W. David Montgomery Senior Vice President NERA Economic Consulting 1255 23rd Street NW, Suite 600 Washington, DC 20037 Tel: 202-466-9294 Fax: 202-466-3605 w.david.Montgomery@NERA.com www.nera.com Office of Fossil Energy U.S. Department of Energy 1000 Independence Avenue, SW Washington, DC 20585 December 3, 2012 Attn: Deputy Assistant Secretary Christopher Smith Dear Mr. Smith I am transmitting with this letter a clean copy of NERA’s report on the macroeconomic impacts of LNG exports from the United States that was contracted for by the Department of Energy. Sincerely, W. David Montgomery Senior Vice President Enclosure document8 This page intentionally left blank Macroeconomic Impacts of LNG Exports from the United States Project Team 1 W. David Montgomery, NERA Economic Consulting (Project Leader) Robert Baron, NERA Economic Consulting Paul Bernstein, NERA Economic Consulting Sugandha D. Tuladhar, NERA Economic Consulting Shirley Xiong, NERA Economic Consulting Mei Yuan, NERA Economic Consulting NERA Economic Consulting 1255 23rd Street NW Washington, DC 20037 Tel: +1 202 466 3510 Fax: +1 202 466 3605 www.nera.com 1 The opinions expressed herein do not necessarily represent the views of NERA Economic Consulting or any other NERA consultant. NERA Economic Consulting i Contents EXECUTIVE SUMMARY 1 I. SUMMARY 3 A. What NERA Was Asked to Do 3 B. Key Assumptions 5 C. Key Results 6 II. INTRODUCTION 13 A. Statement of the Problem 13 B. Scope of NERA and EIA Study 14 C. Organization of the Report 15 III. DESCRIPTION OF WORLDWIDE NATURAL GAS MARKETS and NERA’s ANALYTICAL MODELS 16 A. Natural Gas Market Description 16 B. NERA’s Global Natural Gas Model 20 C. N ew ERA Macroeconomic Model 20 IV. DESCRIPTION OF SCENARIOS 23 A. How Worldwide Scenarios and U.S. Scenarios Were Designed 23 B. Matrix of U.S. Scenarios 26 C. Matrix of Worldwide Natural Gas Scenarios 27 V. GLOBAL NATURAL GAS MODEL RESULTS 29 A. NERA Worldwide Supply and Demand Baseline 29 B. Behavior of Market Participants 33 C. Available LNG Liquefaction and Shipping Capacity 35 D. The Effects of U.S. LNG Exports on Regional Natural Gas Markets 35 E. Under What Conditions Would the U.S. Export LNG? 37 F. Findings and Scenarios Chosen for N ew ERA Model 45 VI. U.S. ECONOMIC IMPACTS FROM N ew Era 47 A. Organization of the Findings 47 B. Natural Gas Market Impacts 48 C. Macroeconomic Impacts 55 D. Impacts on Energy-Intensive Sectors 64 E. Sensitivities 70 VII. CONCLUSIONS 76 NERA Economic Consulting ii A. LNG Exports Are Only Feasible under Scenarios with High International Demand and/or Low U.S. Costs of Production 76 B. U.S. Natural Gas Prices Do Not Rise to World Prices 76 C. Consumer Well-being Improves in All Scenarios 76 D. There Are Net Benefits to the U.S. 77 E. There Is a Shift in Resource Income between Economic Sectors 77 APPENDIX A - TABLES OF ASSUMPTIONS AND NON-PROPRIETARY INPUT DATA FOR GLOBAL NATURAL GAS MODEL 79 A. Region Assignment 79 B. EIA IEO 2011 Natural Gas Production and Consumption 80 C. Pricing Mechanisms in Each Region 81 D. Cost to Move Natural Gas via Pipelines 84 E. LNG Infrastructures and Associated Costs 84 F. Elasticity 90 G. Adders from Model Calibration 91 H. Scenario Specifications 93 APPENDIX B – DESCRIPTION OF MODELS 95 A. Global Natural Gas Model 95 B. N ew ERA Model 102 APPENDIX C – TABLES AND MODEL RESULTS 113 A. Global Natural Gas Model 113 B. N ew ERA Model Results 178 APPENDIX D - COMPARISON WITH EIA STUDY 200 APPENDIX E - FACTORS THAT WE DID NOT INCLUDE IN THE ANALYSIS 210 A. How Will Overbuilding of Export Capacity Affect the Market 210 B. Engineering or Infrastructure Limits on How Fast U.S. Liquefaction Capacity Could Be Built 210 C. Where Production or Export Terminals Will Be Located 210 D. Regional Economic Impacts 210 E. Effects on Different Socioeconomic Groups 211 F. Implications of Foreign Direct Investment in Facilities or Gas Production 211 APPENDIX F – COMPLETE STATEMENT OF WORK 212 NERA Economic Consulting iii Table of Figures Figure 1: Feasible Scenarios Analyzed in the Macroeconomic Model 4 Figure 2: Percentage Change in Welfare (%) 7 Figure 3: Change