Should Bad Business Decisions Create a National LNG Export Crisis?

What’s the issue?

In a highly publicized letter to Energy Secretary Granholm, the trade group Industrial Energy Consumers of America (IECA) asked the U.S. Department of Energy to take immediate action under the Natural Gas Act to limit LNG exports until U.S. gas storage inventories reach the 5-year average storage levels.

Why does it matter?

LNG prices are already very high around the world and any reduction in U.S. exports could drive prices higher, but also any reduction in U.S. exports could suppress prices here in the U.S., which is the stated goal of the IECA’s request.

What’s our view?

The IECA represents a very small sliver of the users of the interstate natural gas system in the U.S. and its members have almost no interstate storage contracts. The request to limit exports, like last year’s request to reduce production in Texas, is essentially just a request by market participants, who failed to adequately hedge their market risks, for government intervention to protect themselves from their poor business decisions. We do not believe this call for government interference in the markets will be taken up by the Biden administration.

 


 

In a highly publicized letter to Energy Secretary Granholm, the trade group Industrial Energy Consumers of America (IECA) asked the U.S. Department of Energy (DOE) to take immediate action under the Natural Gas Act (NGA) to limit LNG exports until U.S. gas storage inventories reach the 5-year average storage levels. LNG prices are already very high around the world and any reduction in U.S. exports could drive those prices higher. Also, any reduction in U.S. exports could suppress prices here in the U.S., which is the stated goal of the IECA’s request.

Today we look at the IECA itself, but primarily at the action it has requested by the government. The IECA represents a very small sliver of users of the interstate natural gas pipeline and storage system in the U.S. In fact, its members have almost no interstate storage contracts. The request to limit exports, like a similar request last year by certain Texas producers to limit oil production in Texas, is essentially just a request by market participants who failed to adequately hedge their market risks. Given that failure, they then appeal to the government to bail them out of their poor business decisions. We do not believe this call for government interference in the markets will be taken up by the Biden administration any more than last year’s call to limit production in Texas was taken up by the Texas Rail Road Commission.

 

Who is the IECA?

On its website, the IECA claims to be a nonpartisan association of leading manufacturing companies with $1.1 trillion in annual sales, over 4,200 facilities nationwide, and more than 1.8 million employees worldwide. However, it does not identify any of its members. It does state that membership is exclusive to companies that are industrial energy consumers and that they can offer a unique “consumers” point of view. A look at its federal tax forms over the last few years, though, show that its membership took a substantial hit in 2017.

 

IECA members by year graph

 

As seen above, in the most recent year for which a tax return is publicly available, the total membership was down to only 21 companies. By tracing through the tax returns, we can identify the most recently reported members of the organization and then determine how much capacity collectively those members held on the interstate pipeline system and the interstate storage system. Collectively, the twenty-one members hold a vanishingly small amount of capacity in either system.

 

IECA members pipeline capacity

 

So while the other statistics the organization uses for its members may be true, its members do not represent a substantial portion of “customers” of the interstate natural gas industry.

 

IECA’s Request

Despite this rather small footprint in the industry, the letter to Secretary Granholm that it sent last week generated a significant amount of press coverage, primarily because of the two rather exceptional requests it contained. First, it asked Secretary Granholm to take immediate action under the NGA “to prevent a supply crisis” by requiring LNG exporters to reduce export rates until U.S. inventories of gas in storage reach the 5-year average storage levels. Second, it asked the secretary to put a hold on all existing, pending, and pre-filing permits and approvals on LNG export facilities in the lower 48, and conduct a review of whether these facilities are in the public interest under the NGA.

 

Price Spikes Are Not a Supply Crisis

The first request, like the one we discussed last year in To Prorate or Not to Prorate - That is the Question for the TRRC to Decide Next Week, is essentially a request for the government to intervene in an operating market to favor one group over another. In Texas last year, the request was from producers to limit the production of oil and gas to allow the price of oil to recover from the hit it took following the economic shutdowns caused by COVID and an OPEC decision to not limit production. Conversely, the IECA’s request is by consumers for the government to limit exports to intervene in what is perceived to be a high gas price market. In both cases, the parties seeking government intervention are asking the government to protect themselves from their own bad business decisions. The IECA’s own letter notes that its plea is based on the fact that the “U.S. Henry Hub winter strip natural gas price is $5.50 per MMBtu, more than double from a year ago.” It goes on to note that because of offshore LNG demand, Henry Hub prices would have to increase to $10 per MMBtu to provide the incentive to fulfill domestic natural gas demand. It notes that based on the experience of its members in 2008, those types of prices will destroy manufacturing demand for gas because “many manufacturers can no longer compete in the market at those prices.”

This argument is very similar to the one made by the producers in Texas last year. Those wanting the government to impose a cap had clearly not adequately hedged against such a price drop and those opposed to any production caps were those who had properly hedged and did not want to see their production reduced. If, as IECA asserts, its members “know” that a price of $10 per MMBtu will “destroy” their businesses, they could have hedged against such a risk. Because they apparently failed to do so, they are now asking the government to protect them from their own poor decisions.

 

IECA Has Been Arguing for Years that LNG Exports Are Not in the National Interest

IECA’s second request is nothing new for the organization, which has been arguing since the first wave of LNG export licenses began to be granted that the export of natural gas was not in the national interest because, as they state in their letter, “U.S. consumers, the health of the economy, and national security should take priority over LNG export profits.” These same arguments were unsuccessfully made by IECA to both the Obama and Trump administrations and we don’t see any reason why the Biden administration would be any more receptive to them. Indeed, when the Biden administration has been imposing sanctions to stop the Nord Stream 2 pipeline, it would be very counterproductive to put European LNG deliveries at risk simply in an attempt to lower U.S. natural gas prices.

 

Natural Gas Act Requires a Supply Emergency

While the IECA does not specify what provision of the NGA it believes is applicable to the current price situation, the emergency powers of the president under the NGA seem to be wholly inapplicable. In particular, the emergency powers granted to the president apply only to “a severe natural gas shortage, endangering the supply of natural gas for high-priority uses.” As stated above, even the IECA’s own letter makes it clear that its concern is about price and not supply. Further, the president’s powers are limited to situations where the president has exhausted other alternatives to the maximum extent practicable, to assist in meeting natural gas requirements for such high-priority uses. Finally, the ways in which IECA members would most likely use natural gas are not “high-priority” uses for which the president can exercise emergency powers. Those high-priority uses are limited to: (1) use of natural gas in a residence; (2) use of natural gas in a commercial establishment in amounts less than 50 Mcf on a peak day; or (3) any use of natural gas the curtailment of which the president determines would endanger life, health, or maintenance of physical property.

For all of these reasons, we simply do not believe it is likely that Secretary Granholm will act on the IECA’s request to suppress natural gas prices any more than the Texas Rail Road Commission acted to support oil prices.

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