Natural Gas Exports Will Raise Domestic Prices (CHK, XOM, AA, DD)

The US Energy Information Administration (EIA) today released a study on the impact of domestic pricing if the US begins to export natural gas. The question has been on the minds of natural gas producers and large commercial users of natural gas, each of which has a lot at stake if natural gas prices in the US rise.

Producers like Chesapeake Energy Corp. (NYSE: CHK), Exxon Mobil Corp. (NYSE: XOM), and others support increased exports. Large consumers like Alcoa Inc. (NYSE: AA) and E.I. du Pont de Nemours & Co. (NYSE: DD) will see a sharp increase in fuel costs, and generally oppose exporting natural gas in large quantities.

According to the EIA’s summary of its full report, there are four significant impacts of increasing natural gas exports:

1. Increased natural gas exports lead to increased natural gas prices.
2. Natural gas markets in the United States balance in response to increased natural gas exports largely through increased natural gas production [from shale gas deposits].
3. The remaining portion [of increased gas production] is supplied by natural gas that would have been consumed domestically if not for the higher prices.
4. Even while consuming less, on average, consumers will see an increase in their natural gas and electricity expenditures.

It is worth noting that in point 3, the increased gas available for domestic consumption comes from fuel-switching. Electricity now generated using natural gas will be generated in coal-fired plants (mostly) and, to a lesser extent, from renewable sources.

Booming production from shale fields and expected warmer weather is sending natural gas prices lower again today, down more than -6% to $2.32/thousand cubic feet, the lowest level in 10 years.

Under any of the EIA’s scenarios, domestic natural gas prices rise, it’s just a question of how fast and how much.

Paul Ausick