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Dow Chemical’s recent resignation from the powerful National Association of Manufacturers (NAM) in a dispute over liquid natural gas (LNG) exports underscores its expanding split over this issue with the broader business community. But in a less visible way, it also suggests the nation’s largest chemical company is retreating from its long-stated commitment to address climate change.
The LNG issue boiled over last month when the US Department of Energy released the second of its delayed and highly anticipated reports on the potential impact of relaxing restrictions on natural gas exports. This analysis, prepared by NERA Economic Consulting, concluded “the US would experience net economic benefits from increased LNG exports”—and they could be staggering. Among other key points: any potential price impacts would be in a “relatively narrow range” and exports would result in “an increase in US households’ real income and welfare,” even among vulnerable lower income families.
NAM, along with another powerful industry group, the American Chemistry Council, endorsed the DOE findings, even though most of its members, particularly chemical companies, could see modest natural gas price rises, a marginal cost in manufacturing processes.
The researchers estimate that increasing exports could eventually generate more than $125 billion and as many as 5 million jobs—a jolt for the US economy still trying to shake off worldwide financial doldrums.
The Energy Department’s conclusions echo numerous comprehensive independent studies from across the ideological spectrum, including progressive analyses by the Hamilton Project led by Michael Levi, senior fellow and energy expert at the Council on Foreign Relations and research directed by Charles Ebinger at the Brookings Institution . This is a rare instance in which liberals and conservatives as well as industry and thoughtful environmentalists mostly agree.
The primary critics constitute an unlikely coalition: Dow, which spearheads a handful of companies likely to take a short term hit from higher industrial natural gas prices; and a cadre of anti-hydraulic fracturing liberals, who traditionally have opposed almost all measures that could lead to increased shale gas exploration.
That group is headed by Congressional energy heavyweights Rep. Ed Markey (D-Ma), poised to succeed John Kerry as senator if the current Massachusetts senator is approved as Secretary of State; Rep. Henry Waxman (D-Ca), the ranking member of the House Energy and Commerce Committee; and Sen. Ron Wyden (D-Or), the presumptive new head of the Senate Committee on Energy and Natural Resources.
Dow and anti-LNG export Congressmen are dressing their opposition in populist garb. Both say it will raise prices, hurting consumers and industry alike. Last year, both Wyden and Markey told Energy Secretary Steven Chu that increasing exports would amount to a “transfer of wealth from consumers to oil and gas companies.”
It’s a classic and often effective political argument, pitting Big Gas against the poor, or in Dow’s view, Big Gas against poor Big Chemical. It’s classic populism, which has guaranteed that their position would make the rounds of activist web sites. All it lacks is evidence.
Reports from a variety of outlets, including the DOE and the US Energy Information Administration, which did the first part of the two required DOE analyses, show that most LNG would be sourced from new natural gas development, which means exports are unlikely to materially impact domestic demand or prices. EIA found that increased exports would initially raise consumer electricity bills by 1-to-3 percent annually, before subsiding. Both Levi and the DOE estimate the rise in industrial prices would not exceed 10 percent at most at its peak, before dropping.
LNG exports could at most cost on average about $4 a month adding “as much as $50 to the annual electric bills for the poorest American households by the end of the decade,” Levi write. “But the federal Low Income Home Energy Assistance Program could help shield the most vulnerable as long as its financing is protected.”
So what’s going to happen next? There’s no current ban on exports of natural gas. Supplies are exported to a limited number of countries with which the US has a free trade agreement. However, regulations passed when the country faced a severe shortage and high prices still require the government to determine whether an export permit is in the “public interest.” The DOE report was considered the next to last step in that process. The final decision is now in the hands of the Administration.
Behind the curtain at Dow
What is the “public interest”—the notion supposedly guiding the government’s independent final decision—can be highly politicized. Public advocacy groups, Congressmen and self-interested corporations can all play a role in a decision that’s supposed to be guided by science and economics.
Since the 1990s, Dow Chemical, America’s largest chemical company, has tried to brand itself as forward thinking on energy and environmental issues. It reduced the carbon footprint of its manufacturing processes—a win-win situation that actually saved the company money while gathering plaudits from activists.
And, over the last decade, lavishly supported by federal tax policy and handouts guided to it by the powerful Massachusetts Congressional delegation led by Markey, Dow expanded its “green” product line. It began turning out advanced insulation products, diesel engine filters and lithium-ion batteries.
The sizable government largesse helped forge a pragmatic bond between top Dow officials and Markey, an outspoken campaigner for climate change initiatives and against shale gas development. They haven’t always been on the same page. For example, Markey has opposed a chemical security measure, which Dow has backed. But that issue is small potatoes compared to climate change, one of Markey’s signature issues.
