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Keynote Address by Ambassador Nirupama Rao at American Enterprise Institute (AEI): "America's Natural Gas: Should Exports be Restricted?"

"There is the East; there lies the road to India."

Mr Arthur C Brooks, President, American Enterprise Institute;
Mr Benjamin Zycher, visiting scholar at AEI and the moderator for the morning’s discussion;
Friends,  ladies and gentlemen.
It is my privilege to be present here today, to participate in a debate on an issue that has tremendous strategic significance, for the energy security of the United States, and, beyond, for a large number of other countries; an issue of great importance for the future of economic growth and progress in the United States, and, possibly of a number of other trading partners of this country;  for the future of free trade based on the comparative advantages of nations;  and, last but not the least, for the future of economic co-operation between India and the United States.  I am grateful to the American Enterprise Institute and to President Arthur Brooks, for having given me an opportunity to present my views at this important discussion.

2.      Let me begin my re-capitulating some known facts, which are nevertheless important.  Until a few years ago, U.S natural gas production was understood to be declining.  However, U.S natural gas consumption was forecasted to increase, as gas would remain an important fuel for electric power, industrial and residential uses.  Therefore, policy makers were focused on the need for increased U.S liquefied natural gas (LNG) import capacity, a subject of extensive public discussion.  Technology improvements, primarily the combined use of horizontal drilling and hydraulic fracturing, then enabled the exploration, development and production of vast U.S shale gas resources, altering supply, demand and price forecasts for natural gas in the United States.  As shale gas has become economically viable to produce, the U.S has emerged as one of the world’s most important gas producing countries.  Growth in shale gas production in the coming years is now expected to substantially reduce, if not eliminate, the need for the U.S to import natural gas, and companies are instead looking to reach new markets beyond electric power, industrial and residential uses, both in the United States and overseas.  While it is not my intent to burden you with statistics, I quote on the authority of the Energy Information Administration (EIA) of the U.S Department of Energy, that in a few years time, i.e., around 2020, the total production of natural gas in the U.S will exceed domestic consumption.

3.      This scenario opens up the possibility of the export of liquefied natural gas (LNG) cargoes from the U.S to other energy scarce countries, including India.  In India, natural gas is used in various industries, although the predominant consuming sectors continue to be power and fertilizers, which are critical to energy and food security for our country.  The demand supply gap of natural gas in India, which is estimated at around 2.2 trillion cubic feet (TCF) per annum presently, is likely to go up to nearly 4 TCF/annum by 2016-17.   And, there is significant untapped potential for natural gas demand in all end use segments; as per the Integrated Energy Policy of the Government of India, the demand of natural gas is expected to be about 8 TCF/annum by the year 2030.

4.      A large part of the present natural gas demand supply gap of India remains unmet due to the constraint imposed by the total re-gassification capacity of the country, which is around 0.65 TCF/annum presently.  However, a large number of re-gassification terminals, along the long coastline of the country, are presently under construction, and total capacity in this regard is expected to go up nearly 5 times by 2016-17.  Thus, in that timeframe, India will be in a position to import a substantial part of its total demand supply shortfall, provided that viable and attractive supply purchase agreements (SPAs) can be tied up with exporters of natural gas around the world.

5.      The potential of exports of natural gas from the U.S, on account of its linkage to the Henry Hub (HH) prices, would imply considerable savings in terms of landed costs in a country like India.  We estimate that these savings would be in the range of US $ 4-5 per million metric British Thermal Units (mmbtu).  This would result in cheaper electricity, lower subsidies on urea and other nitrogenous fertilizers, and a more economical fuel for a variety of industrial and consumptive gas usages.  Thus, there is a clear and present benefit to India, if exports of U.S natural gas are permitted to India.

