[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
THE DEPARTMENT OF ENERGY'S STRATEGY FOR EXPORTING LIQUEFIED NATURAL GAS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ENERGY POLICY,
HEALTH CARE AND ENTITLEMENTS
of the
COMMITTEE ON OVERSIGHT
AND GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
MARCH 19, 2013
__________
Serial No. 113-11
__________
Printed for the use of the Committee on Oversight and Government Reform
Available via the World Wide Web: http://www.fdsys.gov
http://www.house.gov/reform
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COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM
DARRELL E. ISSA, California, Chairman
JOHN L. MICA, Florida ELIJAH E. CUMMINGS, Maryland,
MICHAEL R. TURNER, Ohio Ranking Minority Member
JOHN J. DUNCAN, JR., Tennessee CAROLYN B. MALONEY, New York
PATRICK T. McHENRY, North Carolina ELEANOR HOLMES NORTON, District of
JIM JORDAN, Ohio Columbia
JASON CHAFFETZ, Utah JOHN F. TIERNEY, Massachusetts
TIM WALBERG, Michigan WM. LACY CLAY, Missouri
JAMES LANKFORD, Oklahoma STEPHEN F. LYNCH, Massachusetts
JUSTIN AMASH, Michigan JIM COOPER, Tennessee
PAUL A. GOSAR, Arizona GERALD E. CONNOLLY, Virginia
PATRICK MEEHAN, Pennsylvania JACKIE SPEIER, California
SCOTT DesJARLAIS, Tennessee MATTHEW A. CARTWRIGHT,
TREY GOWDY, South Carolina Pennsylvania
BLAKE FARENTHOLD, Texas MARK POCAN, Wisconsin
DOC HASTINGS, Washington TAMMY DUCKWORTH, Illinois
CYNTHIA M. LUMMIS, Wyoming DANNY K. DAVIS, Illinois
ROB WOODALL, Georgia PETER WELCH, Vermont
THOMAS MASSIE, Kentucky TONY CARDENAS, California
DOUG COLLINS, Georgia STEVEN A. HORSFORD, Nevada
MARK MEADOWS, North Carolina MICHELLE LUJAN GRISHAM, New Mexico
KERRY L. BENTIVOLIO, Michigan VACANCY
RON DeSANTIS, Florida
Lawrence J. Brady, Staff Director
John D. Cuaderes, Deputy Staff Director
Robert Borden, General Counsel
Linda A. Good, Chief Clerk
David Rapallo, Minority Staff Director
Subcommittee on Energy Policy, Health Care and Entitlements
JAMES LANKFORD, Oklahoma, Chairman
PATRICK T. McHENRY, North Carolina JACKIE SPEIER, California, Ranking
PAUL GOSAR, Arizona Minority Member
JIM JORDAN, Ohio ELEANOR HOLMES NORTON, District of
JASON CHAFFETZ, Utah Columbia
TIM WALBERG, Michigan JIM COOPER, Tennessee
PATRICK MEEHAN, Pennsylvania MATTHEW CARTWRIGHT, Pennsylvania
SCOTT DesJARLAIS, Tennessee TAMMY DUCKWORTH, Illinois
BLAKE FARENTHOLD, Texas DANNY K. DAVIS, Illinois
DOC HASTINGS, Washington TONY CARDENAS, California
ROB WOODALL, Georgia STEVEN A. HORSFORD, Nevada
THOMAS MASSIE, Kentucky MICHELLE LUJAN GRISHAM, New Mexico
C O N T E N T S
----------
Page
Hearing held on March 19, 2013................................... 1
WITNESSES
Mr. Tom Choi, National Practice Leader, Gas, Deloitte Marketpoint
LLC
Oral Statement............................................... 8
Written Statement............................................ 11
Mr. Paul Cicio, President, Industrial Energy Consumers of America
Written Statement............................................ 16
Oral Statement............................................... 18
Dr. Charles Ebinger, Director Foreign Policy, Energy Security
Initiative, Brookings Institute
Oral Statement............................................... 30
Written Statement............................................ 32
Mr. Chris Smith, Actng Assistant Secretary Fossil Energy, U.S.
Department of Energy
Oral Statement............................................... 42
Written Statement............................................ 44
APPENDIX
The Honorable Jim Jordan, a Member of Congress from the State of
Ohio, Opening Statement........................................ 98
The Honorable James Lankford, a Member of Congress from the State
of Oklahoma, Opening Statement................................. 99
The Honorable Jackie Speier, a Member of Congress from the State
of California. Opening Statement............................... 101
DEI, Opening Statement........................................... 104
The Honorable Elijah E. Cummings, a Member of Congress from the
State of Maryland, Opening Statement........................... 106
THE DEPARTMENT OF ENERGY'S STRATEGY FOR EXPORTING LIQUEFIED NATURAL GAS
----------
Tuesday, March 19, 2013,
House of Representatives,
Subcommittee on Energy Policy, Health Care and
Entitlements,
Committee on Oversight and Government Reform,
Washington, D.C.
The subcommittee met, pursuant to notice, at 3:10 p.m. in
room 2247, Rayburn House Office Building, Hon. James Lankford
[chairman of the subcommittee], presiding.
Present: Representatives Lankford, Gosar, McHenry,
DesJarlais, Farenthold, Massie, Issa, Speier, Horsford, Lujan
Grisham, and Cummings.
Also present: Representatives Turner, Meadows, and Fleming.
Staff Present: Ali Ahmad, Majority Communications Advisor;
Molly Boyl, Majority Parliamentarian; Joseph A. Brazauskas,
Majority Counsel; Sharon Casey, Majority Senior Assistant
Clerk; Drew Colliatie, Majority Legislative Assistant; Brian
Daner, Majority Counsel; Linda Good, Majority Chief Clerk;
Tyler Grimm, Majority Professional Staff Member; Ryan M.
Hambleton, Majority Professional Staff Member; Frederick Hill,
Majority Director of Communications and Senior Policy Advisor,
Christopher Hixon, Majority Deputy Chief Counsel, Oversight;
Mark D. Marin, Majority Director of Oversight; Scott Schmidt,
Majority Deputy Director of Digital Strategy; Jaron Bourke,
Minority Director of Administration; Jimmy Fremgen, Minority
Legislative Assistant; Nicholas Kamau, Minority Counsel; Chris
Knauer, Minority Senior Investigator; Adam Koshkin, Minority
Research Assistant; Safiya Simmons, Minority Press Secretary
and Mark Stephenson, Minority Director of Legislation.
Mr. Lankford. Let us begin this hearing by saying the
Oversight's mission statement.
We exist to secure two fundamental principles. First,
Americans have the right to know that the money Washington
takes from them is well spent. Second, Americans deserve an
efficient and effective government that works for them.
Our duty on the Government Oversight and Reform Committee
is to protect these rights. Our solemn responsibility is to
hold the government accountable to taxpayers because taxpayers
have a right to know what they get from their government. We
will work tirelessly in partnership with citizen watchdogs to
deliver the facts to the American people and bring genuine
reform to the federal bureaucracy.
This is the mission of the Government Oversight and Reform
Committee.
Today we are here to discuss the Department of Energy's
strategy and process in reviewing applications to export
liquefied natural gas, LNG, specifically to non-free trade
agreement countries.
For countries with which we have a free trade agreement
covering the Natural Gas Act of 1938, and obviously amended
multiple times since then, the Department of Energy is required
to grant applications to export LNG. Such export is deemed to
be consistent with the public interest and the authorization
must be granted without modification or delay.
For countries with which we do not have a free trade
agreement covering natural gas, the Natural Gas Act presumes
the Department of Energy will grant the application to export
LNG unless the Department finds the proposed exportation will
not be consistent with the public interest.
The issue we are here to discuss today is not if we should
export natural gas. The U.S. has exported natural gas via
pipeline to Canada and Mexico since the 1930s. We are also not
here to discuss if we should export liquefied natural gas. The
U.S. has exported LNG from the Kenai Peninsula in Alaska since
1969.
Again, by statute, the Department of Energy must approve
LNG exports to FTA countries and the default position is it
exports to non-FTA countries unless DOE finds that it is not
consistent with the public interest.
Finally, we are not here to discuss if we should export
liquefied natural gas to non-FTA countries. Again, the U.S. has
exported to Japan, which is not an FTA country, from Alaska
since 1969. In the lower 48 in May 2011, the Department of
Energy granted the first permit to export LNG to a non-FTA
country. That facility is currently under construction in
southwest Louisiana and will begin exporting LNG within two
years.
We are not even here to discover for the first time the
economic impacts of LNG export. DOE has already commissioned
and released the results of a two-part study. The first part
was conducted by the U.S. Energy Information Administration and
the second part was conducted by NERA, Economic Consulting.
Dave Montgomery of NERA was invited to testify today as well,
but due to a last minute scheduling conflict, has submitted
written testimony for the record for which I will ask unanimous
consent to put into the record.
Mr. Lankford. The DOE studies concluded that for every one
of the market scenarios examined, net economic benefits
increased as the level of LNG exports increased and that
exports of natural gas will improve the U.S. balance of trade
and result in a wealth transfer to the U.S.
Two additional studies on LNG have also been commissioned
by Brookings and Deloitte, which will testify here today on the
risks and potential gains for our economy and global
relationships.
As a Nation, we have already decided exporting is
consistent with our public interest and we will continue to
export natural gas by pipeline and LNG to FTA and non-FTA
countries. The only issue here is how and when the Department
will process the approximately remaining 20 LNG export
applications. Every other applicant is now significantly behind
the first permit holder which was permitted almost two years
ago. It is essential that the process moves fairly and
expeditiously.
Today's question is really a narrow and simple set of
process questions, although each answer has enormous
implications for our international economic relationships and
capital investments at home. When will DOE make its
determination of public interest and what are the specific
criteria in that decision, especially since the law encourages
a default yes answer to exports.
The two DOE-requested studies are complete. They both show
a favorable gain for our nation when we export LNG. Now the
comment period and replies are also complete. Will the DOE seek
to limit the number of billion cubic feet that can be exported
per day? Has DOE already set a certain amount of LNG to export
and if so, how was that limit chosen? Will DOE seek to limit
the number of export facilities permitted and thus allowed to
compete and explore for contracts worldwide? What role will the
market or geopolitical goals play in this decision? When can
potential exporting companies begin competing for those
contracts?
There are not an infinite number of contracts that can be
acquired worldwide. If we delay making a decision on
permitting, other countries with a more efficient bureaucracy
will beat us. The U.S. has a great head start in terms of
technology, experience, pipeline infrastructure and processing.
We have developed financial and legal systems to support gas
development. These advantages will not last forever.
There are massive shale gas fields around the world. China
and India have invested in the Marcellus Shale in order to
learn more about our technologies and currently Australia has
eight LNG export facilities under construction. We have one.
The demand window is open. We can step through it or we can
delay until the window closes.
If DOE intends to delay the decision to export to reduce
the opportunity for global contracts, that is also something we
should know. I don't believe that is the Administration's
intent. In December 2012, President Obama said to Time
Magazine, ``The United States is going to be a net exporter of
energy because of new technologies and what we are doing with
natural gas and oil.''
The President also recognizes these energy developments
could have huge geopolitical consequences. For decades, energy
has been used as a diplomatic tool against the U.S. Now with
LNG, the U.S. has the potential to flip that and be in the
position to use energy as a tool to benefit our Nation's
strategic interest.
Now that DOE has completed the first permit and developed a
system, what will be the timing and systems to permit the
remaining applicants? With billions of private capital at
stake, how can we make the process neutral, fair and expedited?
How quickly can that process be released and how can we
complete the process so that our nation can move forward with
energy exploration, jobs, construction, midstream jobs and the
narrowing of our trade deficit?
Uncertainty destabilizes a free market economy. It is time
to provide timelines and decision-making criteria ensuring
fairness of the process for everyone involved. I look forward
to those answers on all these key issues today.
Mr. Lankford. With that, I would like to recognize the
distinguished Ranking Member, the gentlelady from California,
Ms. Speier, for her opening statement.
Ms. Speier. Thank you, Mr. Chairman. Thank you for holding
today's hearing. I look forward to an informative discussion on
the Obama Administration's process for reviewing the export of
liquefied natural gas.