In 2009, Dow broke ranks with many manufacturers to aggressively support the American Clean Energy and Security Act, the Democrats’ cap-and-trade bill, jointly sponsored by him and Waxman in 2009. Many on the left and the right savaged the bill as both weak and a pork-fest. After barely passing in the House it went down to bi-partisan defeat in the Senate in 2010. Although it never became law, it provided a huge political boost to Markey and Waxman—and Dow’s support was crucial. And now Markey and Dow are aligned once again.
Within days of the release of the government study, Dow held a news conference on January 10 denouncing it and announcing the launch of its anti-natural gas export website America’s Energy Advantage. Dow, which public records indicate has spent more than $45 million on lobbyists over the last six years, recruited as partners Alcoa, American Public Gas Association, Celanese, Eastman Chemical and Nucor— corporations likely to face marginally higher natural gas energy bills if industrial prices rise modestly with export deregulation, as anticipated. Huntsman Chemical joined the rump group on Tuesday.
Before the DOE report came out, Dow, guided by its public relations team, had characterized itself as “in the middle” on this issue. All last year, the company had repeatedly declared itself a “proponent of fair and free trade,” stating that it “opposes policies that arbitrarily limit reasonable experts of natural gas to free-trade agreement countries or that provide for unlimited global exports.” As George Blitz, vice president of energy and climate change and a corporate vice president, claimed as late as October, it just wanted a balanced public policy.
Behind the scenes, however, Dow was taking a far different position. According to sources inside the company, executives had learned from lobbyists with connections to the Energy Department that the analysis was “not going well”—by which they meant the DOE was going to report LNG exports would be broad positive to the American economy, help promote US geopolitical interests and produce more environmental benefits than challenges. Dow was reportedly apoplectic.
Expecting the worst from its perspective, Dow held crisis meetings during the late summer, eventually concocting a response plan that included a web presence and an extensive social media campaign. On September 12, Dow purchased the website America’s Energy Advantage, which is now registered privately. It created Facebook and Twitter accounts in September and began posting in Facebook on October 12 and sent its first Tweet on October 18.
As its anti-shale gas export attack response plans were percolating Dow was moving on another front to secure its commitment to exporting natural gas. Yes, you read that correctly. Dow owns a sizable chunk of Freeport LNG, which owns a LNG import terminal in Quintana Island, Texas that is now almost dormant after only four years of operation. Dow and its partners are seeking approval from the Federal Energy Regulatory Commission and the DOE—yes, the same DOE it is now demonizing—to spend $2 billion on its conversion with the aim to have the facility exporting 1.4 billion cubic feet of natural gas daily by 2015.
“The discovery of shale has really recreated the value proposition to build these facilities in what is the world’s largest market,” Andrew Liveris, Dow’s chief executive, gushed about its Texas expansion plans.
All the while, Dow continued to voice support for LNG exports—it was, after all, a player itself—even portraying itself as supportive of the DOE’s evaluation process. “I think they are doing a great job of looking at the issue,” said Blitz in October. “They are being conscientious. They are thinking it through. I am confident they are going to come out with a reasonably good answer…that talks about energy security, consumer pricing, and domestic growth and jobs because I think those are public interest issues.”
And in fact, that’s exactly what the DOE did in its analysis: reasonably assess the complicated impact of LNG exports across a range of economic and environmental variables. Although the Energy Department’s findings were well received by most economists across the political spectrum, Dow along with the coalition of anti-shale gas Congressmen rejected them outright.
I asked Nancy Lamb, Dow’s chief spokesperson, to arrange an interview with Blitz or any Dow executive to explain the background on AEA or a host of other puzzling contradictions: Dow’s ties to Markey, its ownership of an LNG export facility whose benefits it extols, what appears to be the abandonment of its commitment to limiting global warming and its apparent inside/outside maneuvering on a range of issues—but she said Dow declined.
“Our position on LNG exports has not changed,” Lamb wrote in a boilerplate response that echoed the talking points at the January news conference. “The report failed to give due consideration to the importance of manufacturing to the US economy. Further we do not believe that any one report gives the whole picture and we are asking the DOE to ensure that it remains cognizant of the country’s long-term growth potential when making any decisions.”
Dow, through AEA, now writes on its website that it opposes “unfettered” free trade and urges “caution.” It’s hoping to indefinitely delay a final decision by the DOE and the Administration.
Geopolitics of natural gas
According to the independently produced International Energy Agency World Energy Outlook 2012, the global energy map is being redrawn on the back of shale gas. The United States was recently facing the prospect of long-term scarcity. Now the US could pass Russia and Saudi Arabia as the world’s top energy producer during the,2020s while dramatically decreasing its carbon footprint—unless political forces conspire to turn back the clock.