6.      However, the point that I would like to stress is that the advantage is mutual and that natural gas exports represent a ‘win-win’ co-operation opportunity.  Already, we have invested significantly in the liquefaction terminals that are likely to come up in this country.  The Gas Authority of India Limited (GAIL), which is our flagship oil and gas public sector undertaking, has executed an LNG off-take agreement with Sabine Pass Liquefaction LLC, Lousiana, a subsidiary of Cheniere Energy, for import of 3.5 million metric tonnes (mmtpa) per annum LNG from the USA on FoB basis.  The commencement of supply is expected to start from 2017-18.  Recently, GAIL has also booked 2.3 mmtpa capacity in the Cove Point LNG Terminal proposed to be commissioned by Dominion Cove Point LNG LP in 2017.  Finally, during the recently concluded LNG 17 Conference at Houston, India’s Petronet LNG Ltd and United LNG,LP have entered into a conditional agreement to supply LNG from the Main Pass Energy Hub LNG project in the Gulf of Mexico, with the final agreement expected to be concluded by year end.  Thus, by late 2017, on the assumption of DoE approvals, we are already looking at a scenario of 0.5 TCF/annum of LNG exports from U.S to India, which is nearly 75% of our current yearly imports of natural gas from all sources.  Our companies are scouting for more tie-ups and ownership stakes in the 19 odd terminals which have applied for export of natural gas to non-Free Trade Agreement (FTA) countries.  Besides, other Indian companies, including Reliance Industries Limited in the private sector, have bought stakes in oil and gas exploration and production companies, a trend which will receive a huge boost if export of natural gas is permitted to India.  According to another EIA study, roughly 20 percent of the US $133.7 billion invested in U.S. tight oil and shale gas from 2008 to 2012 has come from abroad, with Indian companies accounting for a total investment of nearly US $ 4 billion so far.  These investments represent more growth, jobs and progress for the U.S economy and should, in my view, be welcomed.

7.      Indeed, the study by NERA Economic Consulting, which was commissioned as an independent study by the administration, in order to address the potential cumulative macro-economic impact of the grant of export licenses to the pending non-FTA applications, has highlighted these very advantages to argue for liberal exports of natural gas from U.S to other countries.  The report has inter alia concluded that exports of LNG enhance the net welfare of the U.S consumer, and increase the U.S GDP; the benefits that come from export expansion more than outweigh the losses from reduced capital and wage income to US consumers; and, the level of net benefits to the economy increases with the quantum of exports, which is exactly the outcome that economic theory describes when barriers to trade are removed.

8.      There are other benefits as well, which for me, as a practitioner of international relations are equally obvious.  As the U.S  National Security Advisor, Tom Donilon, recently pointed out, increased global gas production, resulting from the new energy bounty of the U.S, could break the link between gas prices and higher oil prices, weaken control by traditional dominant natural gas suppliers, and give the U.S, in his words,“a stronger hand in pursuing and implementing our international security goals”.

9.      The United States today is a principal advocate and beneficiary of a global trading system characterized by the free flow of goods and capital, andwe have witnessed how the United States has a long-term economic and political incentive to refrain from intervention in the market. Seen in this light, the non-exportation of US LNG comes at the opportunity cost of forgoing the considerable benefits of that very same free market.

10.    Ladies and gentlemen, I would conclude by re-iterating that the optimal course of action is to let the market determine the dynamics of supply, demand and exports.  This will ensure that U.S natural gas is allocated to its most efficient end uses, many of which, in addition, will bring significant geo-political and strategic advantages to both the United States and its partners and allies across the world.

11.    Our two countries, India and the United States have engaged in a very useful Energy Dialogue since 2005. Today, as I noted recently, as “India’s energy needs continue to rise and the U.S. looks to expand the marketplace for its vast cache of energy resources, our partnership stands to be strengthened further”. My country needs to secure more clean energy supplies to foster the sustainable, ecologically balanced, socio-economic development of millions of our people who still live in poverty.

12.  As a preface to the written text of my speech, I could not resist inclusion of a quote that is inscribed in St. Louis at the foot of the statue of  19th century Missouri Senator Thomas Hart Benton: “There is the East; there lies the road to India” : I do hope that the same urge that drove Americans of days gone by to discover more and more avenues for trade with India will see the unveiling of a new chapter in ourongoing quest to safeguard and to enhance energy security for the benefit of the peoples of our two sister democracies.

Thank You