in building up the
necessary volumes for alternative supply. This has been largely out of
Europe's control. EU and US sanctions against Iran, the slower than
expected progress in Iraq, the upheaval in North Africa postponed or
put on hold indefinitely most of the potential alternative pipeline
supplies. The only new supply volumes coming in from Azerbaijan as of
2019 are exactly the same quantity as the total supply from Libya which
stopped entirely at the end of 2013, an annual 10 billion cubic meters.
What Central Eastern Europe and the EU in general needs right now
is the additional volume of gas. The most viable option Central Eastern
Europeans have today is LNG. The LNG market has numerous advantages:
many suppliers, liquidity and prices set by supply and demand with no
political strings attached. Access to the LNG market would much weaken
the dependence inherently present in pipeline deliveries.
Access to LNG would also assist Ukraine. During 2013, two
additional capacities were opened from Hungary to Ukraine and from
Poland to Ukraine, enabling the supply of natural gas to Ukraine on
purely market terms. If successful, the LNG supply together with the
existing and planned additional reverse flow capabilities, combined
with Ukraine's own shale gas resources, could provide a reasonably
sized alternative to Russian gas in Ukraine.
However, in the absence of an energy security contribution from US
exports, the global supply of LNG is not at all reassuring. Among LNG
exporters, terrorist and insurgent activity impacts gas operations in
Yemen, Libya, Egypt, Nigeria and Algeria. Qatar has a moratorium on
further exports, while in Asia, some important traditional exporters
like Indonesia are now in decline. To the extent supply grows, it is
locked into rigid long term contracts that can't provide flexible
resilience. Without the large shale gas resources and efficient
competitive markets of the United States, LNG cannot provide an
adequate energy security answer.
The urgency of establishing the region's access to LNG means that
the United States Congress has a potent foreign policy/energy diplomacy
tool at its disposal. By clearing the way for US shale gas to reach
America's Central European NATO allies would provide significant
protection against the deployment of the energy/price weapon.
Today, natural gas prices in the United States are one-third to
one-fourth of the gas prices in Europe, including in Central Europe.
Liberalizing US LNG exports would send a signal to market actors to
kick-start the development of missing infrastructure (LNG terminals,
interconnectors). These developments in turn would put an immediate
downward pressure on gas prices in Central Eastern Europe well before a
single American gas molecule reaches the shores of our region. Energy
diplomacy is not about short term fixes, we operate with long-term
investments and decades long contracts, we know that the timeframe for
US gas exports is 3-7 years.
But it is simply not true that lifting the natural gas export ban
today would not have an immediate effect in the region. It would
immediately change the business calculus of infrastructure investments
and send an extremely important message of strategic reassurance to the
region which currently feels more threatened than any time since the
Cold War. Even with regasification, shipping and associated costs, US
gas would be regarded as an important alternative. And let's not forget
that countries in our region are ready to pay a premium price for
energy security.
In short, by liberalizing LNG exports, by eliminating the legal and
administrative obstacles to the free trading of this vital,
domestically produced commodity, the United States would provide fast
and long-lasting protection for its allies against the most important
dangers of natural gas dependency. Moreover, it would also enable them
to act more freely in assisting Ukraine in case of an energy crisis
developed there. Such a help would be in line with past US leadership
in Central Eastern Europe, which many in our region have perceived to
be waning in the past few years. It is important to note that this is
an elegant, yet very effective tool, which is relatively cheap to use.
It incurs no threat of loss of life, not even a disruption of economic
activities: it is only a removal of a self-imposed barrier. Moreover,
it cannot be seen as targeting any single entity- it is only a form of
help for allies, a common sense solution that helps allies and US
businesses at home. It would be hard to find any other tool so
obviously at hand to the US to demonstrate leadership right now, have
an immediate security impact at a relatively low cost.
Hungary, as chair of the Visegrad group (Poland, Czech Republic,
Slovakia, Hungary) together with several other US allies argued for LNG
export liberalization even before the Ukraine crisis started. We have
reached out to members of Congress and the administration to argue that
the US has a historic opportunity to send a strong message of freedom
to the region by simply letting the markets work. Together with my
Czech colleague, Vaclav Bartuska, we have argued that ``accelerating
the export licensing procedure to allow increased sales to trustworthy,
reliable foreign partners should be a policy that politicians on both
sides of the aisle can support.'' This is not a partisan issue. It is
an American issue that all statesmen in this country must show
leadership on. Numerous Members of Congress recognized the geopolitical
importance of LNG export by introducing and co-sponsoring the different
bills that proposed to lift the ban on export licensing. The situation
in Ukraine only underlines how timely this issue is--but also gives it
additional urgency. The US should seize the opportunity and act now.
