Speech April 20, 2015 A Casualty of Bureaucracy? The Compelling Case for Free Trade and LNG Exports Rob S Franklin President, ExxonMobil Gas & Power Marketing Company Johns Hopkins School of Advanced International Studies Washington, D.C. Thank you, Dr. Kohl, for that gracious introduction and warm welcome. I am honored to have the opportunity to speak at such a distinguished institution. We live in a complex and constantly changing world. As such, we rely on citadels of learning like SAIS and Johns Hopkins to light our way and provide us with a fully rounded view of the world and our place in it. My company has been proud to be associated with, and to support, the energy program here at SAIS. The graduates you produce have an exceptional global outlook and a deep understanding of the international environment in which companies like ExxonMobil work. Each day, ExxonMobil’s gas and power marketing company sells more than 14 billion cubic feet of natural gas for use by millions of customers in 35 countries – from the Pacific Rim, to the European Union, throughout the Americas, and into Africa. A growing share of that is being produced and sold as liquefied natural gas.1 Those numbers likely will surprise anyone who thinks of ExxonMobil as purely an oil company. The truth is we view natural gas as an increasingly important part of the world’s future – and a fuel that will meet a growing share of global energy demand in the decades ahead. In the time I have today, I would like to discuss the burgeoning global trade in liquefied natural gas – or LNG – and America’s opportunity to facilitate it. I’ll explain how the United States stands to benefit by holding true to the principles of free trade that have long marked this country’s approach to commerce. But, as will become clear in the course of my remarks, we can secure the promise of LNG only if Washington takes appropriate action. Washington must take certain steps to fix a regulatory structure designed to address the problems of the Great Depression, not one suited to the 21st century and a new era of energy abundance. If policymakers don’t revisit and redress some significant legal and regulatory problems – problems that are relics of a long-gone era – then the U.S. will underperform during one of the great, historic developments in global energy and trade. An historic commitment to free trade It helps to keep in mind that few countries in history have demonstrated a stronger commitment to the principles and the practice of free trade than the United States. That commitment stretches back to our earliest days, when the Founders inserted into the Constitution a provision that “No Tax or Duty shall be laid on Articles exported from any State.” It was intended as a clear check on the power of Washington to interfere in trade flows. As the legendary legal scholar and Supreme Court Justice Joseph Story explained, “The power is, therefore, wholly taken away to intermeddle with the subject of exports.” Of course, it has sometimes been an imperfect commitment to free trade. As many in this audience know, throughout the 19th century Washington relied heavily on tariffs – largely to raise money to fund the federal government, though at times it served to protect domestic industry as well. But even then, in a grand sense, the prosperity and the destiny of the United States was tied to the free flow of commerce. With 20 million immigrants coming to America during the 19th century and helping to fuel the push for westward expansion, economist Bruce Bartlett has noted that, in effect, the United States was “a giant, continental-size free-trade zone, from the Atlantic to the Pacific – the equivalent of the distance from Madrid to Moscow.”2 Meanwhile, the unparalleled prosperity this country enjoyed during the 20th century – during the so-called “American Century” – rests to no small degree on a pledge by political leaders to open American markets to foreign goods while seeking opportunities abroad for domestic manufacturers. That commitment was greatly strengthened in the post-World War II era, with American leadership in establishing the General Agreement on Tariffs and Trade … the World Trade Organization … and in pursuing groundbreaking trade agreements like NAFTA and with partners around the world. According to Harvard’s Greg Mankiw, “Few propositions command as much consensus among professional economists as that open world trade increases economic growth and raises living standards.” The American experience proves that point concretely and dramatically. Yet, today, there exists a tension in America’s public policy – a tension between the free-trade ideals policymakers profess and the practices they embrace. While the U.S. generally favors open markets and the reduction of trade barriers – a goal espoused by everyone from the president on down – a number of artificial barriers to trade have been imposed when it comes to certain energy products, including natural gas. Flying in the face of America’s traditional commitment to open trade, these barriers threaten to stifle the ability of the United States to contribute to and benefit from the growth of a worldwide natural gas market. Though it could be a very significant development in energy and commerce, the United States is in danger of watching from the sidelines ... and paying for it dearly in terms of lost jobs and missed economic opportunities. LNG’s moment The evolution of LNG represents one of the most important global energy stories of our time. It is one of huge potential to spur economic growth here and indeed around the world … to enhance global energy security for America and its allies … and to safeguard the environment and reduce greenhouse