New technologies in horizontal drilling and hydraulic
fracturing have led to significant increases in U.S. natural
gas production and a huge growth in our domestic gas supplies.
For the first time in modern history, America has the
opportunity to become dramatically more energy independent.
As USAID Today reported last year, energy independence is
no pipe dream. The U.S. is already the world's fastest growing
oil and natural gas producer. Counting the output from Canada
and Mexico, North America is the new Middle East. Furthermore,
at our current pace of production, the Energy Information
Administration predicts that the United States will slash its
dependence on foreign oil to as low as 36 percent by the year
2035, down from some 49 percent in 2010.
Many have called natural gas a bridge fuel to a clean
energy future due to its lower emissions compared to other
fossil fuels. Right now the natural gas producing and
transporting industry wants to cross that bridge in part by
exporting U.S. natural gas to foreign countries. Those foreign
countries will pay a higher price for natural gas than is
currently sold domestically. That means higher profits, more
investment and more jobs for the oil and gas industry.
Many gas consuming industries, including many businesses
who ``are making it in America,'' want to cross that bridge in
a different way. These are companies that use gas as a fuel and
as input to make a variety of products ranging from chemicals
to cars. They want U.S. natural gas to be sold into the
domestic market at current prices which will enable them to
make higher profits and invest in more job creation.
The domestic manufacturing industry warns that if we permit
the export of large volumes of our domestic natural gas supply,
prices for natural gas in the U.S. will increase. It is unclear
what the consequences of a rush to export would be for American
manufacturing jobs, as well as for many middle class and lower
income Americans.
I look forward to hearing from today's witnesses about the
importance of natural gas to our manufacturing sector and
whether those benefits have been overlooked or under assessed
in the debate over liquefied natural gas.
We are balancing two very important interests, those that
want to export and those that want to retain the natural gas in
the United States for consumers and companies that make it in
America. The Federal Government should proceed deliberately and
carefully on LNG export. In fact, the Federal Government is
legally bound to determine what degree of LNG exports is in the
``public interest'' before moving ahead on permitting new
export facilities.
Currently, the Department of Energy is fulfilling its duty
under the Natural Gas Act of 1938 to evaluate the cumulative
impacts of allowing the natural gas industry to export U.S.
natural gas. The Department of Energy commissioned two reports
from the Energy Information Administration and NERA Economic
Consulting and is now reviewing more than 200,000 public
comments on those reports, including many that are highly
critical of the reports' methodologies and conclusions.
I would like to hear from our witnesses today whether they
feel that the EIA and NERA's report conclusions are
comprehensive or leave important questions unanswered or
inadequately addressed.
I do not believe it is the job of DOE or the Federal
Government to choose sides in the natural gas marketplace. This
is not what the Natural Gas Act requires. However, it is the
job of the Department to hear all sides and determine, on
balance, how much liquefied natural gas export is permissible
within the ``public interest'' and to make sure that its
decision is informed by the best data and analysis.
Today's hearing should not be read as an opportunity to
influence the DOE's process or to push on the scales of what is
in the public interest. The Department is considering all views
as it is charged to do by statute.
Thank you again, Mr. Chairman, for holding this hearing. I
look forward to hearing from our witnesses.
Mr. Lankford. Thank you.
I now recognize the Chairman of the full committee, Mr.
Issa, for an opening statement.
Mr. Issa. Thank you, Mr. Chairman.
On the screen, I have a slide that I think sets of
something of interest for us to bear in mind throughout the
hearing. The two circles drawn around areas are areas of major
production, one of oil and natural gas at Eagle Ford, the other
one of almost all oil but with enough natural gas being flared
today that it practically looks like New York City. That is the
effect, in no small part, of artificially low natural gas.
I think one of the points we have to make here today is
that when natural gas falls too low, you end up with it
becoming essentially waste fuel. That is not our goal. This is
a valuable and clean energy. This is an energy that produces
not just the methane we think of as burnable natural gas, but
the ethylene that we so often think of for plastics and other
uses; the propane, a highly portable fuel that on which America
counts. All of this and more in the way of byproducts are part
of what we are hoping to get to.
The other thing is, for those who talk in terms of clean
energy and exports, I just want to point out that in 2012, the
United States exported 126 million short tons of coal, a great
deal of it to China, our largest partner in that. If you could
visualize that, it is 1.4 million railcars of coal.
To a great extent, what we are trying to do is export a
cleaner fuel, both in its raw form and of course if we burn it
in the U.S. and use it in the U.S., in the form of exported
product. I believe there is enough fuel, and the studies show
there is, to do both.
Additionally, today, with a roughly $3.90 cost of a million
BTUs, that is about $21 equivalent to a barrel of oil. It is so
cheap that Burlington Northern has announced a $2 billion
investment to convert diesel locomotives to work on natural
gas. For many who find that interesting, let us make something
more interesting. We are going to burn natural gas to haul coal
to China. That is the reality of what we are doing and that's
how plentiful it is.
I support all of the use of both liquefied and compressed
natural gas because, in fact, it is a clean fuel, a plentiful
fuel and an inexpensive fuel. It is going to be part of
reducing our trade deficit.
Mr. Chairman, in 2012, in spite of increased exports, we
had our largest trade deficit since 2008, a whopping $475
billion. Converting to using more natural gas, producing more
oil as we are in North Dakota, all of this comes together to
reduce our imports, increase our exports and make America more
competitive.
For those who view, as they should, the lower a fuel stock
gets, the lower a raw material gets, the better for domestic
business, I concur. However, there comes a point at which a
decision has been made by many companies that at $5.77, which
is our 10-year average price for natural gas, they are going to
bring those jobs to America because that is so much lower than
the global price, that, in fact, American businesses remain
very competitive with this low cost fuel, still half the cost
of using comparable oil.
If you look to Japan where they compete with us often, they
are looking at nearly $20 equivalent to our $3.95. They pay a
lot. They are an important ally.
Mr. Chairman, one of the most important things you are
bringing about today is a discussion on our NATO allies who
find themselves being held hostage both by the Middle East and
by Russia and our Asian allies who find themselves simply
paying a very high price and feeling fuel is part of their
diplomatic decisions.
The ability to export at least, in part, a portion from the
United States, along with Australia and other countries who are
also going to be increasing exports, makes us better neighbors
diplomatically and better allies. Last but not least, you
pointed out very clearly if we deliberately delay the ability
to compete 20 year-plus contracts will go to other nations and
will not go to the United States. We are not dealing with
whether we do it today or tomorrow, we are dealing with whether
delay is working to the detriment of our long term ability to
compete in this important fuel.
Last but not least, for those who say natural prices will
rise, when I have looked at the nature of export contracts, if
we get back to the $12.69 peak in 2008 or above, the liquefied
natural gas exporters will simply shut that down because it
won't be worthwhile. There is a natural stop point on all of
this.
For all of us who have viewed energy as an important tool
of our national defense, as an important tool of our economy,
we have a windfall. We need to make sure we have enough of the
windfall that we do not flare gas for lack of the price to
support infrastructure development.
I thank the Chairman for this important hearing.
Mr. Lankford. I would like to recognize the Ranking Member
of the Full Committee, Mr. Cummings for an opening statement.
Mr. Cummings. Thank you very much, Mr. Chairman. Thank you
for holding this hearing.
I have not reached conclusions; I am coming here today to
hear the witnesses so that I can be better informed. Today's
hearing focuses on a very important energy policy question. Is
it in the public interest to export increasing amounts of
natural gas to foreign markets overseas? That is the question.
Because of new drilling techniques and other technology
advancements, the United States is now able to produce natural
gas in geological formations that were once impossible to tap.
This new technology has given rise to an emerging industry that
is transforming parts of our nation. This recent boom has
reduced the price of natural gas and has saved consumers money
on their electricity bills and is fueling a resurgence in the
domestic manufacturing. Our natural gas has become a
competitive advantage in a global market.
Because so much natural gas is being produced,
paradoxically, it may be placing the natural gas production
industry and the jobs in that sector at some risk. As prices
fall, some producers may be faced with the prospect of
suspending operations or even going out of business. To address
that concern, some companies are now seeking to export gas to
foreign markets.
While that could be a very good thing for United States
producers, it raises questions that must be addressed. First,
will exports drive up prices for domestic U.S. manufacturers
and consumers? Multiple studies have shown that they will. That
will mean higher gas prices for consumers, higher prices for
manufacturers who want to support and potentially higher prices
for goods and services for everyone.
The producers contend that increasing exports will increase
jobs. That too must be a consideration. By converting import
terminals to export terminals, there is likely to be an
increase in the number of jobs in certain sectors. God knows,
we need more jobs.
We also need to understand whether we will be supporting
this set of jobs, those in the energy sector, at the expense of
another set of jobs in United States manufacturing that rely
heavily on natural gas in their operations.
Another question we must answer is whether exporting
natural gas will more quickly deplete U.S. supplies just as the
Country is moving toward greater energy independence. For
years, we have heard that the United States must reduce its
dependence on foreign energy sources. By increasing gas
exports, are we trading part of that independence for short
term profits?
Third, complex environmental questions regarding some of
the techniques used in gas production have not been resolved. I
believe it is critical that we give ample attention to how
increased production may exacerbate those concerns.
Mr. Chairman, as we hear today it is the Department of
Energy's job to determine whether exporting more natural gas is
in our Nation's best interest, but we will also hear today that
studies commissioned by the Department are subject to debate.
Some believe that recent studies demonstrate a clear benefit
from gas exports while others believe the studies point to the
opposite conclusion.
Although we may begin to answer some of these important
questions at today's hearing, I believe we will also learn that
there are a number of key questions that need to be studied
more carefully.
I want to thank you for holding this hearing and with that,
Mr. Chairman, I yield back.
Mr. Lankford. Thank you.
All members will have seven days to submit opening
statements for the record.
I will now recognize our panel. Mr. Tom Choi is the
National Practice Leader, Gas, Deloitte MarketPoint LLC; Mr.
Paul Cicio is President, Industrial Energy Consumers of
America; Dr. Charles Ebinger is Director, Foreign Policy,
Energy Security Initiative, Brookings Institute; and Mr. Chris
Smith is Acting Assistant Secretary for Fossil Energy, U.S.
Department of Energy.
Thank you all for being here.
Pursuant to committee rules, all witnesses are sworn before
they testify. Please rise and raise your right hand.
Do you solemnly swear or affirm that the testimony you are
about to give will be the truth, the whole truth, and nothing
but the truth?
[Witnesses respond in the affirmative.]
Mr. Lankford. Thank you.
Let the record reflect that the witnesses answered in the
affirmative.
In order to allow time for discussion, I would ask you to
limit your testimony to five minutes. Watching our clock, we
expect votes somewhere around the next 15 minutes, so that
would be perfect. We will try to get through all of our
testimony and will start with questioning time. If votes call
us, then we will put temporarily pause, come back and continue
questioning from there.
Depending on time and the questioning, as soon as two of us
get back, I would like to start questioning again and try to
finish as quickly as we can to honor your time as well.
Mr. Choi, you are at bat first. We are pleased to receive
your testimony.
WITNESS STATEMENTS
STATEMENT OF TOM CHOI
Mr. Choi. Good afternoon, Chairman Lankford, Ranking Member
Speier and members of the subcommittee. Thank you for inviting
me to testify this afternoon.
My name is Tom Choi. I am the National Gas Practice Leader
for Deloitte Marketpoint.
Deloitte Marketpoint has worked for a number of clients
across different industries to help them better understand
energy markets. In particular, we have utilized a World Gas
Model to help LNG companies seeking objective and in-depth
economic analysis of global gas and LNG markets. The key
results of our model and our analysis form the basis for my
comments this afternoon.
The World Gas Model computes prices and quantities based on
established microeconomic theories. It has been used by leading
energy companies and institutions for over 20 years. Vital to
this analysis, the World Gas Model represents natural gas
producers' decisions regarding when and how much gas to develop
given a producer's resource endowment and anticipated forward
prices.
The supply-demand dynamic is particularly important in
analyzing the impact of demand changes, including LNG exports.
Without a proper representation, the results would likely under
estimate producer response and over estimate the price impact.
