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Exporting natural gas risky business for U.S.

| Saturday, Dec. 15, 2012, 11:21 p.m.
Edward and Coralyn Knapp stand near their horse trailer on their dairy farm in Sheshequin Township.
Carolyn Knapp points out a hydraulic fracturing well pad near the farm land that she and her husband own.
Submitted
A Marcellus shale gas well owned by Chesapeake Energy Corp. in Bradford County
Edward Knapp, the owner of the dairy farm, looks outward toward the horse's pasture.
Carolyn Knapp sits on a Ford Model 800 Tractor that is on her dairy farm.

Sitting with about 100 landowners inside the Wysox fire hall, Carolyn Knapp listened to a gas company landman discuss the money that would come from the energy trapped in the Marcellus shale a mile beneath her husband's farmland in Rome, Bradford County.

Raising her hand, she shouted out a question: Could the company guarantee that natural gas from their 200 acres would stay in America? Knapp hoped for a big payday, but she also wanted the country to benefit.

“When they wouldn't give (a guarantee) to me?” she asked. “I should have realized there was something up.”

Today, Knapp is paid a one-eighth royalty on the wholesale price of about $2.50 per million British thermal units (MMBtu) for her gas, the so-called wellhead price.

In Japan, that unit of gas would bring about $17.

The difference has spurred a modern-day gold rush to send natural gas from the United States abroad. Companies have asked the government for permission to construct at least 20 export terminals to use to ship overseas an amount of gas equal to 40 percent of what Americans used last year.

Knapp knows her family and other gas-rights owners will not pocket the difference.

A Tribune-Review investigation shows U.S. coffers could be shortchanged, too.

Among the Trib's findings:

• There is no guarantee that all or even most of the profit from gas sold would remain in America. Companies instead could use transfer pricing, in which a foreign subsidiary buys the gas at lower domestic prices and sells it abroad for higher prices, keeping the profit in an offshore financial haven with little or no tax.

• In an attempt to garner more profit, companies could seek to tie the cost of natural gas to petroleum, an international price determined by the Organization of the Petroleum Exporting Countries, not free market forces.

• Most gas exports are destined for countries such as China that do not have free-trade agreements with the United States.

The United States is being asked to export its natural resources under free-trade, without duties or trade concessions in return.

Figures don't seem to favor United States

With abundant gas, the United States' energy situation is far better than it was a few years ago. Instead of worrying about how to keep energy prices down to save consumers money, debate has shifted to how to keep prices up to preserve the drilling industry and benefit mineral rights owners.

But a recent study commissioned by the Department of Energy that supported unlimited gas exports didn't consider some of the concerns the Trib raised above and made some assumptions that experts dispute.

The only export terminal deal to win DOE approval so far displays potential pitfalls of U.S. exports, a Trib analysis shows.

Louisiana's Sabine Pass — a Cheniere Energy project part-owned by the national fund of Singapore and financed by creditors from New York to Tokyo — signed deals to sell about 2 billion cubic feet of gas per day to companies based in South Korea, India, Spain and Britain.

Worth nearly $300 billion over 20 years, the deals are structured so most of that money goes overseas. The company plans to buy American gas at market index rate — about $3.60 per million Btus — and add 15 percent. Once it gets to the terminal, the gas is cooled or liquefied to minus-260 degrees Fahrenheit and shipped aboard tankers.

The cooling process costs the buyer about $2.76 per million Btus, according to company figures. In all, foreign buyers would pay about $7 for gas that could then be sold in Japan for $17. Even factoring in shipping cost of $1.25 to $3 per million Btu, the margin the foreign companies would make far exceeds those generated in the United States.

Multinational corporations and foreign governments — Exxon, GE, Qatar and BG Group among them — have applied to open 19 terminals like Sabine Pass.

Pricing model matters

A DOE report by NERA Economic Consulting advocates for unlimited exports, assuming the ports would follow Sabine's formula. Billionaire Texas oilman T. Boone Pickens and experts with the nonprofit Brookings Institution in Washington disagree.

Pickens said ports would “be foolish” to relinquish such profit. Kevin Massy, associate director of Brookings' Energy Security Initiative, thinks no port would follow the Sabine model.