gas emissions. It is often difficult to identify the great trends in global commerce while they are emerging. The LNG story is such a compelling one because it is unfolding before us in real time. We have arrived at a moment when LNG is beginning to reshape commerce and the global economy while offering the possibility of a more stable and prosperous future. Now this story does not get the attention that it might, given the focus on America’s shale energy revolution. The tremendous volumes of oil and natural gas, unlocked by technology in recent years from U.S. shale regions are helping to transform the national economy – creating jobs, fueling economic growth, and frankly filling government coffers. You only have to compare U.S. industrial production both with and without oil and gas activity, to see that without the development of unconventional gas supplies the U.S. would still be below pre-recession levels of industrial production. However, these two stories – the growth of a global LNG trade and the growth of America’s shale energy production – are not separate. They are complementary and, to a degree, intertwined. America’s incredible shale energy boom has a very important part to play as the global LNG story continues to be written … and LNG can provide the spur to further increase America’s natural gas production, providing all the attendant employment and economic benefits. Each can thrive with the other, or if choked by misguided policy they can each fall short of their potential. From balkanization to a global market Natural gas has emerged in recent years as the fastest growing major fuel because of its many inherent advantages. A few come readily to mind. Natural gas is abundant, as we are seeing in America’s shale formations in Pennsylvania, Ohio, Texas and elsewhere … it burns much cleaner than coal … and when used to generate electricity in large-scale power plants, natural gas emits up to 60 percent fewer greenhouse gas emissions than coal. In many ways it is an ideal fuel. But for years there was one major drawback associated with natural gas – it is not easily transported over very long distances. Compare it to oil, the other partner in the dance team of “oil and gas.” Oil is a liquid. It can very easily be loaded aboard a tanker and shipped virtually anywhere in the world. That has had the effect of creating a single, giant, global market for crude oil – as if there’s one big bathtub of oil that everyone can feed into and take from. That means there is a global price for oil that doesn’t much differ whether you are in Europe, the Middle East, Africa, South America, or Asia. But natural gas is different because of its gaseous form. While it moves well enough through pipelines, it does not lend itself to being easily stored on a tanker and sent across an ocean. As a result of this, there is no single global market for natural gas as exists for oil. Indeed, a balkanized network of regional natural gas markets prevails around the world, unconnected to each other and with prices that vary very widely. In Japan, the price of natural gas is about three times that of the United States. The price of natural gas in Kazakhstan meanwhile has no bearing on the cost in Argentina. So while a worldwide market for crude oil took shape over the course of the 20th century, the same never really developed for natural gas. That, however, is changing. Technology creating opportunity Over the last two decades, companies like ours have worked to address the problem of transporting natural gas. We and others have pioneered technology that cools natural gas to minus 260° Fahrenheit, at which point it becomes a liquid and can be stored at essentially atmospheric pressure. So, liquefied natural gas is nothing more than natural gas that has been cooled to enable its shipment overseas. The process of converting natural gas to a liquid reduces its volume by around 600 times – that’s the equivalent of shrinking this auditorium down into the size of an office desk. This enables LNG to be shipped overseas on specialized tankers. When it reaches its destination, the liquefaction process is reversed, and LNG is transformed back into natural gas to be used in power plants, to heat homes or for any number of other reasons. LNG manufacturing plants are essentially large refrigerators. However they are expensive and require significant engineering skill to build. But, most importantly for policy, it is possible to do, and it is happening. A global market for natural gas is now beginning to take shape. In just a short time, we have seen countries like Qatar, Australia, Nigeria, and others embrace the opportunities to become leading LNG producers to serve the Asian and European markets that need greater supplies of natural gas. Depression-era policies for the 21st century Given America’s position as the planet’s leading producer of natural gas, there should be no reason for the United States. not to be among this group of LNG leaders. Yet, strangely, as it turns out, there is one. Whether that reason makes any sense in this day and age is another question. What is holding the United States back on LNG exports is a federal law, the U.S. Natural Gas Act, which governs much of what we can and cannot do today with regards to natural gas. It went into effect in 1938 - a far different time than today. It was at the depths of the Great Depression, with unemployment nearing 20 percent and where protectionist policies frankly were the flavor of the day. Now while many parts of the Natural Gas Act have evolved over time and provide a modern day regulatory framework, the treatment of exports remains rooted in the past. Specifically, the Natural Gas Act instructs the