It would be tantamount to assuming that the markets would be
surprised or unprepared for the volume of exports and in
effect, would have to ration fixed supplies to meet export, as
well as domestic demand.
Our findings show that the price impact to the U.S. is
likely to be modest. The impact of 6 Bcfd of U.S. LNG exports
on average U.S. prices is projected to be only $.15/MMBtu from
2016 to 2030. Abundant North American gas resources, coupled
with the market's demonstrated ability to respond to market
changes, mitigate the price impact of exports.
Since there is some uncertainty about the magnitude of the
potential impact of LNG exports on domestic prices, an
examination of the fundamental economic factors might be
helpful. I think it is important to separate the timing issue,
that is how quickly new supplies can be brought online from the
resource depletion issue, how increased demand affects future
production costs and prices.
Can the U.S. natural gas production keep pace with
projected gas demand, including potential LNG exports? If
history provides any indication, the answer appears to be yes.
In just four years, from 2008-2012, the U.S. dry gas production
has increased by over 10 Bcfd a day, demonstrating just how
dynamic the U.S. natural gas industry is.
Hence, if export volume can be properly anticipated and
productive capacity made available when needed, then the price
impact will likely be determined by how increased demand
affects resource depletion and future production costs.
Moreover, it is not just the gas fields feeding directly into
LNG export terminals that respond, but rather, the entire
highly interconnected North American gas system.
Since there is a large quantity of domestic gas available
at similar production cost levels, U.S. exports are projected
to increase the price of domestic gas not by very much, because
it is not likely to change the future production cost by very
much.
Our model also projects that natural gas prices will likely
be greater in importing countries than in the U.S. As prices in
the U.S. firm and prices in export markets soften, their price
spread will narrow. Hence, markets will check the volume of
U.S. LNG imports, even in the absence of policy restrictions.
Furthermore, U.S. LNG exports are unlikely to cause prices
to rise to levels of importing regions. The cost of
liquefaction, shipping and regasification form a large price
wedge between prices in the U.S. and those in import markets.
Exports will only occur if large price spreads prevail,
implying that sectors of the U.S. economy that compete in
global markets will not likely see their price advantage
significantly diminished as a result of LNG exports.
In summary, given the dynamic nature of the North American
gas market and the abundance of U.S. gas supplies available at
similar cost levels, our model projects modest price impacts at
our assumed export volumes.
Thank you for this opportunity. I look forward to
addressing your questions.
[Prepared statement of Mr. Choi follows:]
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Mr. Lankford. Thank you, Mr. Choi.
Mr. Cicio.
STATEMENT OF PAUL CICIO
Mr. Cicio. Thank you for the opportunity to testify before
you.
I am Paul Cicio, President of Industrial Energy Consumers
of America.
IECA is a nonpartisan association of leading manufacturing
companies with $1.1 trillion in annual sales, over 1,000
facilities nationwide, and with more than 1.4 million employees
worldwide.
IECA membership represents a diverse set of energy
intensive industries including: chemical, plastics, steels,
aluminum, paper, food processing, fertilizer, insulation,
glass, industrial gases, pharmaceutical, brewing and cement.
IECA member companies are energy-intensive and trade-
exposed, EITE. For these industries, the cost of energy can be
from 10 to 85 percent of the cost of making their products. Our
competitiveness is dependent upon the price of energy relative
to our offshore competitors.
The U.S. manufacturing sector is the largest consumer of
natural gas, as a fuel and as a feedstock, and natural gas-
fired electricity, consuming approximately 40 percent of all
U.S. natural gas. We also consume approximately 30 percent of
the electricity.
It is important to note that IECA is not opposing LNG
exports, although we are very concerned that exports could
negatively impact manufacturing competitiveness and jobs. It is
for this reason that we urge the DOE to do a better job than
what we have seen so far. Even though both DOE-sponsored
studies used domestic demand assumptions, I should understated
assumptions, the outcome of the study should give public
policymakers pause because they confirm one thing, that any
level of exports will increase domestic prices for all
consumers.
Natural gas prices have both direct and indirect impacts on
peoples' lives and their safety for homes, for heating, cooling
and electricity, for the Nation's economic growth, exports of
manufactured products and jobs. Energy intensive manufacturing
industries are especially impacted.
Specifically page 7 of the flawed NERA study confirmed that
``Expansion of LNG exports has two major effects on income. It
raises energy costs and in the prices, depresses both real
wages and the return on capital in all other industries'' and
from our perspective, with only trivial net benefit to the
economy.
My comments today will focus on two issues. First, we urge
the DOE to implement a rulemaking process to determine public
interest determination criteria that will be used on an
application by application basis. Secondly, we also urge the
DOE to complete the necessary studies to clarify the
implications of LNG exports to consumers, the economy and the
manufacturing sector using up to date, domestic demand
assumptions.
DOE must include scenarios that consider pending
legislative and regulatory actions that could impact natural
gas production and spur domestic demand. Special attention is
needed to address the impacts to energy intensive trade exposed
industries.
The U.S. is at an important crossroads on the subject of
LNG exports. If we do this right, the U.S. can export LNG and
provide an adequate supply of natural gas at affordable prices
to domestic consumers. If we get it wrong, the LNG exports
could slow, if not stop, the manufacturing renaissance and
every U.S. consumers' price of natural gas and electricity will
rise, so much is at stake.
Today, the DOE is considering 24 applications to export
LNG. In the modern era, the U.S. Government has not faced the
need to determine the public interest in connection with
requests to authorize exports as large as this. The DOE has
extensive experience in evaluating import applications but has
limited experience with export applications. Perhaps not
surprisingly, there are no clear established criteria for DOE
to apply in determining the public interest with regard to
natural gas exports.
IECA supports an approach to such determinations by DOE
that are based on objective criteria and metrics, established
through a rulemaking process and applied on an incremental case
by case basis consistent and balanced in manner. We urge the
Congress to embrace this process.
Thank you.
[Prepared statement of Mr. Cicio follows:]
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Mr. Lankford. Thank you.
Dr. Ebinger.
STATEMENT OF CHARLES EBINGER
Dr. Ebinger. Chairman Lankford, Ranking Member Speier and
other distinguished subcommittee members, thank you very much
for inviting me here today to share my views on U.S. LNG export
policy.
My name is Charles Ebinger, Director, Energy Security
Initiative, Brookings Institution and not the Director of the
Foreign Policy Program, for the record.
The Energy Security Initiative at Brookings has been
studying this issue of LNG for the past two years and last
March, issued a comprehensive report. In the interest of time,
let me say the report had two primary conclusions. First, the
negative implications of LNG exports in the lower 48 States are
at best marginal and vastly are outweighed by the benefits.
Second, as the lynchpin of a globalized economy, the United
States must continue to espouse free trade and avoid
intervening in a global market.
As we state in our report, ``The United States should
neither act to prohibit nor to promote export of LNG, but
rather let the existing process, with modifications, work its
way through.''
I will not spend much time talking about the economic
implications because I think Tom Choi has done an excellent job
of that, but merely say we echo Deloitte's findings and that of
other major public reports by ICF, EIA and others that we
believe that the impact on domestic natural gas prices arising
from exports would only be between 2 and 11 percent than they
are today by the year 2035, hardly a massive distress to the
American public.
We also believe that LNG exports are likely to have only a
modest impact no electricity prices. Again, studies done by a
host of leading economic consulting firms have produced a range
of estimates but the conclusion is profound. That is that the
average increase in electricity prices per megawatt hour might
be somewhere between $1.40 to just under $5.00.
To put this in context for those that do not follow
megawatt hour pricing, the EIA's annual energy outlook in 2013
estimates that by 2035, the average megawatt price will be $101
a megawatt hour, nearly 95 times bigger than the increase in
prices, again hardly devastating to the American consumer.
I firmly disagree with the views of people who say we
cannot export because it will hurt the prospects of an
industrial renaissance in the United States. Today, the ratio
of the price of oil to the price of natural gas in the world
market is over 30 to 1, well over the 7 to 1 oil to gas price
ratio at which the American Chemistry Council considers the
U.S. petrochemical and plastic producers to be globally
competitive.
Let me turn quickly to the issue of geopolitics. Already,
we have seen the fact that cargoes planned to be destined to
the United States, when we were forecast to import up to 40
percent of our natural gas in the near future have had a major
transformation in the European market and have proven to be of
benefit to our European allies in both western and central
Europe.
The advent of LNG coming into that market has reduced the
influence of Gazprom, the Russian monopoly on the European gas
market and today, rather than dominating the European market,
we see a situation where last month nearly 54 percent of the
gas that flowed in Europe was under spot contracts, not under
long term oil index contracts, saving many of the nations huge
quantities of money, particularly some of the more ailing
economies in eastern Europe.
Already we have seen the impact that LNG exports can have
on alleviating the terrible situations in Asia with index
pricing already beginning to come down away from oil and
towards natural gas which will be of vital assistance to our
major Allies.
Finally, let me turn quickly to say we believe it is a
prudent policy to continue to allow exports. We disagree with
the two extreme proposals of the volumetric gap or a policy
where the U.S. automatically approves all applications.
We do, as we say in our testimony in greater detail,
believe there are reforms that may occur in the process and we
hope they will be seriously considered, both by our
Administration and by members of Congress with oversight on
these issues.
Thank you very much.
[Prepared statement of Dr. Ebinger follows:]
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Mr. Lankford. Thank you.
After 30 minutes of talking about DOE, it will be great to
hear from DOE. We are honored that you are here and glad you
are a part of this conversation.
Mr. Smith, we are pleased to receive your testimony.
STATEMENT OF CHRIS SMITH
Mr. Smith. Thank you very much, Mr. Chairman.
Thank you, Chairman Lankford, Ranking Member Speier and
members of the subcommittee. I appreciate the opportunity to
discuss the Department of Energy's program regulating the
export of natural gas, including liquefied natural gas.
The boom in domestic shale gas provides unprecedented
opportunities for the United States. Over the last several
years, domestic natural gas production has increased
significantly, outpacing consumption growth, resulting in
declining natural gas and LNG imports. Production growth is
primarily due to the development of improved drilling
technologies, including the ability to produce natural gas
trapped in shale gas geologic formations.
Historically, the Department of Energy has played a
critical role in development of technologies that have enabled
the United States to expand development of our energy
resources. Between 1978 and 1992, public resource investments
managed by the Department contributed to the development of
hydraulic fracturing and extended horizontal lateral
technologies that spurred private sector investments and
industry innovation, unlocking billions of dollars in economic
activity associated with shale gas.
Today, domestic natural gas prices are lower than
international prices of delivered LNG to overseas markets. As
in the United States, demand for natural gas is growing rapidly
in foreign markets. Due primarily to these developments, the
Department of Energy has begun to receive a growing number of
applications to export domestically produced natural gas to
overseas markets in the form of liquefied natural gas.
The Department's authority to regulate the export of
natural gas arises from the Natural Gas Act which provides two
statutory standards for processing applications to export LNG
from the United States. By law, applications to export natural
gas to Free Trade Agreement nations are deemed to be consistent
with the public interest and the Secretary of Energy must grant
authorization without modification or delay.
For applications to export natural gas to non-FTA nations,
the Secretary must grant the authorization unless after
opportunity for hearing, the proposed export is found to be not
consistent with the public interest.
The Department's review of applications to export LNG to
non-Free Trade Agreement countries is conducted through a
publicly-transparent process which includes full public
interest review. To date, the Department of Energy has granted
one long term application to export domestically-produced,
lower 48 LNG to non-Free Trade Agreement countries.
In the Sabine Pass Order, the Department of Energy stated
that it would evaluate the cumulative impact of the Sabine Pass
authorization and any future authorizations for export
authority when considering subsequent authorizations. Following
issuance of that order, the Department undertook a two-part
study of the cumulative economic impacts of LNG exports.
The first part of the study was conducted by the Energy
Information Administration and looked at the potential impact
of additional natural gas exports on domestic energy
consumption, production and prices under several prescribed
export scenarios. The second part of the study, performed by
NERA Economic Consulting under contract to the Department of
Energy, evaluated the macroeconomic impact of LNG exports on
the U.S. economy with an emphasis on the energy sector and
natural gas, in particular.
To date, the Department has received 188,000 initial
comments and about 2,700 reply comments on these two studies.
