Rising Prices Due to Natural Gas Exportation? Primus Green Energy Has An Insurance Policy
The abundance of natural gas brought about by hydraulic fracturing (“fracking”) has raised renewed speculation about the United States becoming an exporter of natural gas to energy-hungry markets in Europe and Asia.
In recent days, two of the nation’s leading publications have run widely divergent accounts of the future of natural gas exports.
The first is an Op-Ed by Michael A. Levi in The New York Times, “The Case for Natural Gas Exports,” which highlights the pros of natural gas exports. Noting that the U.S. Department of Energy has to deem exports to countries without free trade agreements to be consistent with the national interest, Levi calls for the approval of such requests by the natural gas companies that have applied. Levi, the author of a study concluding that American firms could make as much as $3 billion by producing and exporting liquefied natural gas, or LNG, says that the increase in the cost of natural gas as a result of the increased demand brought about by exportation would be more than offset by the benefits. He points out, however, that critics of the exportation of LNG would prefer that natural gas be used in the U.S. transportation sector, increasing energy security by reducing dependence on foreign oil.
As a producer of alternative “drop-in” liquid fuels, including gasoline and jet fuel, from natural gas, Primus Green Energy would naturally prefer not to see the price of natural gas increase as a result of an increase in demand from abroad, even if – as Levi argues — that price increase would have only a marginal impact on the use of natural gas for transportation fuel. Fortunately, however, big increases in prices due to exportation might not be a problem, which brings us to exhibit Number Two — Liam Denning’s column in The Wall Street Journal entitled “Don’t Be Surprised if U.S. Gas Export Profits Leak Away”. Denning urges those who are betting on a vibrant market for U.S. natural gas exports to think again, arguing that the riches anticipated from the exportation of natural gas, such as the $3 billion quoted in Levi’s article, may be largely illusory.
The reason lies largely with the expense associated with moving natural gas, which must be turned into a liquid, shipped in special LNG ships and regasified once it reaches its destination. Although the current margin between the U.S. price for natural gas of $3 per million British thermal units and the $17 price in Japan for LNG, for instance, may seem like a golden opportunity, Denning notes that that margin dwindles to next to nothing — and perhaps even moves into negative territory — once the costs of shipping and processing, including the creation of a costly new terminal infrastructure; rising natural gas prices due to the easing of the supply glut; and Asian and European market conditions are taken into consideration. As a result, he reports that natural gas prices are expected to remain relatively low for the next decade.
While this is music to the ears of Primus Green Energy, we also hold an “insurance policy” against rising natural gas prices in the form of the feedstock flexibility of our process. We can use natural gas as a feedstock — or we can use biomass in the form of wood pellets or energy crops such as Miscanthus. This flexibility allows us to nimbly respond to market fluctuations. While we are planning to use natural gas as a feedstock in the near term because of its low price, we have the option of switching to biomass – or a combination of the two — if the price of natural gas shoots back up.
Although we would prefer the price of natural gas to remain low, smart business practice calls for a strategy for dealing with the economic uncertainty surrounding the future of natural gas exports. Feedstock flexibility is our Plan B.