Mr. Chairman, Members of the Committee, I believe that doing away
with these export limitations would make economic sense even in better
times. But there is nothing like a crisis to focus the mind. As
representatives of a country that Central Europe has traditionally
looked to for leadership, you know well that you do not always have the
luxury of choosing the time to make some of the most necessary
decisions. But with the post-Cold War settlement crumbling before our
eyes, if there was ever a time for your leadership, it is now--and if
there was ever an issue that would do as much good at as little cost,
it is the issue at hand.
______
Statement of the American Public Gas Association
a consumer perspective
On behalf of the American Public Gas Association (APGA), thank you
for the opportunity to submit testimony for the hearing titled,
``Importing Energy, Exporting Jobs. Can it be Reversed?''
APGA is the national association for publicly owned natural gas
distribution systems. There are approximately 1,000 public gas systems
in 36 states and over 700 of these systems are APGA members. Publicly
owned gas systems are not-for-profit, retail distribution entities
owned by, and accountable to, the citizens they serve. They include
municipal gas distribution systems, public utility districts, county
districts, and other public agencies that own and operate natural gas
distribution facilities in their communities. Public gas systems'
primary focus is on providing safe, reliable, and affordable service to
their customers. The long-term affordability of natural gas has been a
focus of APGA and its members.
APGA has the privilege of representing the views of American
natural gas consumers. We represent the homeowners and small businesses
that rely on affordable natural gas to heat their homes, cook their
meals, power their restaurants, operate small manufacturing entities,
and service businesses. The interests of these millions of Americans
have often been lost in the contentious debate about liquefied natural
gas (LNG) exports. Media outlets have framed the debate as oil and gas
companies on one side and manufacturers on the other.\1\
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\1\ PGA is a proud member of America's Energy Advantage (AEA),
which represents the interests of bothmanufacturers and natural gas
consumers.
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However, as advocates for natural gas consumers, our position is
slightly different from the manufacturing companies that have spoken
out on the issue. Simply put, APGA opposes all exports of LNG from the
lower 48 states. The simple economics of supply and demand, along with
every study that has been conducted on the subject, whether done by the
federal government or by private consulting companies, all reach one
conclusion: exports will increase the price of domestic natural gas.
How adverse that upward pressure on price will be, no one knows. Based
on past experience though, APGA believes the experts who supported the
export of propane would not have predicted the significant adverse
prices homeowners paid this winter for their propane.
What this means for average consumers is that their energy bill for
natural gas service, electricity, and the goods and services they
purchase--all of which have the cost of energy built into their
prices--will escalate. We can debate about net benefits, aggregate
welfare measures, and other economic metrics, but ultimately LNG export
translates into people paying more for energy and other goods and
services, and consequently having less disposable income. This fact
applies to businesses as well. As energy costs go up, companies are
less competitive and hire fewer workers, whether they serve customers
down the street or compete for customers around the globe.
Before discussing the details of APGA's opposition to the export of
LNG, there is one message that we would like Congress to focus on when
thinking about this issue: it is irrefutable that consumers and
businesses will pay increased prices for energy and all goods and
services if LNG exports are sanctioned.
LNG Export
The Department of Energy Office of Fossil Energy (DO- FE)
commissioned two studies regarding the effects of LNG exports. The
first, conducted by the U.S. Energy Information Administration (EIA),
studied the impact of LNG exports on domestic prices and concluded that
exports will increase prices with higher volumes causing more drastic
increases.\2\ The second, conducted by NERA Economic Consulting,
focused on the macroeconomic effects of LNG exports, which were found
to be a net positive while at the same time confirming that LNG exports
would raise domestic natural gas prices. This would ultimately burden
the U.S. consumers who can least afford the increase and disadvantage
domestic manufacturing.\3\ Policymakers must consider both of these
studies-and and other non-governmental studies on the subject-and in
doing so, consider the profound tradeoffs entailed by exporting away an
increasingly valuable U.S. fuel resource rather than supporting its use
domestically.