Now that all comments are received regarding the LNG export
studies, the Department will take into consideration the
studies, the comments and the record of the proceedings of the
19 non-FTA LNG export applications. The Department will then
make a public interest determination and act on each of these
applications on a case by case basis.
Due to the adjudicatory nature of this process, I will be
unable to comment today on issues that are presently being
addressed in our opinion proceedings. Those issues include but
are not limited to the merit of pending applications, the
validity of the two-part macroeconomic study, the study's
adequacy as the basis for decisions and the appropriate scope
of environmental review.
I can, however, speak to DOE's statutory authority, our
process to review applications to export LNG to non-FTA
countries, our two-part LNG export studies, the comments we
have received on those studies and other recent developments in
LNG export. With respect to those topics, the Department and I
are committed to being as responsive as possible to any
questions the committee may have today.
In conclusion, Mr. Chairman, I would like to emphasize that
the Department of Energy is committed to moving this process
forward as expeditiously as possible. The Department
understands the significance of this issue as well as the
importance of getting it right.
With that, I would be happy to answer any questions the
committee may have.
[Prepared statement of Mr. Smith follows:]
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Mr. Lankford. Thank you.
I ask unanimous consent to place in the record the
statement of Dr. David Montgomery, the Senior Vice President of
NERA Consulting. Without objection, so ordered.
[The information follows:]
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Mr. Lankford. We have a vote that has been called at this
point. It is a single vote, so that makes it rapid to go over
and come back. We will take a momentary recess.
I would like to reiterate something Mr. Smith asked, a
personal privilege for the members of the committee when they
go through the asking of the questions. I would like for us not
to get into a specific application from a specific company,
where they are in the process, how they can move in the
process. I think that is unfair to be able to ask Mr. Smith.
Obviously, each of us can choose what we ask on our own
time and on questions, but I would ask that out of respect for
DOE for being here to be able to honor them in that, process
questions rather than a specific company and whether they are
moving a specific permit.
With that, we will stand in recess for a single vote. We
will return. As soon as two of us get back here, we will
continue with our questions.
[Recess.]
Mr. Lankford. Thank you for being able to recess for a
short period, have the votes and jump back into it.
I would like to recognize the Ranking Member, Ms. Speier,
for a quick motion.
Ms. Speier. Thank you, Mr. Chairman.
I would like to ask unanimous consent that the written
testimony by the American Public Gas Association be submitted
for the record.
Mr. Lankford. Without objection.
[The information follows:]
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Mr. Lankford. I would like to recognize myself for five
minutes of questioning. Then we will move back and forth and
allow members to ask questions. If we have an opportunity,
schedule allowing, we would like to be able to do a second
round if time permits for both the witnesses and us as well.
We are at a 14 year low of actually gas well producing rigs
and 1999 was the last time we had this small a number of rigs
out there producing natural gas. It is an interesting dynamic
to see very little production coming into the stream but
because we have so much currently being produced in the wells
that are out there and makes this conversation about the
cumulative impact and the decision is very difficult for DOE.
The first export facility has been permitted. They are in
the process of construction and will be done some time in two
years from now. When you begin to evaluate, from the DOE
perspective, cumulative impact, how will that work process-
wise? Because obviously we have one facility and will not
really know the impact of that truly for maybe four or five
years as we go through the process. You have the two studies in
hand, now what on determining cumulative impact?
Mr. Smith. Thank you, Mr. Chairman, for that question.
Essentially the way the Department has handled this, when
we issued the permit for Sabine Pass, in that permit we noted
for future applications, since we were looking at queue of
applications that were building up, we would have to consider
the cumulative impact of each of those applications and going
through our public interest determination.
The first step we did was to commission a study. The first
part was conducted by EIA and the second part was conducted by
NERA Economic Consulting. The idea of doing the studies and
offering the studies for public comment was to provide some
sort of analytic rigor to looking at what the production
capability of the natural gas industry in the United States and
the capability of the global gas market to absorb gas in the
United States.
That was the process we undertook. The NERA study is now
back and has been put out for public record. We have entered a
public comment and reply comment period and have received
responses. It is our job now to evaluate not only the study we
received, which was done for the Department, but also the
cumulative comments that we received from stakeholders and
individuals interested in the process.
Mr. Lankford. How does that work from here? Is the
cumulative impact an economic impact, a forecasting, is it a
matter of they have to function for a while before that is
determined or can you do that off the study and the responses?
Mr. Smith. That is the process we are going through right
now. We have something around 200,000 comments and reply
comments that we are evaluating. Our job is to take the studies
that have been provided, that have been put out for public
comment, evaluate the rigor of the studies and also the
opinions we received from the stakeholders.
Mr. Lankford. I understand. Once it comes back, is the
issue really just the evaluation from the studies or will you
have to wait to permit numbers two, three or whatever may be,
if you permit two and three, until after the existing facility
that is under construction is done and is actually exporting?
When will that decision be made? Will it be before the export
begins two years from now or after?
Mr. Smith. The answer to that question is going to be
determined by the analysis we are currently undergoing. The
reply comment period just ended three weeks ago. We are now
looking at a tremendous amount of information we just received.
Mr. Lankford. That is the reply on the initial. You had the
initial that went out, all those comments went out and then
there was reply. That is really the second phase of it,
correct?
Mr. Smith. There were two periods. The reply was 45 days
and the reply comment was 30 days.
Mr. Lankford. The question in making the decision is do you
forecast the decision, what to do with applications to and on
after the facility under construction is already exporting or
before?
Mr. Smith. That is going to be determined by our analysis
of the comments.
Mr. Lankford. It could be four years from now before the
second decision is made? Is there a time period you are looking
at of when to make the next decision or is it that wide open,
could be ten years or two years?
Mr. Smith. I am not in a position to opine on something
that is going to be based on a determination or analysis we are
currently conducting.
Mr. Lankford. Does DOE feel at all an economic pressure of
what happens globally on these contracts? By the way, I do not
intend to pressure DOE. I am just trying to figure out what is
going on with this one way or the other.
Globally, the contracts are going out. As I mentioned,
there are eight export facilities being constructed currently
in Australia and other countries are ramping up for this. There
is a limited amount of time that we have to be able to compete
in the global market and be able to fulfill contracts that are
out there.
If this is going to be ten years before the next facility
is constructed, that is a significant lag to try to get those
contracts. The guess is where do we go as a nation? How big is
that window you anticipate before a decision is made?
Mr. Smith. Again, Mr. Chairman, I am not in a position to
put out a timeline for making decisions because that timeline
is going to be based on the very analysis that we are in the
middle of right now.
Mr. Lankford. When do you think you will have concluded
your analysis? As you go through all the comments, you are in
the second phase of that, do you think that is another 45 days,
another six months, another year? Give us a best guess on how
that moves.
Mr. Smith. Mr. Chairman, it would be inappropriate and
irresponsible for me to make a guess.
Mr. Lankford. I would have to disagree, it is inappropriate
to have an indefinite period of time to decide when you are
going to decide. At some point, there has to be something in
your forecasting to think we are going to decide by this point
and then the decision will be out from there.
Mr. Smith. The comment period ended three weeks ago. We are
currently going through an immense volume of input. Many of the
commenters have made comments very consistent with the points
you are making, so I understand the sense of urgency and the
importance of this decision.
Mr. Lankford. It has to be right.
Mr. Smith. But we have to make the decision in a way that
is consistent with public interest and that withstands the
scrutiny it is certainly going to receive.
Mr. Lankford. Thank you.
I will recognize Ms. Speier for five minutes.
Ms. Speier. Thank you, Mr. Chairman.
Mr. Smith, let us get to what your challenge is, which is
to determine whether or not approving or authorizing the
process to move forward for liquid natural gas to be exported
is consistent with the public interest. Can you be more
specific about the criteria you have to include in that
evaluation?
Mr. Smith. The statute essentially creates a rebuttable
presumption that exports are in the public interest. It is our
job to look at each application to make that determination. The
law gives the Department of Energy considerable latitude in
determining what that means. In fact you opined that when the
law was written, one was not envisioning the export of natural
gas from shale gas resources. That was just not something that
was on the horizon.
Our job has been to come up with a standard which we are
going to have to defend when we write the order. We are looking
at a wide range of factors that Americans care about,
everything from balance of trade, creation of jobs, GDP, impact
of prices on consumers and American families, impact of prices
on American industry, energy security and environmental issues.
We have a wide range of factors we have to consider.
For me, it is illustrative to be sitting next to Mr.
Ebinger, Mr. Cicio and Mr. Choi, all professionals whose work I
am familiar with outside of this hearing, but all who have
somewhat divergent views on what this means.
Ms. Speier. Let me ask, Mr. Cicio, in your statement you
said any level of exports will increase cost of natural gas for
consumers. That was pretty blanketed in that statement. Can you
express that more specifically?
Mr. Cicio. I am referring to the two studies, the EIA study
done in January of last year and the NERA study. Both of them
used a broad number of volume of exports. Under every scenario,
prices of natural gas rose. That is where our comment came
from.
Ms. Speier. Mr. Choi, you make evaluations based on whether
or not they are good investments for the oil and gas industry,
is that correct?
Mr. Choi. We have a model that looks at producer decisions
based on a profit maximization objective for the producer.
Ms. Speier. When you speak up, you are speaking from a
perspective of it being advantageous for the producers as
opposed to whether it is advantageous for domestic
manufacturers or the domestic consumers, correct?
Mr. Choi. Yes. We have a model of the NASR gas industry in
which we represent producer decisions and also consumer
decisions. Our model is different from most other models in
that we represent the individual incentives by each of the
parties. It is not purely looking at the incentives for one
particular sector but rather, representing the industry by
looking at how each individual agent would make decisions.
Ms. Speier. Dr. Ebinger, I actually read your report. One
of the things you stated in the report is that there would be
harm or impact, I should say, to low income consumers with the
exportation of LNG and that there should be some set aside of
whatever sales tax or revenue the Federal Government gets to
make sure low income people would have some form of subsidy
because of the increased cost to consumers, is that correct?
Dr. Ebinger. Yes. We did not go into great detail in
looking at what that real impact would be but it was certainly
our conclusion that low income consumers would have some price
impacts. Again, I would like to emphasize that taken in the
wide sweep of the benefits of exports, however those needs are
met for the low income consumers, we believe overall, the
nation would be much better off with exports.
Ms. Speier. I will yield back, Mr. Chairman, until the
second round.
Thank you.
Mr. Lankford. Dr. Gosar.
Mr. Gosar. Thank you, Mr. Chairman.
Mr. Cicio, the rates are artificially low right now, are
they not?
Mr. Cicio. Natural gas prices are low, yes.
Mr. Gosar. So we are not really being truthful to the
American public, as the Ranking Member mentioned. We are going
to see a natural increase because if we do not, we are not
going to see production, true?
Mr. Cicio. That is true. In fact, the NIMEX price between
now and 2020 increases 44 percent.
Mr. Gosar. Mr. Ebinger, you just heard Mr. Smith's comments
about timelines. How do you view that timeline from your
perspective?
Dr. Ebinger. I view that timeline as very deleterious to
the U.S. natural gas industry because, according to our
analysis by 2020, if you are not in the marketplace by one of
our first few LNG plants, you are going to have very serious
competition. The Chairman has mentioned the projects coming out
of Australia. By the early 2020s, we will see major new gas
projects arising in east Africa, Algeria, Angola and many other
places.
We also remind people in our report that in the Asian power
market, coal remains extremely competitive with LNG and despite
our efforts to curtail global warming, we see massive new coal
deposits coming into the international market. Coal is going to
be competing directly against gas.
As we move into the 2020 period, particularly the ten year
time frame that was potentially mentioned, I think we can
assume there will be at least a handful of additional countries
that come up with their own shale gas development, be that in
China, South Africa or Argentina. We are going to have more
shale gas, more LNG with the prospect of big pipelines coming
from eastern Siberia and Russia to the Asian market which will
also compete against LNG.
It is not going to be easy to finance a big LNG project
when the competition is so great and you have to get your buyer
to take a huge proportion of the sales in order to get the
project financed.