Natural gas spot prices in the US currently hover around $3.70 per thousand cubic feet. Historical low prices have been a boon for consumers who are saving billions of dollars as they switch from more expensive and far dirtier coal and oil. It’s also led to an energy security windfall.
While natural gas prices are rock bottom in the US, they remain exorbitant in Europe and Asia—four to five times as high—where a lack of a geological industry infrastructure to support sophisticated new mining techniques and political opposition to fracking have paralyzed politicians. Europe remains heavily dependent on dirty coal, Russia’s Gazprom and Middle East supplies while Asia relies on coal, nuclear energy and massive foreign oil imports.
The past few years have seen several countries, including the Netherlands, Argentina, Brazil, Kuwait, Thailand, the UAE and Indonesia, once the world’s largest LNG exporter, join the ranks of natural gas importers. More than a dozen other countries are considering or constructing import facilities. The market for US exports is potentially huge. And the potential to reconfigure geopolitical alliances in America’s favor are immeasurable, say foreign policy and energy experts.
Just a few years ago, LNG import terminals were being constructed across North America in response to the then dwindling domestic natural gas supply. Most of them are underused. Today, the public debate is no longer about how to squeeze out more domestic supplies to limit expensive oil and gas imports and cap domestic coal usage but how much natural gas we should export—and that requires approval from the DOE.
Many domestic import terminals are petitioning the government to convert their facilities for exports. So far, the administration has approved exports to nations with which the US has a trade agreement, but only one of about fifteen facility applications to export LNG to non-free trade countries—Cheniere Energy’s Sabine Pass facility in Cameron Parish, Louisiana. However, even in the case of Sabine Pass, final approval has been held up by the opposition by anti-fracking environmental groups, led by the Sierra Club, and in anticipation of the now-released DOE impact study.
Competition looms if the US is slow to respond to the windfall. In British Columbia, Canada, various LNG export projects seem well positioned—geographically and otherwise—to access the lucrative Asian market.
What would be the consequences if the Dow-anti-shale gas coalition should prevail? A decision to cave to political pressures and constrain natural gas exports could rock world trade markets and even damage our green energy aspirations. “For example,” wrote Levi, “the United States has filed with the World Trade Organization a challenge to Chinese restrictions on exports of so-called rare earth minerals, which are crucial for new technologies like wind turbines, missiles and smart phones. If Washington hypocritically limits gas exports, it might as well write the Chinese brief.”
US long-term energy security may hang in the balance. Most economists believe that a healthy export market would also serve to stabilize domestic prices and supply. With natural gas so cheap and plentiful, and with margins so thin or even nonexistent, most companies are losing money even as supplies increase. Consequently, few companies are exploring for new reserves. That’s led to concerns that volatile, downward-sloping prices could abort the natural gas boom that experts say currently delivers a $100 billion yearly jolt to the American economy. Exports, the reports contend, rather than slowing the benefits of the boom, could actually increase them and put the natural gas market, in the US and worldwide, on a more sustainable footing.
And that’s the political rub. Even as support for shale gas extraction grows among more enlightened environmentalists, Dow’s AEA along with anti-shale gas congressmen, mostly Democrats, appear determined to abort the natural gas revolution any way they can.
Dow’s AEA appears so desperate to make its case that it’s taken to exaggerating its support among high profile energy experts, who are almost universally supportive of expanding LNG exports. It lists Daniel Yergin, vice chairman of HIS, which now owns the firm he co-founded, Cambridge Energy Research Associates. In fact, Yergin recently wrote an op-ed in The Wall Street Journal in support of LNG exports. “How can America, having asked Japan to reduce Iranian oil imports, turn around and prohibit the export of surplus natural gas to this key ally?” he wrote.
Many critics of exporting shale gas, including Congressmen, are environmental ideologues who have come to believe that natural gas is an unacceptable energy option regardless of its vast potential benefits. Its advanced extraction procedure, hydraulic fracturing, is just too dangerous, they say. The nation should not provide any incentive, including exporting gas, which could result in expanding gas exploration. They contend that if the US expands LNG exports, it would be exporting greenhouse gases with the fuel, making it harder to combat global climate changes.
No serious study has supported those claims. All the key studies concluded that potential environmental impacts would be limited and manageable. Even a tiny price rise would cut domestic demand, lowering the overall US carbon footprint. And international buyers are eager for natural gas so as to cut back on the most carbon-polluting source, coal and, as in the case of Japan, nuclear energy.“[E]xports would likely reduce global greenhouse gas emissions,” Levi wrote.
