For the reasons discussed above, there is a compelling need to assess far more rigorously than has been done to date:
1. How much additional LNG realistically can be expected to be available to the U.S. market each year in the future;
2. The specific time schedule, price terms and other potential terms and conditions under which it is likely to be made available;
3. The alternative paths that might be pursued to meet U.S. energy needs, both in the relatively near-term (i.e., between now and 2010 or 2012) and over the longer term;
4. The specific actions that are required in order to move forward with these potential alternative sources of supply;
5. The risks and benefits of these alternative strategies versus a strategy of heavy dependence upon LNG;
6. Whether it is necessary to impose at least some regulatory restrictions on LNG imports in order to protect U.S. economic interests and avoid the potential for severe price spikes in the U.S. natural gas and electricity markets; and
7. What our fall-back strategy might be if, for any reason, total imports of LNG in any year don’t achieve the levels assumed in EIA’s most recent estimates.
This assessment is necessary, fundamentally, for two primary reasons:
- First, the prospect that LNG imports might increase dramatically is already having a huge chilling affect on the development of alternative domestic resources.
Major energy companies take EIA’s forecasts seriously, even though in recent year’s EIA’s forecasts often have been far off the market and its estimate of future LNG imports has increase 8-fold over the past three years and may well need to be revised back downward at some future date. (Notably, this 8-fold increase in EIA’s estimate of the likely level of future LNG imports in the space of just 36 months has occurred even though the lead time for major LNG projects typically is among the longest of any major projects in the world.)
As a result, at a time when EIA is still predicting that natural gas prices will fall by almost 25 % over the next 7 years in inflation-adjusted dollars, based in large part on the assumption that massive amounts of LNG will be delivered into the U.S. market and that oil prices also will be falling during this period, domestic natural gas developers are reluctant to undertake projects that will take more than 3 to 5 years to complete.
In part as a direct result of the EIA-fostered belief that huge amounts of LNG are about to flood the U.S. market, for example, rather than investing heavily on exploratory drilling or attempt to develop new fields (which the National Petroleum Council concluded were essential in order to maintain U.S. natural gas production at current levels), natural gas developers in the U.S. have been more inclined to pursue the less riskier path of increasing the density of drilling in existing fields.
This may increase near-term production from these fields. At the same time, however, it inevitably accelerates the date when these fields will begin to rapidly decline.
This chilling affect on longer term development projects, in turn, could easily create a self-fulfilling prophecy, accelerating the decline in U.S. production, and leaving end users in the U.S. market with no alternative other than to bid aggressively for whatever LNG supplies become available on the global market, no matter how high the price, as supplies of natural gas from North American sources available to the U.S. market continue to rapidly decline.
It is essential to break this cycle.
This can be accomplished, however, only by attempting to develop rigorous estimates of the likely time frame for bringing new LNG projects on line and then continuously updating those estimates and making the results public – which EIA has thus far failed to do.
- More fundamentally, however, the stakes for the U.S. in determining how we will meet our future energy needs are simply too high to allow this decision to be made simply by default.
As a practical matter, that is exactly what is occurring currently.
To date, no federal or state Agency has rigorously assessed: (i) whether the assumed increases in LNG imports upon which U.S. energy strategy currently depends are certain to be achieved; or (ii) the potential risks and benefits of a heavily LNG-dependent strategy vs. other available alternatives based upon domestic sources of supply.
This is a potential recipe for disaster.
Energy is the lifeblood of our economy. For the first time in our history, however, beginning as early as 2008, for a key portion of our energy supply, we are depending largely upon the availability of energy from facilities that have not been built (or, in many instances, even broken ground) controlled by the governments of other countries, for whose output we may well be outbid by China, our European allies or any of a number of other countries around the world.
Further, as discussed in earlier sections of this paper, even if these facilities are successfully completed and a significant portion of the LNG from these projects initially is committed to the U.S. market, relying upon LNG as a fuel source will: (i) seriously exacerbate the U.S. balance of payments deficit at a time when the value of the U.S. dollar has been eroding sharply and the size of our balance of payments deficit is becoming an increasingly urgent national concern; and (ii) increase our vulnerability to severe price shocks in the natural gas and electricity markets.