Mr. Gosar. From what you have seen of our previous history
in this country about getting projects like this online, give
me an estimate of getting it online by 2020. My dad is a
geologist, so 30 days, 60 days, 90 days, 120 days, three
months, six months. They all come at cost and within the
bureaucracy of government. What is your best estimate of
getting it done?
Dr. Ebinger. I think it is an impossible question to answer
because DOE and FERC do have statutory responsibilities.
Mr. Gosar. Isn't there a way to streamline the process?
Dr. Ebinger. I would certainly think we could have some
additional plants in the market by 2020, 2022, if we were able
to get the process moving beyond the first Cheniere project
that we could probably see two or three projects in the
marketplace by 2025, say. I think anybody who thinks we are
going to have more or the fearmongers that list all the
projects before DOE and FERC argue that all these were built,
we would collapse the international LNG market. We see no
scenario where that is going to happen.
Mr. Gosar. I agree.
Do you see, Mr. Smith, in regards to the protocol? Looking
at timelines, it is very, very frustrating to America, by not
having a timeline that is equivocally pretty close to an
outline. Does that make sense?
Mr. Smith. I appreciate that Congressman. One think I would
like to emphasize is it is our job to get to a defendable,
transparent a decision as expeditiously as possible. We have a
tremendous sense of urgency for this process. Many of the
points that have been made by members of the committee and by
my friends on the panel have certainly been made multiple times
on both sides of the fence in the numerous comments we have
received in our public comment period.
Our job is to move forward as expeditiously as possible,
but in a way that is open, transparent and which yields a
decision which will withstand the scrutiny that it is certain
to receive. A point we emphasize as we go through our own
internal adjudication is that a decision that does not
withstand scrutiny is not going to be useful for the concerns
you have and it will be a wrong decision for the country.
This is something that is important. We are talking about a
period of analysis that we discussed here but this is
infrastructure that will be in place, if built, for decades.
These are long term decisions and are going to lead to long
term investments that will be important for our economy. We
have to get this right.
Mr. Gosar. That is only if you do them within the time
frame that makes it economically feasible. If you don't, you
are done.
Mr. Smith. On that, I would state I spent 11 years in
industry before I came to the Department of Energy. I actually
worked at Chevron when Chevron was working on the LNG import
terminal at Sabine Pass and I worked on that terminal. I did a
lot of that commercial work.
Industry will move forward to build what it decides to
build. Certainly falling into a window where you think the
market is open sometimes is good for the shareholders of that
company, sometimes it is not. It is not our job to opine on
what the company should be doing.
We have to make sure that our process is managed in the
public interest to make sure we are looking out for the public
interest of American businesses and families, that it is
consistent, open, transparent and will withstand scrutiny.
Mr. Gosar. Thank you.
Mr. Lankford. Mrs. Lujan Grisham.
Mrs. Lujan Grisham. Thank you, Mr. Chairman.
I am actually going to reverse my order of questions
because this is what happens when you are nearly last on a
panel.
Mr. Smith, given your now testimony and description of a
pretty in-depth process to make sure we get it right in terms
of the public interest and considering that we have trade
agreements with our Allies and we are mindful and watchful
about those compliance issues, are you reaching out to those
other federal agencies and stakeholders when you are talking
about those folks you are working with in the public interest
to get this right?
Mr. Smith. We are trying to be as open and transparent as
possible, so we like input from a diverse field of
stakeholders.
Mrs. Lujan Grisham. I appreciate that, but are you also
reaching out? Are you in a position to maintain objectivity
where you are waiting for people to come to you?
Mr. Smith. The process works such that we have an open
comment period, 45 days for entities to make comments and there
is a reply comment period. Anything we are going to consider as
part of the adjudicatory process has to be entered in the
public record, so that is our primary vehicle for making sure
we have an open and diverse group of stakeholders who are
opining on the process.
Mrs. Lujan Grisham. I would just encourage you on that note
that without interfering with the due process required here and
to get it right, and I am mindful and appreciative of the fact
that the public interest issues are paramount and get this
right so that we make the right decisions going forward, that
you are also reaching out and coordinating with our other
administrative partners who are going to have similar issues
and interests. I appreciate that and encourage you within the
context of that process to do that.
Mr. Choi, I am from New Mexico and very excited about the
positive potential here for natural gas and exporting liquid
natural gas. In my home State, it accounts for one-tenth of the
U.S. total and the San Juan and Permian Basins, neither of
which by the way are in my district, but create really the
economic foundation for our State.
Unfortunately, as you all have indicated, the low price of
natural gas has led to a drop off in natural gas production and
it has negatively impacted many parts of New Mexico's economy,
especially our State tax revenues that depend heavily on
severance taxes and other revenue raisers from gas production.
In the context of difficult economic times, the prospect
that we can increase natural gas exports and increase economic
activity and create jobs in my State is particularly
encouraging. As you discussed, we need to examine the issue
carefully and ensure that we are protecting consumers, domestic
manufacturing jobs and the environment as we consider exporting
our surplus natural gas.
Without reading the rest of that statement, the issue I am
getting to, you talked about in the short term, I am really
interested, given the low price of natural gas today and the
supply and demand influences, I want you to talk to me a bit
about whether the processes we are undertaking today can bring
stability in the long term for natural gas in terms of the
price indexes?
Mr. Choi. Are you talking about the regulator process or
the market process?
Mrs. Lujan Grisham. Both.
Mr. Choi. I am more familiar with the market process,
having worked with a number of companies. I can tell you that
they are undergoing a very deliberate and careful process
because a lot of the companies seeking to export LNG are the
same companies that have been burned by building import
terminals in this country. They are not going to rush towards
anything that puts their investments at risk.
Part of the interest in exporting LNG is the abundance of
natural gas that we have in this country. U.S. gas production
has continued to increase. You might have seen a bit of decline
in your home State because some of the production has shifted
from dry gas areas to more liquid rich areas. The total U.S.
production continues to grow.
At the present time, I believe the market is more demand
constrained than it is supply constrained. There are wells that
have been completed but not yet connected just because there is
a lack of demand or possibly because of lack of infrastructure
to take the gas away to markets. I believe the market is well
equipped to determine how much LNG export would be economic.
There could be some increase in price, but according to
economic theory, any increase in demand will have some increase
in price. Just because there is a price increase is really a
pretty innocuous statement; the question is how much of a price
increase will there be? According to our study, that price
increase will be fairly modest because of how dynamic the
market is and because of how much domestic resources we have in
this country.
Mrs. Lujan Grisham. Given the huge fluctuations in the
market, it would be nice if there was a sense given that the
potential here for broadening our exports, that we might be
able to have a little more long term stability in the market by
the appropriate effort between the two, market supply and
demand, a response and an appropriate regulatory environment so
that you do not have these huge fluctuations. You could then
get to a place where we can do consumer protection by some
other model if necessary in that case.
Mr. Choi. I agree with that. Just because we have exports,
I don't believe necessarily means that price volatility would
increase in this country. In addition to exporters securing
long term markets through long term supply contracts, they
would also have supply contracts or supplies that are ready to
support their export terminals. The supply will respond to the
increase in demand.
Mrs. Lujan Grisham. Thank you. I yield back.
Mr. Farenthold. [Presiding]. Thank you very much.
At this point, I think I am next on the list right at the
time I take the center chair, so perfect timing for me. I will
now recognize myself for five minutes.
Mr. Choi, you talk about an abundance of natural gas and
not a whole lot of price volatility with the addition of
exports. Can you give us an idea just how much natural gas we
think there is in some of these new shale finds?
Mr. Choi. It is not just shale finds, it is the total
domestic resource base which includes conventional supplies,
shale gas, coal bed methane and other types.
Mr. Farenthold. Assuming projected growth in world demand,
how many years supply are we looking at?
Mr. Choi. By most accounts, we have over 2,000 bcf of
natural gas in the United States. At our current production
levels, that is equivalent to about 100 years.
Mr. Farenthold. In shale gas, we only recover with our
fracking technology about a third of what is there with today's
technology?
Mr. Choi. The technology is constantly improving and we are
able to recover more. The shale gas comprises a growing share
of our total U.S. production.
Mr. Farenthold. Mr. Smith, are you familiar with the
concept of being in the right place at the right time? That is
where you want to be, right?
Mr. Smith. You would have to clarify that question.
Mr. Farenthold. I guess what I am getting at is I don't
know whether it is coincidence or divine providence or
whatever, but to me it looks like our technology in the energy
industry is pulling this country out of a recession kicking and
screaming. I am going to mix my metaphors here, strike while
the iron is hot. If the blacksmith industry had to go through a
burdensome regulatory process while the tire industry was
developing, we would miss the ability sell a lot of horseshoes
because cars come into existence.
I guess what I am getting at is the Federal Government is
spending a lot of money on alternative energies. I think a
breakthrough in battery technology makes a whole lot of
alternative energies work a whole lot better. Are we not
possibly at a unique time in history where we have a lot of
natural gas, there is a market for it and we could make some
money off it if we did something now?
Mr. Smith. Congressman, what I can say is that there are
certainly a large number of commenters of the 200,000 comments
we are going through now that have made exactly the point you
are making. We certainly have a sense of urgency to as
expeditiously as possible get to a open and transparent.
Mr. Farenthold. I know that Chairman Issa showed this slide
where you can actually see in the dark the Balkan field and the
Eagle Ford Shale in Texas which I am blessed to have touch the
district I represent.
I am also going to show you a map, a Baker Hughes map, that
shows all the rigs currently in production. The red ones are
gas, the blue ones are oil. There is no gas being produced in
the Balkans because there is no market for it and at the
current prices, they cannot afford to build a pipeline. They
basically are just burning it. It is a huge waste of what
potentially is a very valuable resource.
We are seeing gas prices that are just above $3.00, $3.25
or so, in Texas. It is great for us. We have steel plants
coming in, we have plastic plants coming in, we have LNG
companies looking to come in and export. We have some red ones
because we have the pipeline infrastructure to do it and
market.
What we hear from producers is in addition to having to get
pipelines, which are expensive to build and another regulatory
burden, I only need say the word Keystone, that is a problem.
Then you zoom in down here and see there are also gas wells
offshore in Louisiana. These are traditional, horizontal wells.
You are not seeing the development of the gas wells because you
cannot produce a horizontal gas well at $3 gas. The gas we are
getting out of these horizontal wells is being produced along
with oil or other liquids. It is not economical to even pursue
it. We could lose this boom if we do not get a market. I guess
I want to make sure you all are aware of the urgency of getting
this done.
Then you look at what is going on now in Japan after the
terrible tragedy there, they are looking to decommission their
nuclear facilities and go with natural gas. Wouldn't it be cool
to actually have something to sell back to them for all those
electronics we are bringing over here to get the balance of
trade? This is the time. I just want to make sure you guys
understand that. There really is that sense of urgency.
Mr. Smith. Thank you for those comments, Congressman. Those
are all factors we are considering. I grew up in Ft. Worth,
Texas in the Labar Neck Shale. I have seen firsthand the
difference that some of these developments can make.
We also understand all the other balancing factors. We want
to make sure we make a good public interest determination and
we need to move forward as quickly as possible in a way that is
open and transparent.
Mr. Farenthold. I appreciate that. I am a relatively
newcomer in Washington but I do know one of the best ways to
kill something is delay. I hope any delay we are doing is
necessary and not intentional.
My time has expired. Mr. Horsford, you are next for five
minutes.
Mr. Horsford. Thank you, Mr. Chairman. Thank you to the
panelists for being here today.
I am from Nevada and we also have natural gas facilities in
our State. It is both a blessing and a curse. On the one hand,
prices are at an all time low. These low prices have benefitted
the manufacturers, the consumers and household users. On the
other hand, these low prices are at adversely affecting many
producers of natural gas.
Going forward, as policymakers, we have difficult questions
to answer. One of the areas I feel we have to address beyond
corporate profitability also pertains to our security, jobs and
households. I would like to ask the panel, Mr. Cicio, you say
in your testimony your organization is not opposing LNG exports
but you ``remain very concerned that exports could negatively
impact manufacturing competitiveness and U.S. jobs.'' Why is
that and is there a way to calculate how many U.S.
manufacturing jobs could be lost or not created if LNG exports
are allowed to proceed?