Analysts also challenged the belief that exports would somehow damage the fledgling alternative vehicle market. “[T]he small price increases that would result from allowing exports would have at most a marginal impact on the use of natural gas as fuel for cars and trucks,” Levi wrote. “Blocking exports wouldn’t push natural gas into automobiles—it would mostly keep it in the ground, because there would be less incentive to extract it.”
Markey—Dow Chemical connection
While it’s not clear whether litmus test politics explains the continued criticism of LNG imports by the troika of Markey, Waxman and Wyden, it explains some of it. Why else would Markey remain so belligerent about expanding natural gas exploration when his own state actually imports almost half of its natural gas supplies—not from the Marcellus Shale formation in Pennsylvania, which is experiencing an export boom, but from Yemen.
Currently, the US imports about 8% of its gas, the bulk of that via pipeline from Canada. But a sizable chunk of LNG imports are from Yemen and go mostly to Massachusetts, where political wrangling fueled by advocacy groups has blocked construction of the necessary pipelines to take advantage of overflowing domestic supplies. That’s left Massachusetts vulnerable to price spikes. Earlier this year, shortages occurred after two Yemenese LNG tankers bound for Boston never sailed because of Al-Qaeda inspired terrorist attacks.
Markey has actually called for the construction of new pipelines to bring gas from Pennsylvania but its falling on deaf ears in the natural gas industry, which has been the focus of his relentless attacks for years. Such are the real-life consequences of anti-shale gas politics.
His inelegant attempt to have it both ways on the issue was on stark display last spring during the Yemen crisis, when he tried but failed to twist the facts to fit his fierce his fierce opposition to LNG exports should be blocked. “These natural gas supply problems highlight the importance of developing the domestic infrastructure that would allow all Americans to benefit from the low-price, abundant and secure supplies of natural gas now being produced in the United States,” he wrote to DOE chief Chu in an extended rant against LNG exports. “I believe that using our domestically produced natural gas here in America to reduce our dependence on foreign supplies should take precedence over any plans to export our natural gas,”
Unfortunately for Markey, his point A—the critical importance of upgrading our natural gas infrastructure—would be undermined by his point B—block new exports on the grounds that it would be a overall net plus to consumers and world stability.
Levi, Ebinger and most recently the DOE addressed Markey’s dubious thesis that expanding LNG exports would increase our dependence on foreign supplies. They concluded much the opposite—a growing export market would increase energy security by expanding overall supply while also providing invaluable geopolitical chips to support US foreign policy goals, all with only minor impact on domestic prices.
“[T]here is potential for positive foreign policy impacts from US entry in the global gas market, through both increased supply diversity for strategic gas-importing allies, and as a contributory factor in weakening the oil linked contract pricing structure that works to the advantage of rent-seeking energy suppliers,” Ebinger and colleagues concluded in their Brookings analysis.
Markey’s immediate response to the DOE study—reiterating stale, year-old talking points— illustrates what can happen when politicians put ideological priorities ahead of independent science and economic analysis.
“This report confirms that exporting our natural gas will lead to some big winners and many big losers in our economy,” Markey wrote in a statement posted online shortly after the release of the DOE report. “American consumers and manufacturers will be the losers, as exporting natural gas will increase domestic prices by up to 30 percent, and reduce domestic investment and wages by $45 billion per year by 2030.”
That contradicts the findings of the DOE consultants, as well as Ebinger and Levi, who all concluded there would be many winners and very few losers. Because of the net benefits to the economy, consumers would be among the biggest beneficiaries.
I asked Markey’s press spokesman, Eben Burnham-Snyder, to name even one position on LNG exports that Markey modified after the series of studies by the EIA, Ebinger, Levi and now the DOE, but he refused. “Go read Mr. Markey’s letter to DOE,” was the best he could muster.
So why is Markey suddenly feeling such sympathy for Dow and other chemical manufacturers, about the only segment of American industry likely to take a serious short term hit if exports are greenlighted and artificially low gas prices rise to more stable levels? Is it pure coincidence that Dow has two large plants in or near his district, in Marlborough and North Andover, both purchased from Rohm & Haas in 2009? They are key hubs in the company’s $14 billion chemical and materials business, and employ approximately 1500 workers.
Dow’s flip-flops and inside-outside strategy make sense from a crude, self-interested business perspective. With economists and environmentalists on the left and the right challenging its lonely position, its reacting more like a caged animal than a responsible corporate citizen. Their reactions, as clumsy as they have been, are at least understandable.
But Markey? We set a higher standard for our public officials who we hope will put the broader public interest ahead of politics.
Jon Entine is senior fellow at the Center for Health & Risk Communication and at the Statistical Assessment Service (STATS) at George Mason University.
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