CICIO: High cost of natural gas subsidies

OPINION:

Congress is considering the NAT GAS Act (H.R. 1380), which would provide very generous tax credits - as much as $64,000 per vehicle - to those who retrofit trucks to run on natural gas. This legislation, the brainchild of hedge fund-operator and sometimes oil- and gasman T. Boone Pickens, is deeply flawed and would damage consumers, farmers and manufacturers.

How would it do this damage? The legislation is specifically designed to increase demand for natural gas in the transportation sector. This artificially enhanced and government-driven demand will, in turn, increase the cost of natural gas for those who use it to heat their homes, use electricity generated from natural gas or use natural gas for chemicals and fertilizers.

Worse, the effects of H.R. 1380 will be magnified because they will appear at the same time as the unprecedented, cumulative effect of the ongoing coal-to-natural-gas fuel switch in the power-generation sector, driven mostly by environmental regulations. They also will coincide with similar fuel-switching by the industrial sector, driven primarily by the Environmental Protection Agency’s (EPA) recently issued regulations on maximum achievable control technology for industrial boilers. The cost effects will even be magnified by Department of Energy-approved exports of liquefied natural gas from Louisiana and Texas to China and the European Union.

Taken together, these policy actions will significantly drive up demand and price for both natural gas and electricity for the entire country - hardly a prescription our ailing economy needs.

Let me offer some specifics.

•  Utilities: An ICF International report in May concluded that proposed federal regulations on power generation could shut down 50 gigawatts of coal-fired generation over the next 10 years. It notes that by 2030, coal-fired generation will account for less than one-third of total generation, down from 47 percent in 2010. Over the same period, gas-fired generation will grow from a 20 percent share in 2010 to 37 percent of total generation. Several other studies have reached similar conclusions.

Tom Kuhn, president of the Edison Electric Institute, said it best: “The consequence of not harmonizing emission-reduction goals with technology will be massive fuel switching that will result in tremendous price pressures on natural gas, higher consumer prices and heavy burdens on the competitiveness of U.S. industries.”

• Industrial Boilers: The EPA industrial boiler regulations apply to thousands of large industrial boilers. These costly rules threaten to shut down use of coal-fired boilers. If a specific facility does not shut down, there is widespread agreement that it will switch to natural gas. It is unclear just how much new natural gas demand this will amount to, but boiler fuel demand is probably the second-largest demand for industrial energy after feedstock demand.
• Liquified Natural Gas: The Sabine Pass liquefaction facility in Louisiana, designed to export liquefied natural gas (LNG), has already received Department of Energy approval to ship natural gas and has secured a memorandum of understanding with the Chinese ENN trading company to send a portion of it to China. Its filing with the Department of Energy indicates that just that one facility has the potential to export .803 trillion cubic feet of natural gas per year. For perspective, that is 3.6 percent of 2010 U.S. demand. The Freeport LNG Development terminal also has announced plans to export gas, and several others, such as Cove Point, are contemplating it. Just those three facilities could easily reduce the supply of natural gas available to U.S. consumers by close to 10 percent.
• H.R. 1380: Advocates for H.R. 1380 have said in congressional testimony that it will increase natural gas demand by 1.5 trillion cubic feet by 2025. That is about 7 percent of current demand.

Again, considered together, it is relatively easy to understand that natural gas is likely to face growing demand and price pressures from a variety of directions. I don’t think it is wise to exacerbate those pressures.

In addition to underestimating the existing and likely pressure from the demand side, those who believe in the inevitability and durability of low-cost natural gas underestimate the intensity of scrutiny that hydraulic fracturing is going to receive from the environmental community judges and federal and state regulators. New strictures are almost certainly coming. While the impact of these new regulations on the cost and supply of producing natural gas may be unclear, we can safely assume that they will drive the cost of natural gas production higher, not lower.

The conversation to date has also been marked by a disturbing lack of perspective. Some in Congress apparently have forgotten the high natural gas prices of just a few years ago - prices that crushed the manufacturing sector, causing the shutdown of 40,000 facilities and the loss of 5,7 million manufacturing jobs. Is our confidence in future supply-and-demand projections - which were so spectacularly wrong just a few years ago - so great as to risk those results again?

It is especially cruel when you consider that low U.S. natural gas prices - compared to our competitors’ prices - have given hope to a manufacturing renaissance, similar to the growth experienced during the 1990s when we enjoyed a period of consistent supply and relatively low natural gas prices. Several chemical facilities have announced plans to use natural gas as a feedstock to produce chemicals and plastics, creating jobs and exports. Steel companies also have announced expansions. Tens of billions of capital investment is at stake and could be placed at risk by feckless and misguided federal policy.

Two final notes: First, it is important to recognize that manufacturing companies are not against using natural gas in vehicles. But that is a decision consumers should make and markets should inform. It is not a decision Congress should twist or alter through subsidies. Second, we are all concerned about the debt and deficit. In this environment, it is perverse to give billionaires an additional $9 billion.

If members of Congress want to increase natural gas demand, they should do it by helping manufacturing grow, which will increase jobs, grow tax revenues and improve communities. They should not do it by artificially increasing demand for what is likely to be a scarce resource.

Paul Cicio is president of Industrial Energy Consumers of America.