Mr. Cicio. It is difficult to answer the second part of you
question. What I can do is tell you that these prices have
clearly started the manufacturing renaissance. There are
upwards to $95 billion of new capital investments by chemical
companies, nitrogen fertilizer for plastics, steel, glass and
these new facilities are going to create upwards to six to
eight bcf a day. With those announcements, we are talking about
a 10 percent increase in demand for natural gas.
Every month, there are new announcements. In our view when
I talk to my companies, in my view this is the first wave. The
commodity, as we call them, the building blocks, the kind of
companies I mentioned they supply energy intensive block
products to every manufacturer in the country. As this new
capacity for this building block material--the plastics,
chemicals and nitrogen fertilizer--comes on stream, our
customers will be expanding.
We are quite optimistic about the demand side, but it is
very difficult, other than to do a study much like the DOE has
done, to determine what negative impact it would have at a
specific price going forward.
Mr. Horsford. As we have heard, those in the oil and gas
sectors believe that failure to permit foreign exports of LNG
could severely undermine that industry and would ultimately
affect current and future jobs. Do they have a valid concern,
do you think?
Mr. Cicio. Manufacturers have a valid concern, yes, they
do. Higher prices, just from 1999, natural gas prices doubled,
then tripled and peaked in 2008. In that time period, I saw
almost 55,000 manufacturing facilities shut down. A lot of it
was related to high prices of natural gas. There is an absolute
relationship between the price of natural gas, the price of
electricity and manufacturing competitiveness.
Mr. Horsford. Is there the proposition of you said the kind
of winner take all where it is to the benefit of one sector and
to the detriment of another?
Mr. Cicio. No.
Mr. Horsford. Can there be a balance?
Mr. Cicio. That is correct. Our testimony bears this out.
If we have a process at the Department of Energy that takes
into consideration the public interest and balances, we should
be able to export and we should be able to provide affordable
prices of natural gas for domestic consumers.
Mr. Horsford. Mr. Choi, what do you say about that?
Mr. Choi. First of all, I think we need to realize that
between 2004 and 2008, U.S. natural gas prices rose to
unprecedented sustained levels. Prices during that time ranged
from about $7 to $10 per mmbtu. Nobody I am aware of is saying
exports will bring prices up to those levels.
The advent of the shale gas revolution, which used the
hydraulic fracturing and horizontal drilling to make vast
amounts of shale gas economical, has fundamentally changed the
picture. Even with exports, we are not going to see prices at
that level in the future.
Mr. Horsford. Thank you, Mr. Chairman. I will wait for
additional questions.
Mr. Farenthold. Thank you. It is interesting where we see
this side of the aisle agreeing with the DOE and Brookings and
not always with the industry.
At this point, I need to ask for unanimous consent for the
gentleman from Louisiana, Dr. Fleming to sit as a member of
this subcommittee. Without objection, so ordered.
Up next is Mr. Turner. Mr. Turner, you are recognized for
five minutes.
Mr. Turner. Thank you, Mr. Chairman.
I appreciate our panelists because it is certainly an
important discussion as we look to the issue of job creation
and energy policy. In Ohio alone, it is expected that Utica
Shale would have a $5 billion economic impact and create or
supply nearly 66,000 jobs in Ohio by 2014. I appreciate the
discussion that we have great opportunity to export and that
the price spikes we had in the past were the result of the fact
we did not have the access to or the abundance of supply that
we are now seeing.
Dr. Ebinger and Mr. Choi, in your reports you both touched
on the issue of the geopolitical implications of exporting U.S.
natural gas. I would like to speak to that for a minute and ask
you a question.
When we look to the U.S. interests and certainly domestic
economic benefits, we also need to look to the issue of the
geopolitical implications of our being able to export. As both
of you have noted, Russia has a major role as a supplier of
natural gas and is a non-reliable exporter to the European
countries. They use it as a political tool, punishing our
European allies, especially eastern Europe, and use it to try
to divide the EU and NATO countries as they put pressure on
individual countries to adopt policies favorable to Russian
positions.
I have a bill, H.R. 580, the Expedited LNG for American
Allies Act, that would expand the ability to export LNG to our
NATO partners and to Japan to allow expedited approval for that
export. This is a bill that initially had been championed by
Senator Lugar. It is a bipartisan and bicameral piece of
legislation. I think it would be very important to give that
expedited opportunity, not only increasing our markets,
lowering the overall bureaucratic process for export, but also
have an impact in the Pacific region with respect to Russia's
export.
Dr. Ebinger and Mr. Choi, would you please elaborate on
your positions and thoughts as to the geopolitical effects of
U.S exports to those regions?
Dr. Ebinger. Thank you, Congressman.
Yes, I would thoroughly agree with your characterization of
what LNG cargoes diverted from the U.S., since we no longer
need them, have played in the European market. The big reason
for that is that in most of the world outside the United
States, petrochemicals are derived from naphtha, an oil-based
product, rather than from natural gas, making them much more
costly.
We have seen LNG cargoes allow the Europeans, as some of
their longstanding contracts with Gazprom have come up for
renegotiation, to use the availability of natural gas to delink
a large portion of their supply from Russia and in some cases,
get significant price concessions from the Russians.
My only concern about your bill, I think it is very
admirable and we certainly support our NATO and European
allies, is that one has to be very careful because having just
returned from a significant gas conference in Amsterdam, it
does appear, listening to the Europeans, that they believe for
the next ten years the European gas market is saturated.
Part of that is, of course, the depressed economic
condition prevailing in Europe, which obviously can switch
around at some point in time, we hope, but I will only caution
that if we were to direct U.S. LNG cargoes there, it might be
good that we could drive prices down further but it might not
necessarily be good for our own exporters if they found that to
penetrate that very glutted market, they had to significantly
redirect it.
Mr. Turner. The bill doesn't redirect it, but streamlines
the bureaucratic process for those who are doing that.
Mr. Choi?
Mr. Choi. In our latest paper, we looked at the global
implications of U.S. LNG exports. In order to understand what
the impacts would be, you have to look at each market and
examine what the marginal source is. The marginal source might
not be just what is currently being exported, it could also be
future supplies. These supplies could be marginal either
because they have high production costs or high transportation
costs, or possibly because of political hurdles that make these
supplies effectively more costly to come to market. I am
talking about the supplies such as from Iran or possibly
Venezuela.
You mentioned Russia. Russia is the largest gas exporter to
Europe. They are vulnerable, according to our study, because
not only do they have the largest volumes, but they are also
the highest cost contract supplied to the European market. We
believe if the U.S. exports to Europe, which is one of our
scenarios, Russian supplies would be vulnerable.
Mr. Turner. Thank you, Mr. Chairman.
Mr. Farenthold. Thank you, very much.
We will now recognize the gentleman from Louisiana, Dr.
Fleming, for five minutes.
Mr. Fleming. Thank you, Mr. Chairman. I thank the committee
for allowing the courtesy today to sit in and I appreciate the
panel here today.
I come from the 4th District of Louisiana which has the
Haynesville Shale. The Haynesville Shale, as you know, in the
period around 2007 to 2008, we had nothing less than a
revolution in marrying the old technology of hydro-fracking and
the new technology of horizontal drilling, which has released
tremendous wealth and economic activity which has really
sustained my district through difficult economic times.
We are victims of our own success, unfortunately. As a
result of that, as you know, the price has been well displayed
here, and has been depressed because of all of the production,
so we have gone from excessive demand and little supply to
excessive supply and relatively the same demand, which is kind
of interesting because our friends on the other side of the
aisle assure us the high cost of gasoline and oil has nothing
to do with supply and demand, it is speculation.
We would like to have a little speculation in natural gas
if that would be okay with you gentlemen just to get that price
up a little bit because we have had a number of actual drilling
sites that we have not moved forward on because it is just not
economically viable.
The other piece is in Lake Charles, we have the Cheniere
plant which is an incoming supply depot for LNG because we have
been net importers. Now they are spending $10 billion to make
it a net export facility and we are glad about that. We will be
well positioned for the future not only to take care of our own
needs, but to take care of the needs of the world when it comes
to this revolution.
I have a couple of questions today. Mr. Smith, what are the
criteria for approving one terminal over another? Is geography
a factor, a region already has a facility or other projects
that may be less advantageous? How do you decide about that
because we are waiting on final permitting and approval with
our plant?
Mr. Smith. As you are aware, and as you stated in your
comments, we have already approved one export facility and that
is the Sabine Pass facility in Louisiana. Subsequent to that,
now that we are looking at cumulative impact of another
additional 28.2 billion cubic feet a day of potential exports,
one of the things we have announced as we go through our
process is we do have a queue, we have a sequence we are going
to use in order to determine the order in which we are going to
evaluate the export opportunities.
We took all of the applicants before the Department and
divided them into two categories, ones which had submitted
their FERC pre-filing application, the process where you start
spending more significant quantities of money, and those who
had no filed for pre-filing. Within those, it is on a first
come, first serve basis.
There is a list. There is a pdf on the DOE website and you
can see the next applicant we are going to consider and you can
see the last applicant. We are going to work through that queue
looking at all the factors we have announced as part of our
public interest determination, everything from jobs, balance of
trade, economic impact on consumers, prices, impact on
industry, international issues, economic and environmental
issues, a wide range of factors we are going to use in order to
evaluate each one of those applicants.
Mr. Fleming. Do you do some en bloc or are they all one on
one?
Mr. Smith. We are compelled by statute to evaluate each of
these on an individual basis.
Mr. Fleming. What about the non-FTA countries? What is the
policy towards them? Are they still in the queue?
Mr. Smith. The law breaks up applicants into two
categories, FTAs and non-FTAs. Free Trade Agreement countries
essentially are approved without delay or modification by the
Department. There is no discretion that is exercised, under
statute, by the Department. Those are being approved as we
receive them. It is the non-FTA applicants we are evaluating.
Mr. Fleming. Is that there to say there is going to be
difficulty in approving them? What are going to be the
challenges in getting approvals for them?
Mr. Smith. There is a process. As I mentioned earlier, it
is illustrative that even on this panel you have individuals
who think should be approved immediately and all of them should
be approved; there are a lot of voices who think there are
concerns with exporting LNG in terms of rising prices. There
are lots of arguments being made.
We received somewhere on the order of 200,000 comments in
addition to the studies we received, some of which we
requested. It is our job to look at all the factors so that as
expeditiously as possible as transparently as possible and as
quickly as possible, we get to a public interest determination
that is going to inspire the right type of confidence in terms
of its ability to withstand the scrutiny it is certain to
attract. That is the process we are in right now.
Mr. Fleming. I certainly want to underscore that we should
encourage approval of non-FTA countries as well. It will be
good for the global economy, it will help our prices. You just
heard that we have more natural gas now than we ever thought we
had in the past and probably with newer technologies coming
online, we will have even more in the future.
It is not that we want to drive up prices; we want prices
to be at real market rates. That is going to be the sweet point
for consumers and for jobs.
With that, I yield back and again, I thank you for your
courtesy.
Mr. Farenthold. Thank you very much.
At this point, we will start a second round of questioning.
I will recognize myself for five minutes and then move across
the aisle.
Mr. Cicio, the gist of your concern is that as we start to
export natural gas, there will either be a shortage or an
increase in cost of natural gas that is used either as a raw
material or feedstock for domestic manufacturing and to keep
domestic electricity prices low as natural gas, certainly in
Texas, is a major source of energy. Is that a reasonable
summary of what you are saying?
Mr. Cicio. No. Natural gas is different. That is what makes
this public interest determination so critical. Natural gas is
very influenced by the public process. There is legislation and
regulation that can impact the access to natural gas in terms
of whether it is in a moratorium or not, and Congress can deal
with the intangible drilling cost tax benefit and that is going
to change the economics.
Mr. Farenthold. Intellectual property is highly regulated
and with music, their ability to profit is determined almost
entirely on government regulation of copyright. We could go in
and regulate almost any other industry.
Mr. Choi, do you agree with that characterization that
natural gas is unique over any other product or commodity?
Mr. Choi. No, I would not. First, I would note that at the
margin, there are some regulations that affect the amount of
drilling, but for the most part, we have deregulated the supply
markets and the market determines how much to produce.
Mr. Farenthold. Thank you.