Considerations of simple prudence, therefore, dictate that we examine available alternatives more carefully before making any new long-term commitments to massively expand our dependence upon LNG.
Recent Mistakes in the Generation Sector
Recent energy industry experience demonstrates quite vividly the potential harm that can result if we fail to systematically assess available options before making major resource commitments that can lock us into a particular strategy for meeting our energy needs for a period of many years.
Between January of 2000 and today, the U.S. has constructed over 220,000 MW of new generating capacity at a cost of over $ 100 billion – by far the largest construction program in the history of the industry.
This $ 100 billion expenditure could have been used to build a diverse new fleet of generating units, minimizing our dependence upon any one fuel.
Instead, however, virtually all of the new generating units built over the past 5 years are gas-fired.
As a result, even though these power plants are among the newest, most efficient generating units in the world, many are still operating at only a fraction of their intended capacity. Further, many of the companies that built them have been forced to file for bankruptcy.
Today, virtually no one would defend the decision to rely almost exclusively on gas-fired generating capacity to meet our incremental generating requirements during this decade.
Instead, by any measure, it has been a colossal mistake – one of the greatest public policy failures of our time.
The adverse consequences of this mistake often are not fully recognized, even within the industry.
The decision to rely on almost exclusively on gas-fired generation, however, rather than building a more diverse mix of generating units, has been a major cause of the near-tripling of natural gas prices that has occurred over the past three years.
This in turn has caused massive harm – literally a hundred billion dollars or more in potentially avoidable costs -- not just or even primarily to the developers of these power plants, but to natural gas and electricity users in every segment of the economy. It has also caused the loss of tens of thousands of jobs and forced numerous U.S. businesses to shut down or relocate overseas. Further, it has backed the U.S. into a corner, forcing us to consider massively expanding our dependence upon another imported fuel in addition to imported oil (i.e., LNG) at a time when there is an urgent need to reduce the U.S. balance of payments deficit.
A decision to massively increase imports of LNG, however, would be likely to result in exactly the same type of harm to energy users and to the U.S. economy as the decision earlier in this decade to build nearly-exclusively gas-fired generating units – potentially forcing every natural gas and electricity consumer in the U.S. to pay literally hundreds of billions of dollars in increased costs for natural gas and electricity over the next 20 to 25 years as a result of an ill-advised strategy for meeting the basic energy needs of our economy and potentially irreparably damaging the ability of many U.S. companies to compete in world markets.
The mistakes made in the generation sector should demonstrate quite clearly the importance of conducting a thorough, objective integrated planning process at the state and federal level before major new resource commitments are made.
It would be unfortunate, to say the least, if the energy industry proceeded to make its next major resource planning decision with a similar lack of systematic evaluation of the risks and benefits of available alternatives.
To date, however, there is very little evidence that, as an industry, we have learned from our previous mistake.
Importance of Timing
For a systematic assessment of alternatives to be of value, however, it must begin at once.
This is in part because the available options – e.g., more aggressive, larger scale conservation efforts, major new natural gas developments efforts in as yet-undeveloped fields, rapid national deployment of coal gasification on a major scale, etc. – are likely to take a number of years to deploy on a large enough scale to provide a meaningful alternative to massively increasing imports of LNG.
For these alternatives to provide credible alternatives, therefore, it is essential that we begin to develop a comprehensive new national energy strategy at once, so that available alternatives can be identified and implemented in a timely manner on a large enough scale and at an earlier enough point in time to become realistic alternatives to a heavily-LNG dependent strategy.
At this point, no major U.S. energy user has made a major new long-term commitment to purchase LNG for many months. The time is rapidly approaching, however, when new commitments will become necessary. Further, when these commitments are made, they are likely to commit literally hundreds of billions of dollars in revenues for periods of up to 20 to 25 years.
