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September 16, 2014

We're Flaring (Wasting) Shale Gas Because We Can't Export It

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I have one of those "Earth at Night" maps from National Geographic on a wall in IPI's offices. Among the things it shows is places in Russia, the Middle East and East Africa that seem to be on fire. That's flaring--the burning off of gas or oil because for one reason or another it isn't being captured and refined.

Most of the time this is because of inefficient operations, lack of pipelines, etc. But according to a piece a few days ago in the San Antonio Express-News, there's quite a bit of flaring going on in U.S. shale formations like the Eagle Ford.

The article is reasonably fair and balanced, but, as Jon Cassidy at points out, the main reason for flaring in the U.S. is the federal export ban on oil & natural gas.

There is one key fact, however, that went missing from the series, which explains a lot of what’s going on. If the reporters knew of it, they may have just decided it was beyond the scope of their story. It’s this: low natural gas prices are not some inalterable fact of the free market. They are largely the result of a federal ban on natural gas exports that dates back to the Arab Oil Embargo.

Overseas, natural gas sells at prices four or five times higher than domestic prices, because while other markets are clamoring for the commodity, the domestic market is awash in it. We’ve simply got more of the stuff than we can put to good use, which is why it sells for about four bucks a roomful.

Unlike other commodities, there is no global market for natural gas. If you multiply four bucks a roomful out to the size of a ship, you can see why it’s not economical to ship it in its natural state. That’s why the gas has to be supercooled to liquid form, which requires wildly expensive plants. A typical LNG liquefaction plant costs $9-10 billion, and that’s if you can get approval.

The Department of Energy has 44 LNG export applications it’s considering. It’s approved just eight of them, two since March. Just getting the initial approval from the Federal Energy Regulatory Commission costs about $100 million.

With such a dampened market, it’s easy to understand why few nations have made the costly investment in the regasification terminals necessary to receive LNG imports. Japan alone has around a third of the world’s capacity.

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