Mr. Cicio, let me ask you this. As we get more natural gas
through pipelines to our ports doesn't that make the liquids
that are oftentimes produced with natural gas more available to
your industrial customers to use for other products?
Mr. Cicio. Drilling for natural gas, drilling for oil, it
increases potentially natural gas liquids, so the answer would
be yes.
Mr. Farenthold. Using your argument that natural gas is
special, does that mean we should add regulations to the export
of other basic chemicals like ethylene and propylene?
Mr. Cicio. I will say it again, natural gas is different
because let us say if DOE approves a terminal, they are
approving it for up to 30 years. The terminal operator then
negotiates long term contracts that are mostly take or pay.
That locks in demand for a 30 year time period. Meanwhile,
consumers are exposed to the risk of public policy on the
production side and on the demand side of natural gas.
Mr. Farenthold. Can any consumer, whether an electric
company generating for the public, negotiate a long term
contract the way exporters can?
Mr. Cicio. No.
Mr. Farenthold. Why not?
Mr. Cicio. There are very, very few long term natural gas
contracts negotiated.
Mr. Farenthold. At $3.00 and something, I might be
negotiating long term ones myself.
Mr. Cicio. We would like to do so.
Mr. Farenthold. Mr. Ebinger, would you like to comment on
this line of questioning?
Dr. Ebinger. Congressman, I would only say I am old enough
to remember when we could not burn natural gas in industrial
boilers or powerplants because ``it was a noble fuel'' and we
should not do that. We have made major disastrous decisions
through the years whenever we tried to not allow market forces
to work. It is precisely for that reason that in our analysis,
we see plenty of NGOs being available for the American
industrial renaissance and used the dry gas for export.
As I said in my formal testimony, I think we have to be
careful because this idea that Dr. Fleming seems to think, and
I would agree with you, sir, I would love to see more natural
gas exported but we think the realities of the marketplace are
not going to allow all these projects before DOE to ever be
developed in any time frame any of us can reasonably foresee
here.
As a result, we find some of the arguments put forth by the
petrochemical industry and others to be somewhat spurious to
the realities of the marketplace.
Mr. Farenthold. Let me ask, Mr. Choi, you studied this,
what is the environmental impact of this? It seems to me as we
have low cost natural gas that is cleaner burning than oil and
in most cases, coal, isn't it a positive net environmental to
get more people burning clean natural gas?
Mr. Choi. Yes, it is. If you look at the carbon emissions
in the United States, we are at I believe the lowest point we
have been in the past decade. Most of it is because we are
burning more natural gas than we ever have.
One other comment I would like to make is that just because
there is a rush to apply for DOE approval to export doesn't
necessarily mean that all these applications, if approved,
would be built.
Mr. Farenthold. Thank you very much. I apologize for
cutting you off but I am out of time. As a courtesy to my
colleagues, we do need to keep moving.
I will now recognize Mr. Horsford for five minutes and turn
the Chair back over to Chairman Lankford.
Mr. Horsford. I want to get back to this issue of who
should be involved in this process. Mr. Choi, would you agree
that all interests, those of the producers and those of the
consumers, should be considered by the Department of Energy in
their determination of what is a public interest?
Mr. Choi. I would rather not speculate on the role of the
Department of Energy but I can say that the market does
consider interests of all parties.
Mr. Horsford. Mr. Cicio, from what I understand, you are
here representing some very large companies that use natural
gas as an energy source and as an input in their production
process. What is your view on being able to have a say in this
process?
Mr. Cicio. Absolutely. All interested parties impacted on
the producing and consumer sides. Let us take a look at when
the DOE was confronted with dealing with determination on
imports. They did a rulemaking process to develop the criteria
and allowed for all parties to comment, both verbally and in
writing, to help develop that criteria. It was done in a very
transparent way.
My comments earlier today were that there has not been any
rulemaking that has allowed for a set of criteria for exports.
That is what we believe is the best process to move forward.
Mr. Horsford. The fact that your report accurately
estimates the impact of exportation on your member companies is
a concern?
Mr. Cicio. It is interesting. The NERA report said that
energy prices go up, wages go down and the return on capital of
all industries are impacted in a negative way.
Mr. Horsford. Mr. Chairman I think this hearing
demonstrates, at least to me, that there are many sides to the
question of allowing LNG exports on a scale never before
considered in U.S. history. The law requires the Department to
do what is in the public's interest. I know none of us want to
be motivated to pushing the Administration into picking winners
and losers and it is something that of course the majority has
talked about, not only in this committee, but in others and has
objected to that type of consideration.
The last Congress I know is in the past but I would hope we
would not do anything to try to push the Administration into
selecting winners and losers in this process.
At this hearing, which concerns something the oil and gas
industry wants, federal permission to export LNG and thereby
raise gas prices and profits, I get the feeling that some
members of the majority want the Administration to go in this
direction so long as oil and gas are the winners. I hope we
have the public's interest in mind rather than merely just one
industry's welfare or profit.
Thank you.
Mr. Lankford. [Presiding] I would recognize myself for the
next line of questioning.
Mr. Horsford, I would agree, this shouldn't benefit one
group or another, but there are tens of thousands of jobs on
the sidelines currently that in a 7.6 percent unemployment rate
for the Nation, we would love to see. The jobs that are
happening take an area like North Dakota, an area where there
are a lot of jobs that are $80,000 and above as a starting
position for a high school education. It would be great to see
this promulgated across the country. A lot of families would
enjoy that kind of benefit to see that in the days ahead.
I apologize that I had to slip out for a moment. I need to
come back to several things on this. I am still trying to
process through how we make the decision and how we move
forward in timing on this.
Mr. Smith, is DOE anticipating setting a numeric number of
bcf to export a day? Is that an expectation, there will be some
moment or some decision to be made to say we are going to find
a magic number of bcf, we are going to limit that?
Mr. Smith. I thank you for the question Mr. Chairman. The
Department has not made any determination about a volumetric
limit or cap or any sort of quantified figure, so that is not a
determination the Department has made.
Mr. Lankford. That decision has not been made or that
decision is irrelevant, it is going to be market-based? I am
trying to figure out will this be centrally determined, that
someone in DOE will determine we can do up to 6 bcf a day but
that is all we can do economically based on studies or will the
market decide?
Mr. Smith. The market has made no determination about the
imposition of any cap, quantification, the calculation of any
caps. That is not a decision the Department has made. We have
not come to that conclusion.
Mr. Lankford. You have made a decision at least 2 bcf are
going to happen a day because the existing export facility has
that capability of 2 bcf a day, correct?
Mr. Smith. We have decided to permit 28.2 bcf per day.
Mr. Lankford. I am trying to figure out where does this go
from here. Is it a situation where we have 19 applicants, we
are going to let the market decide what is appropriate or will
there be some decision to say we have two to permit, we are
going to allow two more, then wait a couple years, allow two
more, wait a couple years or is there going to be a decision we
think eight is the limit and try to figure out some process to
get us to eight?
Mr. Smith. Mr. Chairman, we simply have not made that
determination. We are in the process right now of making this
determination. The comment period literally closed three weeks
ago, so there is a very large volume of analysis the Department
still has to do.
Mr. Lankford. I do have to have some concern on the large
volume because there 186,000 individuals. My understanding is
that was about 300 actual comments and they all came in in the
thousands. Am I right or wrong on that because 300 comments you
are working through, just a large quantity of the same 300
comments?
Mr. Smith. There were a total of almost 200,000 comments.
Many of those were letter writing campaigns but you also have
to go through those because any campaign, people write things.
You have private citizens who are voicing their opinion.
Mr. Lankford. I definitely understand that. We get letter
writing campaigns, I assure you, but the comments, as they come
in, as far as in your decision-making, you have 300 unique
comments really there, you have thousands to reply to, but as
far as your decision-making process, you are really filtering
through 300, is that correct?
Mr. Smith. I do not want to characterize the 300 as being
unique from the other very large volume because we have to go
through all those comments.
Mr. Lankford. I understand. I am just trying to figure out
the decision-making process. As we are trying to process
through this, the assumption was the decision has been made we
are going to exports on non-FTA. That decision is done, it is
behind us. We are going to do it. Now it is how many additional
facilities. What will be the process and time? That is all that
is left at this point to determine. We have already determined
we are going to export.
I am trying to figure out is the timing because there are a
lot of contracts globally that depend on this, there are a lot
of jobs here in America scattered across the country. Mrs.
Lujan Grisham mentioned before, there are areas in New Mexico
and other areas all across the country that are dependent on
job development increasing.
With a 14 year low in production of natural gas happening
right now, that is a lot of jobs sitting on the sideline that
turn around almost immediately if production begins to increase
for export if there is some sort of advance planning, if we
know the timing. I am trying to figure out what is the timing
and what is the process.
Mr. Smith. I can say a couple things, Mr. Chairman. First,
we are committed to dedicating resources, dedicating personnel,
lawyers, to move as quickly and expeditiously as possible to
get to a transparent and defendable decision.
Mr. Lankford. You still don't know whether that is a month
from now or ten years from now?
Mr. Smith. Mr. Chairman, we are in the middle of the
analysis right now. I could opine on that but I would be making
something up that is trying to foresee the outcome of the
analysis we are currently doing.
Mr. Lankford. Do you have an expectation when you make a
decision, will they be made one at a time or based on a set of
merits where you will say this is the criteria. If your permit
application meets this set of criteria, we are going to permit
you and let the market decide or will this be, whatever system
it was, we are going to permit this company and then three
years, six months later or whatever it is, we are going to
permit another one? Will it be that order or will it be open it
up and let them go pursue capital, see who gets the capital and
who gets contracts? How will that work?
Mr. Smith. Again, that would be, to a large extent,
prejudging the analysis we are doing now. I can say we have
announced an order, we know what the next applicant is going to
be, what the subsequent applicant is going to be.
Mr. Lankford. How was that determined as far as the order,
the next one that is going to go down?
Mr. Smith. In the Sabine Pass Order, we stated we had to
look at the cumulative impact of LNG export, since we are
looking at a total of 28.2 bcf with the number of applicants.
Mr. Lankford. There is no way they are going to build that
much. There is not that much capital to build that.
Mr. Smith. That is not the argument I am making. I am just
saying that is the total quantity of export applications we are
looking at. We took the applicants on a first come, first serve
basis, with priority given to those that have started the FERC
pre-filing process. You can go to the DOE website, you can
download a pdf that shows you the list and the order. That is
the order in which we will proceed.
Mr. Lankford. So it is a first come, first serve if they
have gone through the pre-application. That is fine in some
semblances and I am sure for the company that is number two,
they are excited about that process and the company that is
number 19 is probably not as excited.
I know from being in a high school history class, when
tests were turned in on Friday, the first person turning in
their test didn't always get the highest grade. A process that
says whoever got his application request in first and started
with FERC has the highest priority seems to pull out some merit
issues.
Again, I am saying that and probably the number two company
is furious I am saying but there seems to be some need for
merit. Do they have the capital, do they have contracts, have
they had communication on this, can they actually fulfill it,
is this going to economically benefit the Nation?
If we make the determination to do it, then we need to have
some economic benefit immediately coming back to America, that
we know they are actually going to be able to fulfill it and
get it done. Does that come into play on this at all?
Mr. Smith. I appreciate the comment. First of all, in order
to get a permit before the Department of Energy, you need $50
and a fax machine, we get the application and it goes into the
docket. One of the ways we tried to emphasize or measure
seriousness or probability of outcome was to first do those
applicants that have a pre-filing before FERC. That is when you
start to spend very large quantities of dollars. We pushed
those to the front of the queue, the rest to the back of the
queue.
There are any number of algorithms one could try to come up
with to say this company is more serious than that one or they
have a better project than this one. We opted not to do that.
We said we were not going to try to judge the seriousness of
companies, or their business model or the probability of
financing because that is not our job.
We wanted something in terms of fairness to say we think
generally the idea that the company first in the queue should
go first. It was only fair.
Mr. Lankford. Did they know that in advance, that this was
going to be first come, first serve?
Mr. Smith. There was no process in place. This is brand new
ground.
Mr. Lankford. If someone did more research and took more
time to fill out their application, they ended up in the back
of the line. They just didn't know at that point?