Like the decisions to build almost exclusively gas-fired units several years ago, once binding commitments of this nature are made, the potential obstacles to pursuing alternative strategies for meeting our energy needs will increase exponentially -- potentially for many years.
It is critical, therefore, that leaders at both the federal and state level take advantage of the limited window of opportunity that still remains to: (i) compare an LNG-intensive strategy to other possible sources of supply; and, if these projects are more cost effective and in the long-term strategic interests of the U.S., (ii) take steps to ensure that they are initiated in a timely manner.
It is perhaps worth reiterating that increased imports of LNG can, should and almost certainly will play an important role in meeting our future energy needs.
We are in a deep hole; however desirable it might be to avoid increases in our dependence upon another imported fuel, increased imports of LNG undoubtedly will play a role in helping us to dig our way out of this hole.
The open issue, therefore, is not whether it is desirable to allow increased imports of LNG, but the extent to which we should rely on increased LNG imports versus other available alternatives that rely upon domestic sources of supply.
In evaluating this issue, we need to be mindful both of the potential benefit of being able to rely upon LNG as an additional source of energy and its potential limitations and risks.
While at least some new LNG projects undoubtedly will be built, there is a substantial possibility that the global LNG market will never grow to the level many envision – or potentially even reach ½ or 1/4th of the size some predict. Further, even if it does, it ultimately could take 30 years or more to reach this level.
The output from most existing projects and most projects currently under construction, however, already is committed to other markets and therefore of little direct benefit to the U.S. market.
While LNG developers often publicly announce ambitious “soft” target dates for completion of potential new projects, these target dates have little significance until contractually binding commitments are made with firm deadlines enforceable by meaningful penalties.
Few if any of the next tranche of projects have reached this stage.
Instead, for the most part, supplies from the next tranche of projects (to the extent there is one) are not likely to be available for delivery until 2012 or 2014, at the earliest.
This is too late to meet the most pressing needs of the U.S. market.
Indeed, one of the greatest risks of the current U.S. strategy of “hoping that LNG will solve our problems” is the near-certainty that what will occur instead is that, even in a “best case” scenario in which many new LNG projects ultimately are completed (to the extent that is a desirable result) there nonetheless will be a massive natural gas supply deficit in the U.S. market during the period between 2008 and 2012.
Realistically, despite EIA’s forecasts, most experts in the international LNG community expect that very little of the potential production from the second round of projects is likely to yet be available for commercial delivery until, at the earliest, the tail end of this period. In the interim, however, there currently is no other plan in place as to how the incremental natural gas requirements of the U.S. economy are likely to be met.
Further, even if these projects are completed, countries from all over the world will be competing with the U.S. for the output of these projects – most of whom do not have a fraction of the domestic energy resources available that we have available to us in the U.S.
For many of these countries, in a world in which oil supplies may soon peak, there may be few alternatives new sources of energy available. Outbidding the U.S. for the output of these projects, therefore, may literally be the only way for the economies of many of these countries to continue to expand.
This raises significant issues as to: (i) how much LNG realistically will be available to meet U.S. needs, especially given the greater distance of the U.S. from most major potential sources of supply; and (ii) why we would want to compete with these countries when we still have untapped resources here in the U.S. that almost certainly provide a lower cost solution for meeting U.S. need and provide other major benefits to our economy.
In addition, there may even be serious question as to whether it is morally appropriate for us to attempt to outbid these countries for the limited supplies of LNG that are likely to become available on the world market when we have other means to satisfy our energy needs and many other countries do not.
To the extent we are successful in outbidding many of these countries, we may literally be guaranteeing that the growth of their economies will grind to a halt, even though there are other means available to satisfy U.S. needs.
Further, just as significantly, from a purely economic standpoint, the near-certainty of fierce competition for limited available supplies of LNG in a supplied-constrained global market for both natural gas and oil creates a very high likelihood that, in the end, prices for newly available supplies of LNG will be closely tied to the BTU equivalent price of oil (which already is used as the basis for indexing LNG prices in most LNG contracts).