“Other ports,” he told the Trib, “will go for oil-linked prices.” He noted that Qatar, an OPEC nation, is one proposed U.S. terminal builder.

This is a critical point, energy experts agree. The reason natural gas costs much more in Japan than in the United States is that it is linked by formula to world oil prices. The problem is that world oil prices are not linked to free trade — OPEC artificially controls them.

“Worldwide, energy is not a free market,” Pickens said. “It's a free market only in the United States.”

Changing from the Sabine model to a world-oil model would change NERA's cost-benefit analysis and could provide incentive for proposed U.S. export terminals to move profits offshore.

Offshoring profits is a practice in which companies use subsidiaries or affiliates in tax-haven countries to move resources around the world. The Trib's Shadow Economy series has reported that more than half the world's commerce passes through this shadowy, offshore economy.

In an email, NERA called the Trib's inquiry about offshoring profits “very insightful.” Its study did not consider the issue.

Bill Wicker, an aide to the Senate Committee on Energy and Natural Resources, agreed that officials haven't pondered the possible shift of profits offshore.

“Maybe someone will take the approach and say, ‘Hey, if we allow exports, you guys don't get to park the profits offshore,' ” he said. “The whole thing might require a change in the tax code.”

A range of concerns

Offshoring and foreign profits are not the only questions facing policy makers. The NERA report said “financing of investment (in exporting facilities) was assumed to originate from U.S. sources.” The Sabine project disproves that assumption, company and security filings show.

Cheniere spokesman Andrew Ware said $3.6 billion in debt financing for the project was arranged by domestic and foreign firms: the Bank of Tokyo-Mitsubishi, Credit Agricole Corporate and Investment Bank, Credit Suisse Securities, HSBC and RBC Capital Markets.

NERA assumed that exporting would benefit Americans who own leases or invested in energy companies.

But not all leaseholders and investors are Americans.

Foreign companies purchased vast amounts of American gas leases, the Trib has reported. China invests with shale-gas producers such as Chesapeake Energy.

To some who raise questions, trade equality is a major issue. U.S. exports to companies without free-trade agreements could amount to 26.93 billion cubic feet per day.

Companies want to export without the United States first negotiating balanced trade practices, which is “the heart of the issue,” said Paul Cicio, president of Industrial Consumers of America, an organization of U.S. manufacturers with $1 trillion in annual sales.

An open trade stance by the United States would contrast sharply with OPEC countries and with China — potentially the biggest recipient of American gas. China strictly controls its exports through production quotas and duties; it briefly embargoed sales of its valuable rare earth elements, a 2011 Trib series showed.

Approach with caution

None of these issues would exist if the United States didn't have a glut of natural gas as a result of the development of hydraulic fracturing, or “fracking,” to reach into deep shale. Pennsylvania sits above one of the world's largest gas reserves, the Marcellus shale formation, and has a key interest in how the export debate plays out.

Before widespread use of fracking, experts projected the United States would import liquefied natural gas on a large scale. Companies planned 47 import terminals, but the domestic gas supply situation changed before they could be built. Many planners of import terminals now want to export gas.

Lawmakers, seeing a potential windfall for the United States but sensing possible pitfalls, have approached gas exports with caution.

Sen. Bob Casey, D-Scranton, welcomed the potential stimulus of exporting but warned against letting profits flow toto the shadow economy.

“It is imperative that we ensure that the benefits of natural gas drilling go to the United States,” he wrote in an email to the Tribune-Review.

After the Energy Department released its pro-exporting findings, Sen. Ron Wyden, D-Ore., who will head the Senate energy committee next year, said: “It is critical that exports do not squeeze out the billions of dollars of new, natural gas investments that have been proposed in the U.S. chemical, industrial and electric generation sectors.”

Some influential lawmakers foresee a positive scenario.

“The greater the level of exports, the greater the benefit,” said Sen. Lisa Murkowski, R-Alaska, the energy committee's minority leader.

Andrew Conte and Lou Kilzer are staff writers for Trib Total Media. Conte can be reached at andrewconte@tribweb.com. Kilzer can be reached at 412-380-5628 or lkilzer@tribweb.com

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