Mr. Smith. Again, this is a new process that we are
creating.
Mr. Lankford. You have a difficult job in this and I
completely appreciate this. I know you are working
expeditiously but at the end of the day, everyone, all of us on
the dais, you, everyone is going to have to determine and be
able to say to people this was a fair process that worked as
expeditiously as possible.
I have gone well over time on this. I would like to
recognize Ms. Speier.
Ms. Speier. Thank you, Mr. Chairman.
Let me say to both you, Mr. Smith and you, Mr. Chairman,
you have done yeoman's work on behalf of each of your interests
here this afternoon, you, Mr. Smith, in terms of recognizing
that it is a judicial process and you cannot really offer a lot
of information about particular applications and Mr. Lankford
for pitching for his constituents as well. I compliment both of
you.
Let me just say though on your point about winners and
losers and whether or not someone has the ability to actually
take this approval and move forward, it appears they have done
just that. If you have put them in two categories, those that
have already done some precertification through FERC, they are
in the front of the queue you just said, is that correct?
Mr. Smith. Yes, that is the case. Those are being
considered first. Again, that is not a capricious
determination. Those were the companies already spending
millions and millions of dollars on feed and pre-feed and all
the other things they have to do in terms of determining
environmental impact. Those are companies making a real
investment. They are spending dollars now.
As I said, we didn't try to grade each company but we did
create two categories and we thought that was a fair way to
approach it.
Ms. Speier. Let me also ask this question. There are many
folks in the oil and gas industry that will go out, get the
permits and just sit on them. That is not what I think any of
us are interested in. How do we prevent that from being part of
this extended evaluation as to the merits of how much is
eligible to be exported versus not?
Mr. Smith. The Department has some flexibility and some
leeway in the way it writes its Orders. One thing we emphasize
is that when we write an Order, when we say yes or no, we don't
write yes or no on a sticky and say that is a decision. There
is actually a hundred-plus page Order the Department comes out
with that goes through in a very open, transparent and
dependable way, the rationale the Department has gone through
to get to that Order. Also, we have the flexibility and the
discretion to put in qualifications or requirements for the
companies.
If you look back to how we managed the Sabine Pass Order
for Cheniere, there was a requirement that by a certain date,
they had to have first gas going through the terminal which
essentially prevents a company from going in for a relatively
low price.
Ms. Speier. Fifty dollars?
Mr. Smith. Yes, $50, and obtaining an application which
they can sit on ad infinitum. That is not in the public
interest; that is not what we wanted to accomplish. That is how
we managed that.
Ms. Speier. Mr. Cicio, you have been very helpful and have
raised some interesting issues. Can you list out some of the
companies that you represent?
Mr. Cicio. Actually, no. We do not list our companies on
our website, we do not publish them. The reason why is that we
work on some very delicate environmental issues and many of our
companies have retail profiles. We try to protect them from
having that exposure. IECA represents a trade association and
the cumulative views and the consensus of those companies. We
speak as an organization, not speaking on behalf of a company.
Ms. Speier. I understand that, but for us to evaluate the
impact on companies making it in America, you talked about the
American renaissance of manufacturing which we all embrace. We
want products made in America. I do a Make It in America forum
in my district every year. I just want to get a sense of how
many employees are we talking about, are these Fortune 500
companies. Play 20 questions with me.
Mr. Cicio. Our companies have over $1 trillion in revenues,
they employ 1.4 million people, have some of the largest
manufacturing facilities in the United States. These are large
companies. They produce steel, aluminum, chemicals, plastics,
nitrogen, fertilizer, glass, cement, food processing companies,
these are all name brand companies.
Ms. Speier. You said how many employees?
Mr. Cicio. It is 1.4 million.
Ms. Speier. You also indicated that while the export
contracts typically are for 30 years, that is not the case for
manufacturing companies within the United States. Could you
elaborate on that?
Mr. Cicio. Manufacturing companies would love to lock in
long term, particularly fixed or advantaged natural gas prices
but for the most part, that is not happening. They are having
to buy natural gas prices on the spot market.
Ms. Speier. Typically that is a decision being made by the
actual utility that is offering you the gas?
Mr. Cicio. No. This is a negotiation that can occur between
a manufacturing company and a natural gas producer or marketer.
Utilities are not part of the equation.
Ms. Speier. So this is a producer basically saying no, we
are not going to lock in a 30 year contract to you but in an
export setting, they could?
Mr. Cicio. When I referred to 30 years earlier, I was
referring to the DOE approving an application, the terminal
owner then is going to secure long term contracts and they have
that ability for 30 years. The point I was trying to make
earlier is that creates demand that is going to impact domestic
consumer prices for a period of 30 years.
My point is still the same. Natural gas is different than
other trade products because it can be drastically impacted by
public policy, by Congress and by the EPA and by the Bureau of
Land Management that can impact the production over that 30
years and/or drive consumption such as the EPA on utilities, on
the industrial sector, controlling greenhouse gas emissions or
the industrial boiler mac. Public policy does drive demand and
can impact supply.
Ms. Speier. Mr. Chairman, my time has expired. I just want
to thank all of the witnesses for their testimony. It has been,
I think, a very enlightening hearing. I think what is coming of
it, for me certainly, is this is a process that has to be done
carefully, one that probably in my mind should provide for some
level of export but not to the detriment of manufacturing here
in this country or consumers in this country.
Unfortunately, Mr. Chairman, I have to depart to give a
speech. I thank you.
Mr. Lankford. Dr. Fleming, do you have another series of
questions?
Mr. Fleming. Thank you, Mr. Chairman.
I will say parenthetically before I get to my question, EPA
government policy can have impact on any of these natural
resources. Certainly coal is a great example where that is
happening today. Again, I have difficulty seeing where natural
gas is unique.
Mr. Smith, NERA issued a result of their study. I
understand DOE received that this summer, is that correct?
Mr. Smith. That is correct.
Mr. Fleming. However, it was released from DOE in December.
Can you account for that delay?
Mr. Smith. First of all, I certainly would not characterize
that as a delay. This is the NERA study here in my hand. This
was a significant and substantial economic study looking at
quantifying the impact of an unprecedented activity in the
United States in terms of exporting hydrocarbons in the form of
liquefied natural gas.
This study was received by the Department, as requested by
the Department, as something to be responsive to our need to be
judicious about quantifying public interest so we did need some
numbers.
Once it was received, there was an intense process to
understand the study, to ensure that it was clear and
transparent, to ask clarifying questions to make sure this
study, once entered in the public record, would be clear and
responsive to the types of things we need to understand as part
of the public interest determination.
Mr. Fleming. Who made the decision when to actually release
it?
Mr. Smith. I made that decision.
Mr. Fleming. Nothing that happened perhaps in November
could have had any impact on that decision at all?
Mr. Smith. No. The study was released when I was prepared
to release it and when we had done the work we needed to do
within the Department of Energy to make sure it was
appropriate.
Mr. Fleming. Mr. Ebinger, how do the transportation costs
of LNG affect the price in the world market compared to
domestic prices?
Dr. Ebinger. Transportation costs are, of course, extremely
high. Right now, if we are looking at what could we deliver gas
for example if we were ready to export into the Japanese
market, the actual transportation costs would be somewhere in
the neighborhood of $5 to $6 per million BTU, that added on to
the Henry Hub price plus the cost of gasification and
regasification, I think most analysts would agree we would
probably be able to deliver gas to Japan today if we could
export somewhere between $9.50 to $10 per million BTU,
significantly lower, of course, than the Japanese price.
Mr. Fleming. How would that compare to other forms of
energy for Japan? Would that be a favorable price for them?
Dr. Ebinger. At that price, it would be very favorable for
Japan because otherwise Japan imports almost everything and
since the Fukushima accident, the closing of the nuclear
powerplants has added roughly 4 bcf a day to Japanese demand,
killing them because they are importing into a very high cost
market.
Mr. Fleming. Obviously it is a very marketable concept to
sell natural gas to Japan up to and including all the delivery
costs that go with that?
Dr. Ebinger. The concern would be, however, the longer we
take to get some of our projects into the marketplace. I think
some of the others at the table have different views on this,
but if you believe the long run implications of any U.S. LNG
going to market will be to begin to bring further competition,
that the existing prices in Japan will begin to fall.
They will not fall down to probably $10 but they might fall
to $12 or $13, so the competitiveness of the U.S. while still
probably reasonable is not going to be as great the longer we
take to get LNG projects into the marketplace.
Mr. Fleming. How does that affect U.S exporters compared to
competitors and the U.S. exports compared to competitors in
Qatar or African countries?
Dr. Ebinger. The big loser in this competitive LNG market
down the road may be Australia, although most of the big
projects they have coming in they have long term contracts for,
but they are an extremely high cost producer. It is anticipated
Qatar is the low cost producer bar none. Although Australia
will be volumetrically larger than Qatar when all the projects
come in, it is anticipated the new fields in East Africa will
be extremely competitive into the Far Eastern market and even
some of the West African projects in Nigeria and Angola will
probably find a competitive market there.
The big question in my mind is will the Chinese and the
Russians do some very, very large pipeline deals because that
would be extremely competitive in the Far Eastern market
against any LNG.
Mr. Fleming. What I am really hearing is that we are seeing
a tremendous worldwide opportunity in natural gas that will
allow the growth of economies around the world where they will
have very competitive energy prices, that they can be good
producers for export/import which will be good for consumers,
would that be a correct assumption?
Dr. Ebinger. It will not only be good for consumers, but
for those of us that do believe in climate change, it offers a
unique opportunity to at least use a cleaner fossil fuel. It is
not an answer clearly for the long run because it is still a
CO2 emitting fuel but we do get some breathing space on the
carbon front.
Mr. Fleming. It is my understanding that just in the last
three years, carbon emissions have dropped 15 percent across
the U.S. That is due directly to the conversion to natural gas.
Really this is a win-win-win. We get better environment on CO2
emissions, we get better prices for manufacturing and
production so we get better job environment, higher paying jobs
and consumers get a better deal on the cost of energy. I cannot
imagine what could be better for this Nation or this world.
Dr. Ebinger. I would agree. The irony is that for those
opposed to the U.S. signing the Kyoto Protocol, which we did
not sign, ironically because of gas backing out; coal, we have
actually met the reduction targets we would have been obligated
to meet had we signed the Kyoto Protocol.
Mr. Fleming. Thank you, sir.
Mr. Lankford. Gentlemen, thank you for being here. I know
this was a long afternoon. We got interrupted a couple
different times by votes and other things. I appreciate you
coming here and the conversation you have had.
I would like to enter into the record the EIA, the NERA,
the Deloitte and the Brookings study. Mr. Cicio, we had your
study already attached to your testimony, correct?
Mr. Cicio. My written testimony.
Mr. Lankford. I wanted to make sure that was added. I want
to be able to add the other studies into the record.
Mr. Lankford. The issue that we have today is we have
around $40 to $50 billion of private money on the sideline that
our economy desperately needs. The best gift we can put into
our economy is certainty, to know the rules and to fulfill
those rules, so there is some gift of predictability as we walk
through the process.
Mr. Smith, you have a tall order as we have talked about
multiple times and a delicate balancing act. You have somewhere
between 300 and 186,000 different comments that have come in
that we have to sort through, make a decision and predict what
the future economy is going to be based off that. That is no
simple thing.
We understand that but dates of when the decisions will be
made, then a date for how that decision is going to be done and
a process to expeditiously work through that is a huge
difference. It is every company that has applied into and how
we work through the process, whether it be number 2, 19 or 1 to
19 or whatever it may be, to know they are not six years behind
the other one because they were two days behind them in
submitting an application, to know there is some sort of
process that is really fair to everyone but is also clearly
defined.
We don't envy you in that process but we are grateful you
are taking it on and do look forward in the days ahead to
hearing a clear timeline and a clear process so we will be able
to receive that. At any point, if you need to communicate with
this committee or we can help you in any way, we want to be an
asset to you because of that responsibility.
Did you have a final statement?
Mr. Smith. I was just going to say I appreciate that
comment. We are moving forward with all due haste. We
understand that sense of urgency.
Mr. Lankford. Thank you.
With that, we are adjourned.
[Whereupon, at 5:36 p.m., the subcommittee was adjourned.]
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