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\2\ Effect of Increased Natural Gas Exports on Domestic Energy
Markets, U.S. Energy Information Administration (Jan. 2012) (``EIA
Export Report''). As requested by the DOE/FE, the EIA Export Report
considered four scenarios: (1) 6 Bcf/d phased in at a rate of 1 Bcf/d
per year (low/slow scenario); (2) 6 Bcf/d phased in at a rate of 3 Bcf/
d per year (low/rapid scenario); (3) 12 Bcf/d phased in at a rate of 1
Bcf/d per year (high/slow scenario); and (4) 12 Bcf/d phased in at a
rate of 3 Bcf/d per year (high/rapid scenario).
\3\ Macroeconomic Impacts of LNG Exports from the United States,
NERA Economic Consulting (Dec. 2012) (``NERA Study''). APGA understands
(and applauds the fact) that the merits and demerits of the NERA Study
will be assessed independently by DOE/FE in a separate proceeding (77
Fed. Reg. 73627); and hence APGA's comments here on the NERA Study are
only preliminary and not intended to represent its complete assessment
of the NERA Study.
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Increased production of natural gas in the U.S. to meet domestic
demand provides the nation with an unprecedented opportunity to pursue
energy independence and sustained economic growth through a
manufacturing renaissance grounded in plentiful, low cost natural gas.
Price increases will also jeopardize the viability of natural gas as a
bridge fuel in the transition away from carbon-intensive and otherwise
environmentally problematic coal-fired electric generation and inhibit
efforts to foster natural gas as a major transportation fuel, which is
important in weaning the U.S. from its historic and high-risk
dependence on foreign oil.
Background
To date, over 30 applications have been submitted to DOE to export
domestic LNG from the United States to free trade agreement (FTA) or
non-FTA nations based on the promise of huge unconventional domestic
gas reserves and huge profits for the few affected companies. Of those
applications, six have already been approved, meaning that 8.5 Bcf/day
has been approved by DOE for export to non-FTA countries. Also to date,
the total export capacity applied for is 38.51Bcf/d and 35.86 Bcf/d to
FTA and non-FTA nations, respectively. Total natural gas production was
approximately 67 Bcf/d in the U.S. in 2013\4\; therefore, based on
current data, the total applied-for export capacity, if authorized,
would have the potential effect of increasing the demand for natural
gas by nearly 54 percent.
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\4\ See: http://www.eia.gov/naturalgas/issuesandtrends/production/
2013/
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Policymakers in Congress and at DOE have a duty to ensure that any
non-FTA application under consideration for export authority is not
inconsistent with the public interest pursuant to NGA section 3(a).\5\
The ``public interest analysis of export applications'' should be
``focused on domestic need for natural gas,'' threats to domestic
supply, and ``other factors to the extent they are shown to be
relevant.''\6\
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\5\ 15 U.S.C. Sec. 717b(a).
\6\ Sabine Pass Liquefaction, LLC, Opinion and Order Denying
Request for Review Under Section 3(c) of the Natural Gas Act, October
21, 2010, FE Docket No. 10-111-LNG.
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For exports of LNG to countries with which the United States has a
free trade agreement, the application for export authority is
automatically assumed to be in the public interest and is granted
almost instantly without opportunity for the public to comment.
For exports to non-FTA countries, which are the focal point for the
current export debate, DOE adopts a rebuttable presumption that exports
are in the public interest. Those opposed to exports face a nearly
insurmountable challenge of proving a negative; more specifically, that
each individual application is not in the public interest. APGA has
filed motions to intervene and protests every non-FTA application,
pointing out the deleterious impacts of the applications on the
nation's consumers and businesses, relying on, among other materials,
the EIA Export Report and the NERA Study. But since APGA does not have
the resources to conduct independent detailed market impact analyses
for each application in order to prove to DOE that exports are not in
the public interest, the die is cast and the export applications are
granted.
APGA believes that the burden of proof should be shifted to
exporting companies. Companies that seek to export the U.S.'s
plentiful--but ultimately finite-reserves of a strategic commodity
should have to prove to DOE that exporting LNG benefits not merely
their bottom line, nor oil and gas producers, but all sectors of the
economy including natural gas consumers. Surely, consideration of the
public interest requires no less.
