US LNG Exports: Truth and Consequence Revisited [Gas Expert Insights]

This report builds and expands on topics originally discussed in “U.S. LNG Exports: Truth and Consequence.” The basic international trade concepts discussed therein are highly applicable to current discussions about U.S. liquified natural gas (LNG) exports. This report also recaps several points highlighted in “US LNG Exports: Supply, Siting and Bottlenecks,” which contained a brief summary of past LNG market studies and their implications for infrastructure.

Since 2012, several different studies have been commissioned by the U.S. Department of Energy (DOE) since 2012 to support efforts to make a public interest determination regarding U.S. LNG exports. As noted in a 2023 Baker Institute study, each of these DOE-commissioned studies found a net gain from trade across a wide range of different scenarios considered and concluded the net benefits increase with resource availability. While often framed in the context of a larger resource base with more elastic cost-of-supply, these findings also indicate that any impediments to the development of infrastructure will reduce net gains to the U.S. from trade. 

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In general, it appears that all the DOE-commissioned studies conducted prior to 2024 use an elasticity of supply that is too small. In other words, at a given price, actual U.S. production has exceeded what was anticipated even in the high domestic resource cases. It follows directly that the supply response of the modeling exercises is increasing over time.

• The National Economics Research Associates (NERA) 2012 study had the steepest, or least elastic, supply curves.
  
• The Baker Institute for Public Policy Center for Energy Studies (CES) and Oxford Economic 2015 study’s supply curves were flatter.
  
• The NERA 2018 supply curves were even flatter.
  
• The recently released DOE 2024 study prepared by OnLocation, Inc. with Industrial Economics, Incorporated, National Energy Technology Laboratory, and Pacific Northwest National Laboratory appears to have the most aggressive assumption about elasticity of supply.
  

That stated, all DOE-commissioned studies are long-run studies. Hence, they do not capture short-term variations in demand and the resulting impacts on price. This is what the models were built to do. The studies are constructed to examine the long-term, structural impacts of increased LNG exports. Any short-term model should recognize the difference between short-run and long-run elasticity. In the short run, prices tend to be more volatile due to the realization of capacity constraints that are not present in the long run. In fact, a long-run constraint would signal an investment opportunity that, when captured, would alleviate the constraint. This is a subtle but important point in the policy context.

Any forward-looking study should recognize the role that associated gas production is playing in U.S. market balance. Associated gas is an inframarginal source of supply that stretches the supply curve, which helps prevent prices from rising when demand or exports increase. It also connects the gas supply situation in the U.S. directly to oil-directed upstream developments, which is another very important point in the policy context.

Any future study will likely be hard-pressed to not find positive net macroeconomic benefits from trade. Not only is this a basic outcome of international trade theory, but it also follows directly from previous work, which all found net positive benefits. In this context, if a trade is “in the money” (ITM) in a competitive equilibrium, then value must matriculate to all actors along the supply chain, lest the investments necessary to support supply chain development will not occur. Moreover, the value must be higher than alternative uses of investment capital because capital will seek the highest returns. This is why previous studies find net positive macroeconomic benefits associated with exports, despite underestimating domestic supply at a given price.

It directly follows that a license to export LNG is not a guarantee that exports will occur. Rather, a license is an option that the holder can choose to exercise if the export opportunity is ITM. In other words, an export project that is unable to earn a sufficient return on investment along the full supply chain will not move forward, leaving the option unexercised. This has already been witnessed at scale in the history of U.S. LNG trade; for instance, in the early 2000s, over 45 LNG import terminals received a license to import LNG, but those options were not exercised because market conditions did not support it.

There is now attention being given to examine the environmental implications of U.S. LNG exports, both domestic and abroad, as part of the public interest. This is inherently difficult to model, and the outcome can be entirely dependent on assumptions made about sources of supply and destination markets. Domestic environmental impact analyses have been conducted to examine pathways for emissions reductions. However, the sources of supply and pathway from wellhead to liquefaction are not necessarily the same across different existing and proposed export terminal. As such, no macro-level analysis emissions will suffice. Each terminal should be evaluated independently.

International environmental impacts are complicated by the fact that U.S. LNG export cargoes are very flexible. U.S. LNG is loaded free on board (FOB), so predicting where it will land is akin to predicting relative international price movements. U.S. LNG can be, and has been, redirected to chase the highest price. As such, cargo destinations can be influenced by a variety of factors that carry different implications, including:

• Seasonal demand fluctuations.
• Regional deliverability constraints and storage movements.
• Geopolitical disruptions.
• Weather-induced disruptions, among others.

Beyond cargo destination, predicting the fuel mix in different regions is also difficult. A probability weighted approach could be used to estimate how and when gas may compete in different regions, but the uncertainty is inescapable. Moreover, the role of policy in shaping the competitive landscape for different fuels is highly variable from region to region. Any approach that ignores this uncertainty is likely flawed from the outset.

It is important to note that estimating environmental impact is distinctly different from estimating potential gains from trade. All that is required to assess gains from trade is sufficient international demand to incentivize export flow, regardless of where it lands. While there is uncertainty therein, the uncertainty is amplified when trying to estimate environmental impacts because information about specific markets and the energy mix therein — now and in the future — is also required.

Finally, if the path forward is to expand the scope of a public interest determination, then the energy security dimensions of U.S. LNG exports should be incorporated. The recent experience in Europe following the Russian invasion of Ukraine and disruption of supply is a very recent, very salient example of why this is so. U.S. LNG demonstrated significant flexibility in responding to the market signals in Europe, helping to mitigate the economic damage that Russia’s actions inflicted. If these events transpired in 2015, or any year prior to U.S. LNG exports commencing, it would have likely produced a very different outcome. In short, U.S. LNG is a credible threat deterrent to hegemonic intent with energy resources and trade. 

Read full report by Baker Institute.

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