government to approve all permit applications to export to non-Free Trade Agreement countries unless – and this is a big “unless” – unless after investigation, it determines a proposal would be inconsistent with the public interest. If you have an application to export to a country with which the U.S. has a free-trade agreement, then the application is automatically deemed in the public interest; it is, essentially, approved. The problem is that many of the markets that most wish to import LNG are non-FTA countries, like Japan, India, and national of the countries in Europe. These proposals require a government review. Delays and the public interest Defining the public interest is no easy thing. You can imagine how much mischief can be made from that seemingly simple language. What it ultimately means is that bureaucrats hold in their hands the power to decide what constitutes the public interest. It means they – not the marketplace and not consumers -- decide whether proposed projects live or die. For much of the last three-quarters of a century, it was a moot point. Nobody was looking to export natural gas. In fact, as recently as a decade ago companies were formalizing plans to import gas into the United States as domestic production plateaued while demand was rising. But the shale revolution has changed everything. Now there is 100 years supply of natural gas to meet our needs in the U.S., and plenty left over to share with foreign markets … if only Washington were to give approval. Over the past five years, the federal government has received more than 30 applications to export natural gas to non-free-trade-agreement countries. Now, some of these proposals are viable and ready to go, some are less serious or merely in the drafting stages. One of the ready-to-go projects is from a joint venture that includes ExxonMobil, and submitted our application two-and-a-half years ago. In the five years since the first of these 30-plus applications was filed, the federal government has processed just a small handful… while it has changed its procedures more than once. Most applications – including ours – are languishing in approval purgatory, with no indication when of, or even if, the government plans to act. For all but a few lucky firms that secured their approvals under a different process, the government’s slow-walk policy amounts to a defacto ban on LNG exports, regardless of what the market desires. Now to me, there are several obvious problems with this approach. One is of course is a number of companies are seeing their windows of opportunity closing fast. There’s a lot of proposed capacity, both in the U.S. and worldwide. More than 60 international LNG projects are currently planned or under construction in other countries. They won’t all get built. The projects that do get built first are the ones that will be able to take advantage of the immediate commercial opportunities that are out there. Those opportunities won’t last forever and they won’t wait for Washington. That will benefit foreign competitors that aren’t caught in regulatory quicksand. But the bigger problem than merely the fact that American companies could miss out on commercial opportunities. It’s what the country as a whole will miss out on. One of the only frankly good things to come from the seemingly endless delays being offered by the federal government is that it has provided plenty of time to study the issue … and re-study it … and, indeed, re-study it. It started with a macroeconomic study conducted by NERA Economic Consulting at the request of the U.S. Department of Energy. Ostensibly, the department planned to use NERA’s findings to guide its processing of export applications. Now, what NERA found is that by virtually every measure, liberalizing export policy with regard to LNG would benefit the United States. It looked at all sectors of the economy. In every scenario it concluded that the net gains from exporting natural gas were greater than any localized loss that might occur. Now, that’s not perhaps surprising. This is indeed how free trade works, whether you’re talking about U.S. exports of wheat, blueberries, computers, petrochemicals, or automobiles – products, I’ll note, which do not suffer the same regulations and restrictions on exports as natural gas. Similar studies with similar conclusions came from other quarters – IHS Consulting … ICF International … the Energy Policy Research Foundation … the Small Business & Entrepreneurship Council … the American Council for Capital Formation … the Council on Foreign Relations … the Peterson Institute… the Brookings Institution … Rice University … and last week the American Natural Gas Association released its White Paper detailing the once in a generation opportunity that LNG export present. Despite using different models, different analyses, and different methodology, these numerous studies were practically unanimous. They all found that allowing exports of LNG would benefit the American economy, and the greater the level of exports, the greater the benefit. Earlier this year, no less than President Obama’s own Council of Economic Advisors asserted, in its annual economic report, that LNG exports would: Increase U.S. GDP Create jobs Heighten U.S. geopolitical influence, and Promote use of cleaner energy abroad The report was explicit in criticizing the Natural Gas Act for restricting exports and impeding trade. Perhaps most striking about the administration’s pronouncements is the claim that a liberalized export policy would maintain the competitive cost advantage for natural gas enjoyed by U.S. manufacturers since the shale revolution got underway. That point undercuts the central argument put forth by the small