LNG Exports Will Increase Domestic Natural Gas Prices
According to the EIA Export Report, ``[l]arger export levels lead
to larger domestic price increases.''\7\ EIA also concluded that
``rapid increases in export levels lead to large initial price
increases,'' but that slower increases in export levels will
``eventually produce higher average prices during the decade between
2025 and 2035.''\8\
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\7\ Id. at 6.
\8\ Id.
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Even under the ``low/slow'' baseline scenario in the EIA Export
Report, price impacts will reach about 14 percent.\9\ Under the ``low/
rapid'' baseline scenario, EIA projects that wellhead prices will be
approximately 18 percent higher in 2016 than they otherwise would
be.\10\ In fact, under all of the low scenarios accounting for
different economic and shale reserve conditions, EIA predicts price
impacts well above 10 percent that then moderate.\11\ Under the ``high/
rapid'' scenario, EIA projects that prices will increase by 36 percent
to 54 percent by 2018 depending on natural gas supplies and economic
growth. It is important to note that the low/slow baseline assumed an
export level of 6 Bcf/day, which as noted above has already been
exceeded in terms of approvals, and that the high/rapid scenario
assumed an export level of 12 Bcf/day, which appears imminent given
recent actions by DOE.
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\9\ Id. at 8.
\10\ Id.
\11\ Id. at 9.
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The NERA study also concluded that the higher the volume of LNG
exports, the more domestic natural gas prices will rise. Both studies
underestimate potential price increases because they are based on
outdated projections of domestic demand for natural gas and the
questionable assumption that the demand for natural gas is sufficiently
elastic to prevent significant price spikes.
Domestic Demand Underestimated
On December 16, 2013, the EIA issued the Early Release of its
Annual Energy Outlook for 2014 (AEO2014). The AEO2014 projects greater
increases in domestic demand for natural gas than projected in prior
Annual Energy Outlooks. In particular, the AEO2014 projects greater
increases in demand for natural gas from domestic industry,
particularly from the bulk chemicals and metals-based durables
shipments, which ``grow by 3.4 percent per year from 2012-2025.as
compared to 1.9 percent in AEO 2013.''\12\
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\12\ AEO2014 Early Release Overview at 1.
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AEO2014 also projects greater increases in future reliance on
natural gas for electric generation than projected by the EIA in
previous Annual Energy Outlooks. In fact, the AEO2014 Reference case
projects that by 2040 natural gas will account, ``for 35 percent of
total electricity generation, while coal accounts for 32 percent.''\13\
In AEO2013, natural gas would only overtake coal in terms of the share
of electric generation by 2040 under the High Oil and Gas Resource
scenario and would not have done so under the Reference case.
---------------------------------------------------------------------------
\13\ AEO2014 Early Release at 2.
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Moreover, the shift to natural gas for electric generation will be
further increased by the forthcoming implementation of the
Environmental Protection Agency's (EPA) pending Mercury Air Toxic
Standards (MATS), which will force the retirement of a large number of
coal-fired generators.
Both studies commissioned by DOE-FE rely on projected natural gas
demand from AEO2011. These outdated projections fail to account for
current EIA expectations regarding future demand and tend to
overestimate demand elasticity, or the ability of natural gas consumers
to curtail their purchases in response to higher prices in the electric
generation sector. Once a coal plant is retired due to MATS, or for any
other reason, the operator of the retired plant cannot switch it back
on in response to higher natural gas costs. Meanwhile, the EPA's new
greenhouse gas standards for new electric generators virtually ensure
that new coal plants will not be constructed to replace those that are
retired.\14\ Soon, electric generation companies will not only demand
more gas but also rely on it more heavily for base load production,
altering expectations about demand elasticity that prognosticators have
relied on when assuming that natural gas prices will not rise sharply
due to LNG exports.\15\ This same trend would also exacerbate the
increases in the price of electricity caused by LNG exports that are
projected by the EIA and NERA.
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\14\ ``Standards of Performance for Greenhouse Gas Emissions for
New Stationary Sources: Electric Utility Generating Units'' 77 C.F.R.
22392 (Apr. 13, 2012).
\15\ See Energy Information Administration, Fuel Competition in
Power Generation and Elasticities of Substitution (June 2012) (general
description of fuel switching and price elasticity among fuels in the
power generation sector) available at http://www.eia.gov/analysis/
studies/fuelelasticities/pdf/eia-fuelelasticities.pdf.
