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Energy Transfer Partners LP (ETP), Cheniere Energy, Inc. (LNG): How Much Natural Gas Can America Export?

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It appears that Energy Secretary Dr. Ernest Moniz is fulfilling his promise that the Department of Energy would move quickly on LNG export decisions. Since his confirmation as Energy Secretary in May, we have seen two LNG facilities be granted LNG export licenses. The approval of these facilities is making it more clear every day that LNG exports will become a a reality here in the United States. The question remains, though: How much LNG can the US support on a sustainable basis? Let’s look at this question and see if we can come up with a reasonable solution.

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Source: Golar LNG Investor Presentation

Where we’re at
This week’s approval of the Lake Charles, La., facility proposed by British energy company BG Group plc (LON:BG) and a subsidiary of Energy Transfer Partners LP (NYSE:ETP) means that the U.S. will have the ability to export 5.6 billion cubic feet per day of natural gas, but we won’t actually see the first volumes move out of the U.S. until sometime in 2015, when Cheniere Energy, Inc. (NYSEMKT:LNG) brings its facility online.

Energy Transfer Partners LP (NYSE:ETP)According to analysts at Goldman Sachs Group, Inc. (NYSE:GS), the U.S. can realistically sustain about 7.7 billion cubic feet of LNG exports by 2020 without significantly affecting natural gas prices. If we were to use that number as a benchmark, then it means we could see the approval of the next two facilities that are in line for approval: Dominion Resources, Inc. (NYSE:D)‘s Cove Point facility in Maryland, and Freeport LNG‘s request to double the capacity of its already approved facility in Texas. If approved, these facilities would be complete by 2018. Considering there are another 13 facilities lined up behind them and natural gas production is expected to increase well past 2020, then it’s very possible we’ll go past that 7.7 billion cubic feet per day — although it’s very unlikely that we’ll ever see all 23 billion cubic feet per day of capacity come online that is currently proposed.

By the numbers
So how much do we need to grow natural gas production to meet LNG demand? Well, in 2012 the U.S. produced an average of 65.9 billion cubic feet per day. So let’s calculate how much U.S. natural gas would need to grow to meet this demand based on some hypothetical export scenarios.

Export Scenario Compounded Annual Growth Rate (CAGR) of Natural Gas Production Needed to Meet LNG Export Demand
5.6 bcf by end of 2018 (only facilities that have been approved to date coming online) 1.64%
7.7 bcf by end of 2018 (Goldman Sachs Group, Inc. (NYSE:GS) estimate) 2.23%
8.5 bcf by end of 2020 (Morgan Stanley (NYSE:MS) estimate) 1.75%
23 bcf by end of 2028 (all proposed facilities coming online within 15 years) 2.02%

Author’s calculations.

To be clear, this is how much natural gas production would need to grow on top of any anticipated growth in domestic demand or shipments via pipeline to Mexico. So we would need production growth in excess of these numbers to satisfy all parties. Just to lend some perspective to these numbers, from 2007 to 2012, the U.S. increased its natural gas production at a CAGR of 4.55%. You could argue that this time of production wildly oversupplied the market, but it does make the case that we can produce at those levels if necessary.

Then again, the biggest gripe that opponents of LNG exports have is that they believe those exports will drastically affect cheap domestic gas prices, which have spurred a revolution in manufacturing here in the United States. So how much do opponents believe is a manageable amount of natural gas? The Dow Chemical Company (NYSE:DOW) CEO Andrew Liveris, one of the most adamant critics of LNG exports, went on record last year saying that 15% of natural gas production dedicated to LNG would work for all parties involved, although 10% or less would be a smart move for domestic manufacturing. So let’s take those estimates, apply a more conservative 2% CAGR to natural gas production, and see the potential volume of gas we could export over various time horizons.

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