coterie of critics that emerged to argue in favor of limiting LNG exports. A small coalition of natural gas consumers, including a handful of chemical companies, claim that allowing LNG exports would drive up the price of natural gas used as a feedstock for the very products that they themselves want to export. In their telling, exports would eradicate the cost advantage they have enjoyed since abundant supplies of U.S. shale gas have come online. The reason this argument rings hollow – as virtually every study noted – is that increasing exports would in turn encourage dramatically more production of domestic natural gas, mitigating the possible effect on prices. Study after study has emphasized any effect on domestic natural gas prices would be small and do no major harm to the economy. That is not surprising if you look at the resource estimates published by the Energy Information Administration. They show that the remaining natural gas resource base exceeds not only the expected U.S. domestic demand for natural gas … but also the amount that might realistically be exported as LNG. North America is awash in gas, with more than can conceivably be used and exported. Without access to global markets for this gas, the full potential of the shale revolution in terms of job creation and economic growth will not be realized. Gateway to lower emissions and energy security These economic benefits of LNG exports come on top of the tremendous environmental benefits afforded by natural gas. Nowhere is that clearer than with greenhouse gas emissions. New volumes of natural gas being produced in America’s shale regions have allowed many U.S. utilities to turn to natural gas for power generation. This change helps explain why U.S. CO2 emissions have fallen to levels not seen since the 1990s. And these reductions have come as the economy grew by 60 percent and the population by 50 million people. There are good reasons to believe that such benefits might be extended to other parts of the world through LNG exports. One might reasonably conclude that significant GHG reductions could be achieved through the wider use of natural gas globally. In fact in the first peer-reviewed paper of its kind researchers at Carnegie Mellon found the most likely outcome was that U.S. energy exports would help reduce global GHG emissions. And I have hardly even mentioned the global energy security benefits to come from expanding U.S. exports of natural gas. Increased LNG trade would add to the diversity of international supply, helping bring economic stability and relieve energy-related tensions in various regions. It would also help America strengthen relationships with allies around the globe. Taking all these arguments into account, it is hard to see how anyone could claim that LNG exports fail the public interest test. Staying true to trade Finally, one additional argument in my brief for LNG exports has some special resonance. It is one consistent with the points I made earlier about America’s longstanding commitment to free trade. Simply put, to shut American companies off from LNG export opportunities via delay and bureaucracy … and to shut the broader economy off from the myriad benefits LNG exports would afford … wouldn’t just amount to poor economic policy. It could also be a violation of America’s international treaty obligations under the World Trade Organization. Former WTO official James Bacchus has argued persuasively that the government’s lengthy delays in issuing export licenses or export approvals appear to constitute export restrictions, which of course are prohibited under the GATT framework. Now violating international treaty obligations is worrisome, especially when government officials routinely – though correctly – encourage other nations to open their markets and embrace the free flow of goods and services. More worrisome is that the government’s policy of delay on LNG export permitting might well encourage other nations to walk away from the core principles of free trade that have been critical to U.S. economic success in global markets. And it would certainly seem inconsistent with the U.S.’s recent decision to file a WTO case against China regarding its export controls over rare-earth minerals. Undermining free trade is far more damaging than if ExxonMobil or some other U.S.-based company were to lose out on a business opportunity, because it strikes at the engine of American prosperity. And this country’s 21st century well-being is tied intimately to the global economy, the well-being of which can only be guaranteed through openness and increased international trade flows. Conclusion There is a quote I like from Paul Nitze – the legendary statesman who, along with so many other accomplishments, founded this venerable school. With typical modesty, he said, “I have been around at a time when important things needed to be done.” That line seems appropriate for the moment in which we find ourselves. There are important things needing to be done. We know what they are. And we know what they will accomplish, for this country and for its friends and allies. It is not enough, as Paul Nitze hinted, merely to be around when important things need to be done. It requires one to act. To realize the potential offered by this moment … to seize the opportunities presented by the world’s 21st century embrace of natural gas … it demands decisive action from policymakers in this city. It calls on them to validate and confirm the principles of free and open trade on which American prosperity rests. It calls on them to remove the artificial barriers to exporting LNG that are holding back the American economy. It calls on them, simply, to act in the public interest.