If LNG ultimately is priced in terms that are functionally equivalent to oil, however, rather than helping to break the emerging link between oil prices and the price of natural gas and electricity, a heavily LNG-dependent strategy for meeting the incremental energy needs of the U.S. economy will virtually guarantee that the price for all three major forms of energy in the U.S. market (i.e., electricity and direct use of oil and natural gas) will rapidly converge.
It is difficult to see, however, why it is in the best interests of the U.S. to head voluntarily down a path in which the prices of all three major forms of energy used in the U.S. market are destined to quickly converge.
There is no need for us to do so.
We still have the ability, if we choose to do so, to supply virtually all of our incremental energy requirements from domestic energy resources (e.g., natural gas, renewable energy, coal and nuclear energy) the pricing of which historically has not been tightly linked to the price of oil and --unlike LNG traded in a global market -- still has the potential to be de-linked from oil in future years.
Virtually the only reason that ordinarily is offered for not pursuing an energy strategy based predominantly on domestic resources is the claim that is sometimes made that LNG is preferable from an environmental standpoint, because it allegedly leads to lower emissions of EPA-regulated air pollutants and greenhouse gases than one of the potential domestic alternative sources of energy (i.e., coal).
The validity of this claim, however, is less than clear-cut. A state-of-the-art coal-fired plant generally has close to zero emissions of most EPA-regulated pollutants. By contrast, LNG, used to generate electricity in a combined cycle plant, is likely to have higher emissions of most EPA-regulated pollutants, not the reverse.
In the public debate regarding LNG, proponents of LNG often point to the fact that a combined cycle unit burning natural gas has a lower emission rate of CO2 than a conventional steam-fired generating unit burning coal or oil to imply that LNG has a lower emission rate of “greenhouse gases.”
This fails to take into account, however, the large amounts of energy that are required to cool natural gas down to – 260 degrees Fahrenheit, ship it potentially half way around the world and then re-gasify it.
The energy lost during this process eliminates a significant portion of the difference in emissions in CO2 that otherwise would exist between a combined cycle unit burning natural gas and a state-of-the art pulverized coal-fired plant or coal gasification project.
There are, of course, many other issues that should be considered as part of a comprehensive review of LNG and other available alternatives that are beyond the scope of this paper.
The fundamental message of this paper, however, is relatively straightforward: given the potential stakes for the U.S., we can not afford to repeat the mistake made during the first ½ of this decade when we built $ 100 billion of gas-fired generators without seriously considering other potential strategies, by continuing down a path that commits us to massively increase our imports of LNG without ever seriously considering available alternative domestic sources of energy that might better meet the needs of the U.S. economy and the long-term strategic objectives of our country.
Without any extended analysis, discussion or debate, in the past 36 months, however, that is exactly what we have allowed to happen.
We have shifted from not planning to rely on increased imports of LNG to any significant degree to becoming almost entirely dependent upon a combination of increased LNG imports (which are projected to grow by a total of 5.72 TCf per year over the next 20 years) and the successful completion of the Alaskan natural gas pipeline (which conceivably may not be built, but if it is, will increase natural gas supplies by another 1.80 TCf per year) to satisfy 87.7 % of our incremental natural gas requirements for the next 20 years and provide virtually all of the fuel needed to expand utilization of the nation’s existing fleet of gas-fired generating units.
It’s as if we had an opportunity to make a fresh decision on whether we would choose to become dependent upon imported oil as one of the primary energy sources for the U.S. economy – and instead of exploring alternatives, cavalierly chose to go down exactly the same path we are traveling down now, knowing all of the potential adverse impacts on national security and on the U.S. economy of relying on imported oil, without any effort to even identify, much less evaluate, potential alternative strategies for meeting U.S. energy needs.
This makes no sense.
Our last chance to seriously consider alternatives to a massive increase in imports of LNG, however, could begin to disappear soon.