---------------------------------------------------------------------------
While demand elasticity will shrink in the electric sector, leading
to sharper increases in natural gas and electricity prices than
previously forecasted, manufacturers will continue to be responsive to
increases in the price of natural gas-meaning that manufacturers will
curtail consumption and hence production due to higher prices. Congress
and the DOE need to examine what this means for the economy and the
broader public interest of the nation in its consideration of this and
other LNG export applications.
Effects of Higher Prices
Increases in the price of natural gas will impact the U.S.
consumers who can least afford the price increase, inhibit the
expansion of domestic manufacturing, and forestall the further use of
natural gas as a bridge fuel away from carbon-intensive coal for
generation and from foreign sourced oil for transportation. The NERA
study demonstrates that the effects of LNG exports and the attendant
price increases are tantamount to a ``wealth transfer'' from poor and
middle class Americans to those with investments in the natural gas
industry. The DOE-FE should examine what this wealth transfer would
entail for the public interest when evaluating LNG export applications.
Congress must do likewise in considering the state of LNG exports.
Hurts Economically Vulnerable Households
LNG exports will raise domestic natural gas prices, which will
increase costs to households that rely on natural gas for heating and
cooking. NERA projects that these higher costs will be offset by
increases in the value of natural gas resources and related companies,
which NERA assumes many Americans own through retirement savings and
other investments.\16\
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\16\ See Markey Letter (casting doubt on the assumption that
benefits to the natural gas sector will be widely enjoyed by ordinary
American via retirement investments).
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However, the validity of that assumption is highly questionable
since according to a Pew Research survey, ``53 percent of Americans say
they have no money at all invested in the stock market, including
retirement accounts.''\17\
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\17\ See: http://www.pewresearch.org/fact-tank/2013/05/31/stocks-
and-the-recovery-majority-of-americans- not-invested-in-the-market/
---------------------------------------------------------------------------
Furthermore, merely owning stock does not guarantee an individual
will own stock in an oil and gas company or exporting company, without
which an individual will not directly benefit from LNG exports. Taking
the analysis a step further, even if an individual does own stock and
owns oil and gas company/exporting company stock, the key question is,
does that person own enough shares to offset the price increases for
energy, goods, and services that will result from LNG exports. This
distribution of stock ownership casts significant doubt that a majority
of Americans own oil and gas/exporter stock in sufficient quantities to
offset energy price increases.
NERA does admit, however, that ``[h]ouseholds with income solely
from wages or government transfers,'' will not share in the benefits of
increased profits from natural gas.\18\ Therefore, the increase in
natural gas prices due to exports will impact most those consumers
without investments or retirement savings, those living paycheck-to-
paycheck or relying on government assistance, which includes the 46.5
million people that live in poverty in the U.S.\19\ Even beyond
Americans who live in poverty, the majority of Americans, some 167
million people, will only incur the costs of exports and none of the
benefits.
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\18\ NERA Study at 8.
\19\ See: http://www.nclej.org/poverty-in-the-us.php
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Suppresses Other Domestic Industries
The NERA study indicates that as the price of natural gas
increases, the economy demands or produces fewer goods and services.
This results in lower wages and capital income for consumers; under
such economic conditions, consumers save less of their income for
investment.
As a result, industries that rely on natural gas will experience
``a reduction in overall output,'' mitigated by a ``switch to fuels
that are relatively cheaper.''\20\ The latter argument assumes that
alternatives to natural gas are affordable and available, which is an
invalid assumption for fertilizer manufacturers and many other
industries.
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\20\ NERA Study at 53.
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Moreover, the NERA study identified chemical manufacturing as one
of the natural gas and energy intensive industries that will be among
the most severely disadvantaged due to natural gas price increases
caused by LNG exports.\21\ According to NERA ``[d]omestic industries
for which natural gas is a significant component of their cost
structure will experience increases in their cost of production, which
will adversely impact their competitive position in a global market and
harm U.S. consumers who purchase their goods.''\22\ Leaders in the
chemical sector have voiced concern regarding LNG exports and adverse
impacts on the industry caused by inflated natural gas prices.\23\
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\21\ NERA Study at 64.
\22\ NERA Study at 13.
