RS21787 -- Foreign Trade Effects of an Alaskan Natural Gas Pipeline March 30, 2004 This report examines the policy implications for the U.S. current account balance of the construction of natural gas pipeline from Alaska to the lower 48 states. The 108th Congress hasincluded in H.R. 6 , the omnibus energy bill, provisions which provide incentives for the construction of anAlaska natural gas pipeline. A pipeline would link currentlyunavailable Alaskan gas supplies to the consuming market. This report analyzes the possible expansion orcontraction of natural gas imports as a result of constructing, or notconstructing, an Alaskan pipeline, within the framework of the National Energy Modeling System (NEMS). (1) NEMS is used by the EIA as a tool to forecast futureenergy trends asincluded in the AEO. (2) Recently, the EIA haspublished analyses of a variety of restricted natural gas supply scenarios including the non-availability of an Alaskanatural gas pipeline. (3) The AEO reference case forecast is the EIA's baseline estimate of the state of energy markets in the out years to 2025. (4) The reference case forecast projects naturalgas prices to be highenough after 2009 to begin construction of an Alaska natural gas pipeline. (5) In the forecast, natural gas deliveries come on stream from a pipeline in 2018with full capacity deliveriesbecoming available near the end of the forecast period, in 2024. If policy based incentives to construct a pipelinebecome available, it is possible that a pipeline might be constructedsooner than in the AEO reference case altering the results presented in this report. As a result of the constructionand delivery time line assumed in the reference case, the forecasts withand without the construction of a pipeline are virtually identical until 2018. This report will examine differencesin the forecasts for the years 2020 and 2025. (6) To focus on the international trade effects of the pipeline, likely variations in the current account balance in 2020 and 2025 will be calculated. The current account balance is a basicmeasure of a nation's foreign trade position and is defined as the nation's exports of goods and services minus thenation's imports of goods and services. When a nation's exportsexceed its imports, the country has a current account surplus. When a nation's imports exceed its exports, the nationhas a current account deficit. The EIA forecasts do not includeestimates of the cost of constructing the pipeline, or any trade effects that might come about as a result of sourcingdecisions for the steel and other goods and services used in theconstruction process. The current account balance effects described in this report are limited to the natural gas thata pipeline would deliver to the market. In the AEO reference case, an Alaska natural gas pipeline is expected to deliver approximately 2 trillion cubic feet (tcf), about 7% of yearly consumption, of gas per year by the time itreaches full capacity operation in 2024. Although deliveries are forecast to begin in 2018, they are expected to beginat approximately 0.8 tcf per year and grow to full capacity. By 2020 the reference case forecast projects a gap between total domestic production, 23.89 tcf, and total demand, 30.36 tcf, requiring imports of 6.47 tcf. The forecast projects that by2020 pipeline natural gas imports from Canada will be in decline compared to 2003 level. The U.S. imported 3.4tcf of natural gas from Canada in 2003, about 97% of importrequirements. By 2020 Canadian imports are expected to decline to 2.5 tcf, even though total U.S. importrequirement will have nearly doubled over 2003 levels. The reference forecastprojects that essentially all of the additional U.S. import requirements will come from liquefied natural gas (LNG). The values cited in the forecast are determined in conjunction withthe forecast wellhead price of natural gas in 2020 which is expected to reach $4.28 per thousand cubic feet in realterms, which would be over $8.00 per thousand cubic feet in nominalterms. (7) By 2025, the reference case projects total domestic production to reach 24.09 tcf and total demand to reach 31.33 tcf with a gap of 7.24 tcf to be filled by imports. In 2025, Canadianpipeline imports are projected to be 2.56 tcf with LNG again filling most of the remaining import gap. The referencecase forecast projects LNG demand growing from 2.16 tcf in 2010to 4.14 tcf in 2020 and 4.8 tcf in 2025. By 2025, the reference case projects a wellhead natural gas price of $4.40per thousand cubic feet in real terms, translating to a nominal price ofabout $8.40. (8) In contrast to the reference case forecast, the no pipeline case