Dow Chemical Will Still Be Globally Competitive With Natural Gas Exports According To 2009 Senate Testimony

| About: Dow Chemical (DOW)

A major energy controversy in Washington right now is whether the federal government should allow U.S. energy companies to sell some of their natural gas bonanza to eager buyers overseas, and if so, whether those gas exports should be restricted or limited. The main concern of those groups opposing "unchecked" natural gas exports and who are aggressively engaged in lobbying rent-seeking to limit gas exports if they are even allowed, is the possibility that exports of our low-cost, abundant natural gas would put upward pressure on domestic prices.

And who are those groups that are worried about rising gas prices? Heavy gas-consuming chemical and manufacturing companies like Dow Chemical, Nucor Steel (NYSE:NUE), and Alcoa Aluminum (NYSE:AA) who want to keep as much of America's shale gas bonanza to themselves at the current, historically low prices, and keep their profits as high as possible. Those energy-hungry, gas-guzzlers have recently joined forces in an organization called America's Energy Advantage (for Big Chemical and Big Steel), to engage in rent-seeking activities to oppose "unfettered natural gas exports."

So the big question is: what effect would natural gas exports actually have on domestic prices? Based on three independent research reports, the answer is clearly "not very much." Based on research that Dow Chemical paid for, the answer is "a lot." Here's a breakdown:

1. A 2011 study by the Deloitte Center for Energy Solutions estimated that natural gas exports would increase U.S. prices by only a negligible 1.7% between 2016 to 2035. In dollars, average natural gas prices might rise due to exports by only $0.12 per million Btus (MMBtus).

2. According to a 2012 study from The Department of Energy, gas expenditures for U.S. residential, commercial and industrial users, depending on the exact level of exports, could increase by between 3 to 9 percent between 2015 to 2035.

3. In a 2012 research reported contracted for by the Department of Energy, the economic consulting firm NERA found that: "Natural gas price changes attributable to LNG exports remain in a relatively narrow range across the entire range of scenarios. Natural gas price increases at the time gas exports could begin range from zero to $0.33 (per 1,000 cubic feet, Mcf). The largest price increases that would be observed after 5 more years of potentially growing exports could range from $0.22 to $1.11 per 1,000 cubic feet."

Note: A million Btus of natural gas is roughly equivalent to 1,000 cubic feet.

In summary, the consensus of those three reports is that natural gas prices would rise only modestly from the effects of exports, in a range from 12 cents to about $1 per MMBtu or Mcf.

In contrast, a firm hired by Dow Chemical Company, Charles Rivers Associates (CRA), found that natural gas prices would gradually increase under its "likely exports scenario" from $4 per MMBtu in 2015 by 50% to about $6 per MMBtu in 2025, and eventually doubling from the 2015 level to $8.80 per MMBtu by 2030 (in 2012 dollars, see chart below). Under CRA's likely scenario, natural gas prices would increase by almost $5 per MMBtu due to exports.

In its conclusion, the CRA predicted that higher natural gas prices from exports would have this adverse effect on U.S. manufacturers like Dow Chemical:

"A significant, gas-intensive sub-sector exists that will be challenged in passing through high natural gas costs in the competitive, global market. Manufacturers will look to establish new plants and relocate existing operations in more favorable gas markets around the world. The historical precedence of companies exiting US manufacturing is well documented and can happen again if LNG exports rise too high."

Flashback to 2009, when Edward Stones, Director of Energy Risk at The Dow Chemical Company, testified in October of that year before the U.S. Senate at a hearing of the Committee on Energy and Natural resources. The topic of the hearing was "The Role of Natural Gas in Mitigating Climate Change" and a full transcript of the hearing is available here.

Question from the Committee: If Congress were to enact legislation that somehow promoted natural gas use, and natural gas was available at a consistent $6-8 dollar per MMBtu range, how would that impact your competitiveness?

Answer from Edward Stones:

US petrochemical competitiveness depends on a multitude of factors, such as the relative cost of energy, the relative cost of new facility construction, the strength of the economy in each global area, and the extent to which local industry is protected by local government policies. In general, we believe that if … natural gas were available at a consistent $6-$8 dollar per MMBtu range [in 2009 dollars], US petrochemical facilities could be globally competitive."

Bottom Line: Adjusting for inflation, the range of natural gas prices for Dow Chemical to remain globally competitive would be between $6.41 to $8.54 per MMBtu in 2012 dollars, according to its 2009 Senate testimony. Therefore, even the natural gas price increases from exports predicted by Dow's own consulting firm, which are several orders of magnitude higher than any other estimate, would allow Dow Chemical to remain profitable and globally competitive through almost the entire period out to the year 2030 (gas prices wouldn't be higher than the upper-limit of $8.54 until about 2029). And under the more realistic, much smaller increases in natural gas prices from a consensus of other research reports, Dow Chemical and other energy-intensive U.S. companies will have no trouble being competitive and profitable even with natural gas exports. Of course, Dow Chemical and its partners in America's Energy Advantage will be more profitable if they can restricts nat gas exports, and that explains the group's aggressive rent-seeking activities.