\23\ Press Release, Dow Chemical, DOE Report on LNG Exports Short
Changes Manufacturing and U.S. Competitiveness (Dec. 6, 2012) available
at http://www.dow.com/news/press-releases/article/?id=6138
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When evaluating whether export applications are consistent with the
public interest, policymakers must ask not only ``what will we gain
from LNG exports,'' but also ``what will we give up.'' A U.S.
manufacturing renaissance that promises greater economic growth and job
creation with positive effects rippling throughout the economy hangs in
the balance. Right now, industry is poised to invest billions of
dollars in new natural gas intensive facilities in the U.S. premised on
the promise of low domestic natural gas prices. For example, Sasol
North America, Inc. is currently considering investing in the first gas
to liquids plant in the U.S., an innovative technology for producing
diesel and other liquid fuels without oil, and U.S. natural gas prices
are a primary consideration regarding whether the investment will go
forward.\24\
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\24\ Clifford Kraus, South African Company to Build U.S. Plant to
Convert Gas to Liquids, New York Times (Dec. 3, 2012) available at:
http://www.nytimes.com/2012/12/04/business/energy-environment/sasol-
plans-first-gas-to-liquids-plant-in-us.html?__r=0.
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Affordable natural gas prices in the U.S. provide the path forward
for the manufacturing renaissance. Higher natural gas prices due to LNG
exports threaten this promising return to American manufacturing, and
prior economic data demonstrate that when domestic energy prices
increase, the country loses manufacturing jobs, particularly in the
fertilizer, plastics, chemicals, and steel industries.\25\
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\25\ U.S. House Committee on Natural Resources Democrats, Drill
Here, Sell There, Pay More: The Painful Price of Exporting Natural Gas
(March 2012) available at http://democrats.naturalresources.house.gov/
reports/drill-here-sell-there-pay-more.
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Rather than trading long-term manufacturing jobs for short-term
natural gas-related construction jobs, the DOE-FE should pursue
policies that create new manufacturing jobs and broader economic growth
in the U.S. Using natural gas for manufacturing provides a value-added
benefit to the economy because industry multiplies the value of every
dollar it expends on natural gas for energy or as a raw material.
Rather than investing in natural gas exports, which squeeze out
investments from other sectors of the economy, the U.S. should pursue
policies that allow industry to invest in natural gas dependent
manufacturing. Energy and natural gas intensive manufacturing produces
chemicals, metals, cement and other materials that may be add low-
value, but create positive ripple effects up the value chain and
throughout the economy.\26\ Rather than exporting natural gas as a raw
natural resource, the U.S. could export processed materials, such as
steel, or higher value-added goods at more competitive prices, with
greater benefits to the U.S. job market and GDP.
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\26\ NERA claims that harm resulting from exports will ``likely be
confined to very narrow segments of industry,'' namely low value-added,
energy intensive manufacturing. NERA Study at 67-69. NERA, however,
ignores the benefits of producing materials in the U.S. that can then
be used by other U.S. manufactures that are less energy intensive and
higher up the value chain. For instance, if plastics are produced at
competitive prices in the U.S., toy manufacturers may find it
economical to ``re-shore'' toy manufacturing plants. Steven Mufson, The
New Boom: Shale Gas Fueling an American Industrial Revival, Washington
Post (Nov. 14, 2012).
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Threaten Transition from Coal
Current low natural gas prices provide an opportunity to wean the
U.S. off of carbon-intensive coal. Inflated natural gas prices due to
LNG exports will decrease the viability of natural gas as a bridge fuel
to a lower carbon future. Current low prices make natural gas-fired
electricity generation an economically sound alternative to coal-fired
generation. Sustained low prices may encourage this transition by
private initiative regardless of increased environmental regulations as
investors find natural gas competitive with coal. If exports inflate
natural gas prices, the economics turn against cleaner burning natural
gas.\27\
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\27\ EIA Export Report at 17.
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As discussed above, new greenhouse gas regulations will also soon
force coal retirements. If natural gas prices remain low, the U.S. may
be able to transition away from carbon intensive coal without causing
electricity prices to increase significantly. If natural gas prices are
high, however, electricity prices will spike as relatively cheap coal-
fired generators are forced to retire for regulatory reasons. Spiking
electricity rates will have rippling effects on the U.S. economy,
especially energy intensive, cost-sensitive manufacturing.