assumes that a natural gas pipeline from Alaska is not constructed. As a result, Alaskan natural gas production, whichtotaled about 0.51 tcf in 2003, is projected to rise to 0.72 tcf in 2020 and 0.51 tcf in 2025, less than the 2.29 tcf and2.71 tcf for the same years in the reference case. (9) Since imports areexpected to fill the gap between U.S. domestic production and total demand, a simple analysis might suggest thatthe no pipeline case would show an approximate 2 tcf increase inimports to compensate for no delivery of Alaskan gas. This is not the case, however. The unavailability of Alaskannatural gas through the pipeline leads to price increases in the naturalgas market. These price increases reduce the total demand for natural gas, as well as providing an incentive forproducers both in the U.S. and Canada to increase production. As aresult of these adjustments, the gas not available because of a lack of a pipeline from Alaska is not replaced byimports on a one to one basis in the EIA analysis. The increases in imports attributable to the lack of a natural gas pipeline from Alaska are 0.72 tcf in 2020, and 0.63 tcf in 2025 as projected in the EIA no pipeline case. To determinethe effect of these projected increases in natural gas imports, these quantities must be multiplied by appropriateprices. The EIA publishes import prices as part of the AEO referencecase, but not for the no pipeline case. As an approximation of the import price in the no pipeline case, CRS hascomputed prices based on the EIA reference case prices. (10) For 2020, theestimated import price is $4.81 per thousand cubic feet, and for 2025 it is $4.90 per thousand cubic feet. Based onthese values for price and quantity of imported natural gas, estimatedincreases in the value of natural gas imports as a result of lack of construction of a pipeline would be approximately$3.46 billion in 2020 and $3.09 billion in 2025. (11) To put theseprojected increases in imports in perspective, they are less than 1% of the current account deficit in 2002, the yearto which the price of natural gas is set in the EIA forecasts. Although these values represent potential increases in the current account deficits in 2020 and 2025 (or reductions in the surpluses), they might well be either increased or decreased byother related effects in the economy that might result from higher projected natural gas prices. For example,industrial demand for natural gas is projected to decrease. This could meanthat the U.S. production of chemicals, especially those that have natural gas as a large cost component, might bereduced. This might mean greater imports of fertilizers and otherchemicals bringing additional pressure on the current account balance. On the other hand, if the higher natural gasprices resulted in general reductions in income and employment in theUnited States, that might imply lower imports of consumer goods and services, improving the current accountbalance. The EIA analysis, which focuses on energy issues, does notprovide a detailed picture of all the secondary economic effects of higher natural gas prices as they alter relationshipsin the economy as a whole. An Alaska natural gas pipeline is projected to account for about 2 tcf of delivered gas in 2025 when operating at full capacity, but imports increase by only 0.63 tcf in that year as a resultof the lack of pipeline construction. In 2020, a pipeline is projected to deliver about 1.6 tcf, reflecting the build-upof delivered gas as operation begins in 2018, but imports increase byonly 0.72 tcf in the forecasts if no pipeline is constructed. It might appear that 1.37 tcf of gas in 2025, and almost1 tcf in 2020, has disappeared. The lost volumes can be accounted forby examining the effects of the higher projected prices of natural gas in 2025 and 2020 on aggregate demand andsupply. As a likely result of higher prices, projected natural gas demand is lower in the no pipeline case, both in 2025 and in 2020. Aggregate demand is 0.71 tcf lower in 2025 and 0.62 tcflower in 2020 compared to the reference case. In a 2025 comparison of demand patterns in the reference case andthe no Alaska pipeline case, all sectors reduce their consumption, butthe largest declines are in the industrial and electric generators at 0.11 tcf (1%) and 0.31 tcf (3.7%), respectively. In comparison, the residential and commercial sectors reduced theirconsumption by only 0.06 tcf (0.5%) in total. Fuel switching and reduced demand due to curtailed production arelikely explanations for the relatively larger reductions in the industrialand electric generator sectors. The pattern of reduced consumption is similar in 2020.