in Income Components and Total GDP in USREF_SD_HR (Billions of 2010$) 8 Figure 4: Change in Total Wage Income by Industry in 2015 (%) 9 Figure 5: NERA Export Volumes (Tcf) 10 Figure 6: Prices and Export Levels in Representative Scenarios for Year 2035 11 Figure 7: Comparison of EIA and NERA Maximum Wellhead Price Increases 11 Figure 8: Global Natural Gas Demand and Production (Tcf) 16 Figure 9: Regional Groupings for the Global Natural Gas Model 17 Figure 10: 2010 LNG Trade (Tcf) 19 Figure 11: International Scenarios 23 Figure 12: Matrix of U.S. Scenarios 27 Figure 13: Tree of All 63 Scenarios 28 Figure 14: Baseline Natural Gas Production (Tcf) 30 Figure 15: Baseline Natural Gas Demand (Tcf) 30 Figure 16: Projected Wellhead Prices (2010$/MMBtu) 32 Figure 17: Projected City Gate Prices (2010$/MMBtu) 32 Figure 18: Baseline Inter-Region Pipeline Flows (Tcf) 33 Figure 19: Baseline LNG Exports (Tcf) 33 Figure 20: Baseline LNG Imports (Tcf) 33 Figure 21: U.S. LNG Export Capacity Limits (Tcf) 38 Figure 22: U.S. LNG Exports –U.S. Reference (Tcf) 38 Figure 23: U.S. LNG Export – High Shale EUR (Tcf) 40 Figure 24: U.S. LNG Export – Low Shale EUR (Tcf) 41 Figure 25: U.S. LNG Exports in 2025 Under Different Assumptions 43 Figure 26: Scenario Tree with Maximum Feasible Export Levels Highlighted in Blue and N ew Era Scenarios Circled 45 Figure 27: Historical and Projected Wellhead Natural Gas Price Paths 48 Figure 28: Wellhead Natural Gas Price and Percentage Change for NERA Core Scenarios 50 Figure 29: Change in Natural Gas Price Relative to the Corresponding Baseline of Zero LNG Exports (2010$/Mcf) 51 NERA Economic Consulting iv Figure 30: Natural Gas Production and Percentage Change for NERA Core Scenarios 52 Figure 31: Change in Natural Gas Production Relative to the Corresponding Baseline (Tcf) 53 Figure 32: Natural Gas Demand and Percent Change for NERA Core Scenarios 54 Figure 33: Percentage Change in Welfare for NERA Core Scenarios 56 Figure 34: Percentage Change in GDP for NERA Core Scenarios 57 Figure 35: Percentage Change in Consumption for NERA Core Scenarios 58 Figure 36: Percentage Change in Investment for NERA Core Scenarios 59 Figure 37: Average Annual Increase in Natural Gas Export Revenues 60 Figure 38: Minimum and Maximum Output Changes for Some Key Economic Sectors 61 Figure 39: Percentage Change in 2015 Sectoral Wage Income 62 Figure 40: Changes in Subcomponents of GDP in 2020 and 2035 63 Figure 41: Percentage Change in EIS Output for NERA Core Scenarios 65 Figure 42: Percentage Change in 2015 Energy Intensive Sector Wage Income for NERA Core Scenarios 66 Figure 43: Interagency Report (Figure 1) 68 Figure 44: Energy Intensity of Industries "Presumptively Eligible" for Assistance under Waxman-Markey 69 Figure 45: Quota Price (2010$/Mcf) 71 Figure 46: Quota Rents (Billions of 2010$) 72 Figure 47: Total Lost Values 73 Figure 48: Change in Welfare with Different Quota Rents 74 Figure 49: Macroeconomic Impacts for the High EUR – High/Rapid and Low/Slowest Scenario Sensitivities 75 Figure 50: Global Natural Gas Model Region Assignments 79 Figure 51: EIA IEO 2011 Natural Gas Production (Tcf) 80 Figure 52: EIA IEO 2011 Natural Gas Consumption (Tcf) 80 Figure 53: Projected Wellhead Prices ($/MMBtu) 83 Figure 54: Projected City Gate Prices ($/MMBtu) 83 Figure 55: Cost to Move Natural Gas through Intra- or Inter-Regional Pipelines ($/MMBtu) 84 Figure 56: Liquefaction Plants Investment Cost by Region ($millions/ MMTPA Capacity) 85 Figure 57: Liquefaction Costs per MMBtu by Region, 2010-2035 86 Figure 58: Regasification Costs per MMBtu by Region 2010-2035 87 Figure 59: 2010 Shipping Rates ($/MMBtu) 88 NERA Economic Consulting v Figure 60: Costs to Move Natural Gas from Wellheads to Liquefaction Plants through Pipelines ($/MMBtu) 89 Figure 61: Costs to Move Natural Gas from Regasification Plants to City Gates through Pipelines ($/MMBtu) 89  Figure 62: Total LNG Transport Cost, 2015 ($/MMBtu) 90 Figure 63: Regional Supply Elasticity 90 Figure 64: Regional Demand Elasticity 91 Figure 65: Pipeline Cost Adders ($/MMBtu) 91 Figure 66: LNG Cost Adders Applied to Shipping