Keeps the U.S. Dependent on Foreign Oil
Currently, the U.S. imports billions of dollars of oil from around
the globe, a great deal of which is used as gasoline to fuel vehicles.
The replacement of current gasoline-powered fleets with natural gas
vehicles would significantly reduce U.S. dependence on foreign oil, and
thereby enhance U.S. security and strategic interests and reduce our
trade deficit.\28\ State governments, businesses and many of APGA's
members are expending substantial resources today to put the needed
infrastructure in place.\29\
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\28\ Cheniere and other exporters claim that their proposed exports
will benefit the U.S. balance of trade, but it does not consider the
benefits to the trade balance of cutting oil imports and exporting
value-added goods manufactured in the U.S. with affordable natural gas.
\29\ Officials are planning a series of compressed natural gas
(``CNG'') filling pumps at existing filling stations across the
Pennsylvania US Route 6, stretching 400 miles from New York State near
Milford, Pike County, Pa. in the east and through Crawford County, Pa.
to the Ohio state line on the west, known as ``PA Route 6 CNG
Corridor;'' at the same time, Chesapeake Energy is converting its
vehicles in northeastern Pennsylvania to CNG and working with a local
convenience-store chain and transit authority to foster further CNG
integration. Eric Hrin, Pennsylvania Looks to CNG, The Daily Review
Online (May 26, 2011) available at http://thedailyreview.com/news/
pennsylvania-looks-to-cng-1.1135267; see also, Texas S.B. 20 (On July
15, 2011, the governor of Texas signed S.B. 20, supporting a network of
natural gas-refueling stations along the Texas Triangle between Dallas/
Ft. Worth, San Antonio, and Houston. The new legislation will lay a
foundation for wider-scale deployment of heavy-duty, mid- and light-
duty natural gas vehicles (``NGVs'') in the Texas market).
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Automobiles are not the only modes of transportation that
businesses are interested in transitioning to natural gas. A company in
Canada is investing in commercial locomotives powered by LNG and
teaming up with Caterpillar to employ similar technology in heavy duty
equipment that currently runs on diesel.\30\ If Congress and the DOE
allow export applications to go through, the resulting increase in
natural gas prices could undermine recent investments to expand natural
gas as a transportation fuel.
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\30\ Rodney White, Firm on Track to Build LNG-Fueled Locomotive,
Platts Gas Daily (Nov. 28, 2012).
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Policymakers should not pursue an export policy that undermines the
efficient, domestic use of a domestic fuel stock and America's first
and best opportunity to move toward energy independence by decreasing
reliance on foreign oil.
U.S. and Foreign Natural Gas Prices Will Converge
Currently, there are significant disparities between domestic
natural gas commodity prices and prices in some nations that rely on
LNG imports. These disparities provide would-be exporters with
appealing arbitrage opportunities in the short-term, but they will not
last. Gas rich shale deposits are a global phenomenon, just now
beginning to be tapped. Also, despite relatively low domestic natural
gas prices, certain countries, such as Qatar, can produce massive
quantities of natural gas at even lower prices. As other nations
develop their resources and export capacity, and as U.S. natural gas
prices increase due to export, international and domestic prices will
converge, leaving the U.S. with higher domestic prices that thwart
energy independence and that undermine the competitiveness of the
manufacturing sector that relies heavily on natural gas as a process
fuel.
The U.S. is at the forefront of technology in the development of
shale gas reserves. A recent study by MIT concludes that the U.S.
should export its technology and expertise.\31\ According to MIT, the
development of international unconventional natural gas reserves will
create a more liquid market with less disparity between prices around
the globe.\32\
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\31\ MIT Energy Initiative, The Future of Natural Gas, at 14
(2011).
\32\ Id.
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The U.S. should follow this strategy, instead of spending billions
of dollars to build facilities in order to export a commodity that will
possibly be abundant worldwide before the LNG export facilities can
even be completed.\33\
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\33\ The U.S. should be ever mindful of the billions of dollars
invested in LNG import facilities, which are white elephants that stand
as testaments to the extent to which technology at home or abroad can
undermine investments that ignore the portability of technology.
