The Government Foil to Energy Independence (and Profit)

As the rush to export liquefied natural gas (LNG) gathers steam, the Energy Advantage portfoliois primed for even bigger gains.

Make no mistake, LNG exports are now set to hand us one of the best investment opportunities of the decade.

That's a stunning reversal from just seven years ago, when everyone agreed the United States would be using LNG imports to meet 15% of its gas needs by 2020.

However, the unconventional shale boom (shale, tight, and coal bed methane) has changed everything we used to think about natural gas.

Now, even the most conservative Russian estimates acknowledge that the U.S. could be providing between 6% and 8% of all LNG exports worldwide by 2020.

In fact, Cheniere Energy Inc. (NYSE: LNG) has already garnered no fewer than five huge, multi-billion dollar, 20-year contracts with some of the largest European and Asian importers.

But new developments have suddenly thrown up another hurdle that threatens to delay all of this economic promise.

Here's the countermove that's brewing in Washington, D.C...

A New Wrinkle in the LNG Export Debate

At the eleventh hour, the Environmental Protection Agency (EPA) has now stepped in.

At issue is the application by Sempra Energy (NYSE: SRE) for permission to export LNG from a terminal at Cameron, La.

You see, despite the fact that the Department of Energy (DOE) authorized exports in this case over a month ago, the Federal Energy Regulatory Commission (FERC) must still approve all export permits.

That's where the EPA has figured in.

The U.S. environmental regulator has again raised concerns about what the export of LNG may mean to the aggregate production of natural gas.

Specifically, the EPA has recommended that FERC review the proposed Sempra Energy export project to determine the potential environmental effects of more natural gas drilling. The EPA released its findings on March 3, but FERC only published its findings on March 28.

In its findings, the EPA urged FERC to weigh the indirect greenhouse gas emissions and other environmental effects that would result from the increase in gas drilling required to supply exports from the Cameron plant.

Now both sides on the issue of drilling regard the EPA assessment as a new wrinkle in the debate over how much LNG should be exported from the United States.

FERC should "consider the extent to which implementation of the proposed project could increase the demand for domestic natural gas extraction, as well as potential environmental impacts associated with the potential increased production of natural gas," the EPA said in response to the commission's draft review of the project.

An Exercise in "Keystone XL Logic"

Of course, we've already seen an application of this type of reasoning in another recent policy decision.

In providing what amounted to support for the construction of the Keystone XL pipeline, the environmental impact assessment (EIA) released by the U.S. Department of State concluded that the pipeline project would not directly lead to increased heavy oil and oil sands production in Canada.

In other words, the "indirect" impact on production argument has already been employed.

In the case of a contentious cross-border crude oil pipeline, the State Department concluded there was not a direct causative relationship between moving oil south and increasing production north of the border. The production will take place anyway, the EIA concluded.

However, some proponents who want to place limits on U.S. (and maybe even wider North American) drilling regard the EPA finding in the Sempra case as more promising.

Here, the argument goes, each further allowance of LNG exports comprises a direct incentive for additional natural gas drilling.

After all, the environmentalists maintain, the exports are not coming from supplies of gas that would have been used domestically. That supply is already covered. Rather, LNG comprises new additional volume that would have remained in the ground otherwise.

Industry experts point to the lack of tangible data on the subject, which may actually provide unintentional support to the point the EPA is making. True, the agency is not calling for a restriction of drilling per se. And even if the LNG does result from a net increase in drilling, the environmental impact still must be determined.

But in the case of such exports, the opposition may have a new policy angle to support their cause... at least in the demand for additional considerations.

It is not an issue that there are genuine environmental concerns here. On the other hand, LNG processors and the natural gas operators supplying them are strongly of the opinion that the gas exported will not have an adverse environmental impact.

The Hurdles to Economic Growth

Of course, with the likely LNG volume expected to come online as early as a year from now, projected exports would allow for substantially increased American gas production since there are currently no American exports in the international market.

Now, it looks like the United States will be moving at least 9 million tons annually before we reach 2020.

Assuming the terminal facilities are up and operating, that would mean the ability to lift 48 billion cubic feet of natural gas for each million tons of LNG transited without impacting the price of gas at home - which in itself is another political concern.

However, the amount of economically extractable natural gas available makes the higher price argument an untenable position as well. At current technology and market conditions, we can now increase overall American gas production by 25% per year into the foreseeable future. In short, there is plenty of natural gas to go around.

Exporting a portion of this largess will merely add jobs, introduce business opportunities for a large range of support and service companies, and provide significant injections of revenue into local and regional markets, while enhancing local tax bases.

Still, with the EPA's latest findings, there's now another set of looming hurdles to negotiate.