LNG Exports: A Cost-Benefit Analysis

LNG Exports: A Cost-Benefit Analysis

By Tanya Abrahamian

The debate over the benefits of an LNG export regime has engendered a polarization of views surrounding the legitimacy of hydraulic fracturing. Given that increased domestic LNG exports will likely produce increases in hydraulic fracturing, discussing the various consequences of increased exports is appropriate. What is less apt is the manner in which the discussion is conducted, with industry minimizing the environmental implications of an export regime and environmental advocates using single, oftentimes non-representative incidents to legitimize environmental concerns. Ultimately, the final verdict concerning an export regime depends upon how one weighs the various costs and benefits articulated above.

This analysis below involves a cost/benefit framework for analysis in accordance with the current regulatory system. NEPA and DOE’s public interest determinations involve making project-specific cost/benefit determinations. While NEPA review seeks to evaluate the environmental costs and benefits of a particular project, the public interest determination has conventionally served as the domain for economic and, to a lesser extent, geopolitical analyses.[1]

1. Economic Factors

LNG exports likely produce positive impacts on the U.S. economy as measured by modest increases in GDP. Though the price to consumers is likely to increase due to an export regime, this increase is likely to be small and will be offset by gains to employment, reversing the trade balance, and increased returns from the natural gas sector and its suppliers.

Furthermore, the likely regressive distributional impacts of a more robust LNG export regime does not warrant restricting these exports. Policies producing economic welfare gains (an expansion of the oft-cited economic “pie”), are likely to produce alterations in income distribution (a change in the way this “pie” is allocated). Generally, orthodox economic theory favors undertaking policy measures that increase welfare gains absolutely and makes no judgments as to distributional issues.[2] However, if social equity issues are important to policymakers, it is possible to undertake subsequent redistribution of these resources through a tax, such as a tax on natural gas production or exportation, to subsidize the lower income households most likely to be impacted by such an expansionist trade policy.

2. Environmental Factors

A majority of the environmental costs associated with increased exports of LNG can be minimized by greater enforcement under the regulatory framework already in place. NEPA requires that cumulative and indirect impacts be considered in creating an EIS. The Council on Economic Quality (CEQ) guidance defines indirect effects as including “growth inducing effects and other effects related to induced changes in the pattern of land use…and related effects on air and water and other natural systems.” The same draft proposal defines cumulative impacts as those “result[ing] from the incremental impact of the action when added to other past, present, and reasonably foreseeable future actions regardless of what agency…or person undertakes such other actions.[3] Cumulative impacts can result from individually minor but collectively significant actions taking place over a period of time.”[4] Accordingly, the primarily point of contention revolves around the extent of environmental analysis required pursuant to these terms as defined under NEPA. This paper will focus on the argument surrounding the inclusion of upstream fracking and gas infrastructure in an environmental assessment.

Comments to FERC by environmental interest groups suggest that cumulative impacts as defined require a lifecycle analysis. Accordingly, the required environmental assessment analysis should begin in the natural gas fields and include pollution resulting from greater hydraulic fracturing to meet higher export demand.[5] Yet quantification of this value is difficult, if not impossible, given that the very fact of appreciably greater domestic fracturing remains, as evidenced by the discussion above, uncertain.[6] Even assuming supply increases in the future, it will be difficult to quantify the exact proportion of this increase attributable to increases in exports rather than to increases in domestic demand. Additionally, even assuming that supply increases due to the construction of export terminals were quantifiable, attributing the proportion of this increase to a specific facility would be difficult. The “reasonably foreseeable” directive under NEPA is unlikely to necessitate such an attenuated analysis.[7] Consequently, such estimation is unlikely to be accurate and, even if undertaken, would create a backlog of permits, thereby reinstating a de facto embargo on LNG exports.

There is the supposition that a policy favoring increased LNG exports, and potentially greater fracturing, will have environmentally deleterious consequences if the approval process for individual export facilities does not require a lifecycle emissions analysis. Because an increase in LNG exports will be met with an increase in supply, rather than a reduction in demand, the environmental costs associated with LNG exports are analogous to those associated with hydraulic fracturing as a process.[8] Yet such attenuated concerns are best addressed by regulating the source of the problem- hydraulic fracturing- rather than implementing a de facto ban on export facilities through more stringent review requirements. Accordingly, the accompanying environmental costs associated with the process of natural gas extraction should be remedied by regulating the process itself, not by targeting the far removed implications of such a process- greater exports.

In this vein, the analysis conducted by FERC is oftentimes terminated at the environmental assessment stage with a finding of no significant impact (FONSI). Consequently, the analysis ultimately undertaken is oftentimes insufficient to satisfy the cumulative and indirect impact analysis as required under NEPA. Yet NEPA requires reasonable forecasting of environmental impacts and though the exact quantity of supply increases may be too attenuated to quantify, there is nonetheless an ability to reasonably determine the source of the LNG to be exported by a given facility.[9]

For example, in the case of the Cove Point Liquefaction Project, the construction of pipeline infrastructure from the Marcellus Shale is an indication that a majority of the supply will be derived from a well-defined region. Even assuming that determining lifecycle emissions from this source is cost prohibitive and too attenuated to be foreseeable, there are some costs that can be traced directly to the export facility in question. For example, there are greenhouse gas impacts of energy required to pump the gas to the LNG facility, liquefy it, ship it overseas, regasify it, and pipe it to market that are readily traceable to a particular export terminal.[10] Furthermore, constraining the focus of greenhouse gas emissions to the liquefaction project area may be similarly unwarranted when specificity as to the quantity of extraction and production activities due to a single export facility is often quantifiable. LNG export facilities are constructed once supply contracts are finalized. The fractional increase in production from a particular shale play is therefore clearly identifiable and a FONSI determination is unwarranted.