Routes ($/MMBtu) 92 Figure 67: Domestic Scenario Conditions 93 Figure 68: Incremental Worldwide Natural Gas Demand under Two International Scenarios (in Tcf of Natural Gas Equivalents) 94 Figure 69: Scenario Export Capacity (Tcf) 94 Figure 70: Map of the Twelve Regions in the GNGM 97 Figure 71: Natural Gas Transport Options 99 Figure 72: Circular Flow of Income 103 Figure 73: N ew ERA Macroeconomic Regions 104 Figure 74: N ew ERA Sectoral Representation 105 Figure 75: N ew ERA Household Representation 106 Figure 76: N ew ERA Electricity Sector Representation 107 Figure 77: N ew ERA Trucking and Commercial Transportation Sector Representation 108 Figure 78: N ew ERA Other Production Sector Representation 108 Figure 79: N ew ERA Resource Sector Representation 109 Figure 80: Scenario Tree with Feasible Cases Highlighted 114 Figure 81: Detailed Results from Global Natural Gas Model, USREF_INTREF_NX 115 Figure 82: Detailed Results from Global Natural Gas Model, USREF_INTREF_LSS 116 Figure 83: Detailed Results from Global Natural Gas Model, USREF_INTREF_LS 117 Figure 84: Detailed Results from Global Natural Gas Model, USREF_INTREF_LR 118 Figure 85: Detailed Results from Global Natural Gas Model, USREF_INTREF_HS 119 Figure 86: Detailed Results from Global Natural Gas Model, USREF_INTREF_HR 120 Figure 87: Detailed Results from Global Natural Gas Model, USREF_INTREF_NC 121 Figure 88: Detailed Results from Global Natural Gas Model, USREF_D_NX 122 Figure 89: Detailed Results from Global Natural Gas Model, USREF_D_LSS 123 NERA Economic Consulting vi Figure 90: Detailed Results from Global Natural Gas Model, USREF_D_LS 124 Figure 91: Detailed Results from Global Natural Gas Model, USREF_D_LR 125 Figure 92: Detailed Results from Global Natural Gas Model, USREF_D_HS 126 Figure 93: Detailed Results from Global Natural Gas Model, USREF_D_HR 127 Figure 94: Detailed Results from Global Natural Gas Model, USREF_D_NC 128 Figure 95: Detailed Results from Global Natural Gas Model, USREF_SD_NX 129 Figure 96: Detailed Results from Global Natural Gas Model, USREF_SD_LSS 130 Figure 97: Detailed Results from Global Natural Gas Model, USREF_SD_LS 131 Figure 98: Detailed Results from Global Natural Gas Model, USREF_SD_LR 132 Figure 99: Detailed Results from Global Natural Gas Model, USREF_SD_HS 133 Figure 100: Detailed Results from Global Natural Gas Model, USREF_SD_HR 134 Figure 101: Detailed Results from Global Natural Gas Model, USREF_SD_NC 135 Figure 102: Detailed Results from Global Natural Gas Model, HEUR_INTREF_NX 136 Figure 103: Detailed Results from Global Natural Gas Model, HEUR_INTREF_LSS 137 Figure 104: Detailed Results from Global Natural Gas Model, HEUR_INTREF_LS 138 Figure 105: Detailed Results from Global Natural Gas Model, HEUR_INTREF_LR 139 Figure 106: Detailed Results from Global Natural Gas Model, HEUR_INTREF_HS 140 Figure 107: Detailed Results from Global Natural Gas Model, HEUR_INTREF_HR 141 Figure 108: Detailed Results from Global Natural Gas Model, HEUR_INTREF_NC 142 Figure 109: Detailed Results from Global Natural Gas Model, HEUR_D_NX 143 Figure 110: Detailed Results from Global Natural Gas Model, HEUR_D_LSS 144 Figure 111: Detailed Results from Global Natural Gas Model, HEUR_D_LS 145 Figure 112: Detailed Results from Global Natural Gas Model, HEUR_D_LR 146 Figure 113: Detailed Results from Global Natural Gas Model, HEUR_D_HS 147 Figure 114: Detailed Results from Global Natural Gas Model, HEUR_D_HR 148 Figure 115: Detailed Results from Global Natural Gas Model, HEUR_D_NC 149 Figure 116: Detailed Results from Global Natural Gas Model, HEUR_SD_NX 150 Figure 117: Detailed Results from Global Natural Gas Model, HEUR_SD_LSS 151 Figure 118: Detailed Results from Global Natural Gas Model, HEUR_SD_LS 152 Figure 119: Detailed Results from Global Natural Gas Model, HEUR_SD_LR 153 Figure 120: Detailed Results from Global Natural Gas Model, HEUR_SD_HS 154 Figure 121: Detailed Results from Global Natural Gas Model, HEUR_SD_HR 155 . SW Washington, DC 20585 December 3, 2012 Attn: Deputy Assistant Secretary Christopher Smith Dear Mr. Smith I am transmitting with this letter a clean