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The U.S. has an opportunity that was unimaginable two or three
years ago to significantly expand its manufacturing sector, transition
away from our reliance on coal-fired electricity generation without
risking price shocks, and finally make real progress towards energy
independence. All of this, however, depends on relatively low and
stable natural gas prices, which sharply contrasts with the history of
natural gas price volatility. Congress and the DOE should not turn a
blind eye and allow the same businesses that gambled and lost on
projections of the need for future natural gas imports to now
potentially squander our nation's future on what may well turn out to
be another failed venture as natural gas production and export capacity
develop throughout the world.
Alternative Approach
The United States should be exporting the drilling technology that
has enabled producers in this country to tap into our huge shale
reserves. There are likewise vast shale reserves in Europe, including
in Ukraine, that are there for the taking, assuming the selfsame
countries are willing to invest in the technology to access those
reserves and also to permit drilling for shale gas reserves. There is
certainly no good reason why the U.S should undertake a domestic LNG
export policy that has numerous downsides for the American gas
consumers when many of the very countries we are seeking to help are
capable of helping themselves by accessing their own domestic shale gas
reserves.
In lieu of exporting our affordable premium fossil fuel, Congress
should focus on adopting policies that encourage greater domestic
demand for natural gas and greater emphasis on exporting drilling
technology to WTO and other countries that have the capability to
access natural gas reserves. It is a much better choice, in both the
short and long term, to accelerate the transition in the United States
from imported oil to domestic natural gas to fuel our transportation
sector, revitalize our manufacturing industry, and improve our balance
of trade.
Conclusion
APGA appreciates the opportunity to submit testimony on this
critical natural gas and public interest issue. We stand ready to work
with the Committee on these and all other natural gas issues.
______
North America's Building Trades Unions,
March 26, 2014.
Hon. Mary Landrieu,
Chairwoman,
Hon. Lisa Murkowski,
Ranking Member, 304 Dirksen Senate Office Building, Washington, DC.
Dear Chairwoman Landrieu & Ranking Member Murkowski;
On behalf of the three million skilled craft professionals in the
United States and Canada comprising the fourteen national and
international unions of the Building and Construction Trades
Department, AFL-CIO, I am pleased the Senate Energy and Natural
Resources Committee held the March 25, 2014, hearing entitled Importing
Energy, Exporting Jobs. Can it be Reversed? Our members stand ready to
be part of a solution. We believe a modern U.S. energy policy,
encompassing enhanced energy security and a self-reliant North American
production capacity, will result in economic prosperity and robust job
creation.
During this shift from a net energy importer to one of the world's
largest producers, a labor force comprised of skilled craftsmen and
women will be necessary to construct the pipelines and build the
facilities needed to support domestic production. The Building Trades
can provide the skilled labor and craftsmanship needed to meet this
looming construction boom. And our 100 years of experience with
successful, sustainable, high quality joint labor-management
apprenticeship programs (JATC) ensure the demand for skilled craft
professionals will be met with the best-trained, most well-equipped
workforce in the world.
JATCs collectively spend more than $1 billion in private funding
annually on apprenticeship instructors, curriculum, and job placement.
The unionized construction industry (labor and management acting
together) also invest, through collective bargaining, an additional $11
billion annually on wages and benefits. To give some perspective to the
size of our JATC training system, managing and operating roughly 1,900
training centers across North America, if it was a singular college or
university, it would be the second largest in the US.
Our system of apprenticeship training and education has become
world renowned for several reasons:
We maintain a direct linkage to the labor market
Our apprentices earn while they learn
There is continuity of employment over the three to five
year training program driven by labor-management commitment
We integrate employment and training
In addition to our apprenticeship programs, we are extremely proud
of our ``Helmets to Hardhats'' program. This non-profit organization
connects National Guard, Reserve, retired and transitioning active-duty
military service members with apprenticeship training and career
opportunities in the construction industry. The program's Wounded
Warrior initiative connects wounded veterans with non-field careers and
accommodations in construction. During its ten-year existence,
``Helmets to Hardhats'' has placed thousands of veterans in jobs and
career training opportunities.
Given our track record of training and supplying world-class
craftsmen and women to work in the construction industry, North
America's Building Trades members stand ready to serve as the
foundation of this exciting energy revolution and construct the
infrastructure needed to transform our domestic energy industry into
the envy of the world.
We are thrilled your chairmanship coincides with this pivotal point
in US energy policy. We stand ready to work with you and the committee
in any capacity to ensure our energy policy drives job creation and
economic prosperity.
Sincerely,
Sean McGarvey,
President.