Consequently, though a comprehensive lifecycle analysis of a particular Liquefaction project may be unwarranted, a more stringent NEPA review than that conducted by FERC may nonetheless be feasible. The localized emissions and land use impacts from a particular project whose shale source can be definitively traced is reasonably foreseeable enough to warrant an EIS. Consequently, pre-existing or planned transmission pipelines connecting a liquefaction terminal to a particular shale formation allow some downstream analysis to be conducted with relative ease. Emissions and land use impacts during production and transmission from a clearly defined source are reasonably foreseeable as contemplated by the CEQ. By contrast, tracing the increases in hydraulic fracturing and emissions on a national or global scale is cost prohibitive because it is too attenuated of an analysis and requires a multiplicity of assumptions.[11] Mandating a lifecycle analysis on a national scale from an isolated project would therefore impose a de facto ban on LNG export terminals. The above supports a more moderate approach where the downstream impacts are included within a NEPA analysis when those sources can be readily identified by pre-existing or planned transmission infrastructure.

3. Final Recommendation

The cost-benefit framework detailed is not complete without the addition of value judgments. Ultimately, the determination of whether or not to favor increases in LNG exports requires one to weigh the factors described above, with such weights depending upon the national ethos at any given time. This report indicates that macroeconomic gains, as measured by GDP, are likely to be modest, the geopolitical ramifications potentially large and positive, and the environmental impacts, as of yet, uncertain. It is the position of this author that the environmental costs be weighed equally with the potential economic and diplomatic gains from increasing LNG exports. On this basis, the author endorses policies aimed at increasing natural gas exports.

In terms of the system of regulatory review for LNG export projects, this report takes a moderate position short of conducting a lifecycle emissions analysis. As presented above, this report eschews the application of a lifecycle emissions analysis as a requirement of NEPA review for approval of each permit. Rather, the report supports a more moderate approach between that currently adopted by FERC and that advocated by environmental interest groups. Such a review process is aligned with the cost-benefit framework presented in this paper.

That is not to say, however, that a comprehensive environmental study need not be conducted on the environmental impacts of increased exports. It is only to suggest that application of such a lifecycle study for each terminal is too attenuated of an analysis to be warranted. Rather, a comprehensive environmental review of increased LNG exports under a low-, medium-, and high-export scenario could be helpful in determining whether or not to control the source of the problem- increased hydraulic fracturing. As articulated above, any strategy to reduce global emissions due to increased natural gas use will necessarily involve the regulation of the source of the problem- the fracturing process itself and the demand for energy. Attempting to obstruct a mere segment of this process- the construction of LNG terminals- only serves to obfuscate the discussion regarding increased greenhouse gas emissions.

[1] See Brown, Jeremy, “NEPA and Environmental Impacts of LNG Exports,” KBH Energy Center- The University of Texas at Austin (September 30, 2014), https://kbhenergycenter.utexas.edu/2014/09/30/nepa-and-environmental-impacts-of-lng-exports/.

[2] Given advances in economics, this is currently perceived as a highly simplistic theory, but we adhere to it in this report nonetheless as a general axiom by which to simplify the cost-benefit analysis we undertake

[3] Authorization Order PP 227-230.

[4] 40 C.F.R § 1508.8(b); 40 C.F.R § 1508.7

[5] Douglass, Elizabeth, “In FERC’s Approval of Gas Exports, Climate Effects Get Glossed Over,” Inside Climate News, October 1, 2014, http://insideclimatenews.org/news/20141001/fercs-approval-gas-exports-climate-effects-get-glossed-over.

[6] See Myersville Citizens for a Rural Comty., Inc. v. FERC, 783 F.3d at 1326-27 (upholding FERC determination that, although a pipeline project’s excess capacity may be used to move gas to an LNG export project, the projects are “unrelated” for purposes of NEPA).

[7] N. Plains Res. Council v. Surface Transp. Bd., 668 F.3d 1067, 1078 (9th Cir. 2011); See also Fund for Animals v. Kempthorne, 538 F.3d 124, 137 (2d Cir. 2008) (noting that there is no requirement that the engage in endless hypothesizing as to remote possibilities).

[8] See Chesapeake Climate Action Network, “Stop Cove Point: No Fracked Gas Exports,” ChesapeakeClimate.org, http://chesapeakeclimate.org/maryland/covepoint/.

[9] Scientists’ Inst. for Pub. Info., Inc. v. Atomic Energy Comm’n, 481 F.2d 1079, 1092 (D.C. Cir. 1973).

[10] “Re: Comments on Dominion Cove Point LNG, LP, Docket No. CP13-113-000,” Earthjustice, May 3, 2013, http://vault.sierraclub.org/pressroom/downloads/Comments-Application-0506.pdf.

[11] As presented above, these assumptions include the increase in exports, the quantity of leakage, the increase in global demand for LNG, the price of LNG, tanker size among others