Members of a Brookings Institution task force said proposals to develop LNG export infrastructure in the United States will focus attention on environmental issues surrounding hydraulic fracturing and shale gas production, potentially cutting off natural gas exports at the source.

A Brookings report put together by the task force and released May 2 concluded that U.S. LNG exports are technically feasible. According to the report, exports are backed by abundant unconventional and conventional natural supplies, and exports will not cause dramatic disturbances to the national economy as some gas consumer groups worry. The report recommended that U.S. policy makers allow the market and the federal review under existing statutes to determine which export projects are built. However, the report issued a note of warning on environmental controversy surrounding shale gas production.

"The case for U.S. LNG exports depends heavily on the continued development of unconventional gas," the report said. "This development itself depends on the safe and sustainable continuation of the practice of fracking, a process that has been under intense public scrutiny since shale gas production increased."

The report cited a 2011 report by the Secretary of Energy's Advisory Board that said if the natural gas production industry does not reduce the environmental impact of shale development, a large domestic energy resource could be shut down. The Brookings report said there are three categories of problems that need to be addressed: water issues, including its use, disposal and potential contamination; emissions; and other pollution such as noise from drill sites.

The warning was reinforced in a discussion by the Brookings task force members at a May 2 press conference at the institution's Washington, D.C. headquarters. Before the press conference, a member of the LNG industry in the audience called the Brookings report "balanced."

"The environmental regulation wild card is a big one," said Kevin Book, managing director for research at ClearView Energy Partners LLC. He said his ClearView team estimated the costs at the wellhead of pending federal oil and gas regulations could be between 31 cents and 76 cents per thousand cubic feet of gas. Such costs could make a difference in decisions on how to invest and whether or not to produce, he said. "That could change your behavior."

"The real issue here is going to be at the marginal profitability point, where regulation can change the decision from 'go' to 'no go,'" Book said. "Will shale gas be able to respond to the demand that is being expected of it? Our contention is it probably will, but it won't necessarily come from all the current producers who are producing today. The problem with regulation that standardizes environmental rules, whether it be at the state or national level, is that means non-maintenance CapEx for some of the people who maybe should have been doing that CapEx before; they may be out of business. You may see consolidation in the profile of producers across the industry. It's not necessarily bad, though, if the result is prudent development."

Asked about the Sierra Club's objections to exports based on the potential for increased gas drilling, Michael Levi, director of the Council on Foreign Relations program on energy security and climate change, said the review of exports will bring more scrutiny to environmental issues around gas.

"I'm actually surprised there hasn't been more effort to link this to local environmental concerns," Levi said. "I would expect that to happen in the future."

"My guess is that telling people that someone is poisoning their water to send gas to China will sit badly," he said. "If industry is excited about the prospect of natural gas exports, which might come online around 2015, it ought to use the intervening time to really get its act on solid ground and to really increase public confidence. Because the presence of exports will make [industry's] efforts to win public acceptance more difficult than they already are today."

 
Copyright 2012 SNL Financial LC. All Rights Reserved.

 (Originally published May 4, 2012, in SNL Daily Gas Report.)