Biden’s LNG pause is a short-term gambit [Gas in Transition]
Having moved into the number one spot as the world’s largest LNG exporter, President Joe Biden has hit the pause button on new permits for LNG projects.
It is a confidence knocker for the industry and for those many countries around the world pinning their hopes on LNG for improved energy security and greenhouse gas (GHG) emissions reductions via coal-to-gas switching.
However, it is only a pause, one designed to play to environmentally-minded voters ahead of the presidential elections this November.
No major policy shift
Biden has not announced a policy shift. If he wins a second term, a decision on LNG permits will hang on the new economic and environmental analyses requested of the Department of Energy (DoE) regarding whether further LNG export capacity is in the public interest.
In any case, the decision will not affect the next phase of expansion of the US LNG industry. According to the US Energy Information Administration, by 2027, US LNG capacity will grow 9.7bn ft3/d (76mn t/yr) from 14bn ft3/d currently, owing to the five major projects already under construction.
Not only that, but there are a lot of projects in the pipeline which have already received the requisite permits for exports to non-Free Trade Agreement countries. According to the DoE, total export authorisations amount to 48bn ft3/d, more than three times current export capacity.
However, many of these projects are slow moving and their permits are time limited. Project developers have seven years from receiving the permit to start exporting. An application for a permit extension will likely count as a ‘pending decision’ and therefore be subject to the temporary pause, causing delay and uncertainty.
DoE analyses need updating
Updating the DoE analyses is a legitimate concern and takes place regularly, it is the accompanying permitting pause that is new. US LNG exports have expanded rapidly, reaching 104.3bn m3 in 2022, up from next to nothing in 2015. They are set for another massive jump over the next five years.
At the same time, there has been a surge in US exports to Mexico. New LNG capacity in Mexico will be fed by US gas, adding another major driver to the expansion of US-Mexican pipeline gas flows. Moreover, in 2022, US Henry Hub gas prices, at an average $6.45/mn Btu, were the highest since 2008.
However, the economic case for more US LNG exports should come out stronger than the one conducted in 2018. 2022 was, of course, unquestionably an exceptional year, owing to the conflict in Ukraine, but also one in which US gas prices stayed far lower than in Europe or spot LNG prices in Asia.
In fact, from 2016-2022, the period of US LNG’s rapid entry on to the world market, the average Henry Hub price was $3.33/mn Btu, lower than the preceding seven-year average of $3.67/mn Btu and less than half the $6.59/mn Btu average price from 2002-2008, pre-shale. Not only that, but US prices have been the fastest to normalise to pre-Ukraine invasion levels, falling back to less than $3/mn Btu in early 2023 and trading close to $2/mn Btu in early February 2024.
Despite a COVID-induced dip in 2019/2020, US gas production has been on a steady upward trend since before 2010, coping well with increases in both domestic and export demand without domestic price inflation nor signs of reserve exhaustion.
Such has been the expansion of US gas output, that imports of Canadian gas have been curtailed. Although it is developing its own LNG export capacity, Canadian gas reserves remain an important back stop to the US gas system.
The record stands that the US gas industry has met increased demand remarkably well. The fact that both US and Canadian proved gas reserves are higher today than they were ten years ago suggests the US gas sector can continue its expansion without negative impacts on the wider economy as a result of higher domestic gas prices.
Remember also that the 2018 report looked at LNG exports up to a huge 52.8bn ft3/d -- and concluded that in all scenarios such an expansion would result in higher overall GDP, household income and consumer welfare. If all pending decisions were approved, the US would have 62bn ft/d of LNG capacity, but it is highly unlikely that all of these projects will progress to construction.
Environmental conditions also supportive
The other main re-assessment to be undertaken is the environmental impact of increased US LNG production. Environmental organisations argue that LNG plants harm local communities and that the expansion of the gas industry goes against the US’s environmental commitments. They see more gas production as locking in fossil fuels long term and adding to overall GHG emissions.
On the other side, proponents argue that exported US LNG displaces coal use in other countries, reducing GHG emissions overall, as well as having a positive economic impact domestically and improving importing countries’ security of energy supply.
It is on the latter side that the DoE currently sits, and it is not clear why a re-assessment of the situation should change its position.
The DoE uses the National Energy Technology Laboratory study entitled Life Cycle Greenhouse Gas Perspective on Exporting Natural Gas from the United States: 2019 update. This found that the lifecycle GHG emissions for exported US LNG used in the power sectors of Asia and Europe were lower than for regional coal use.
It also said that for the natural gas scenarios, 34-45% of the life cycle emissions are from the natural gas supply chain prior to the power plant, compared with 2% for regional coal, on a 100-year basis, and that this share increases to 42-64% on a 20-year basis, owing to the increased importance of methane emissions over shorter time frames.
This highlights that reducing the emissions intensity of US LNG exports is very much within the control of the US government and gas industry. It should also be noted that between 2019-2022, the emissions intensity of US LNG exports fell by almost 15%.
The US introduced new methane emissions control regulation late last year and many of the new US LNG plants proposed will have much lower emission intensities than their predecessors, owing to the use of Carbon, Capture and Storage and electric drive trains combined with low carbon power. The pressure for this is not just domestic, but also comes from their customers, who want lower carbon LNG.
Coal-to-gas switching is the key
Biden has promised to cut climate pollution by half by 2030. This will be difficult as both US oil and gas production continue to grow. But don’t forget coal. US coal consumption in 2022 was less than half the level in 2010 and that could not have happened without gas displacing coal in the power sector. In doing so, increased natural gas use became the principal contributor to reduced US GHG emissions. US carbon dioxide emissions have fallen because of the expansion of gas production.
At the same time, while the US is using less coal, the rest of the world is using more – global coal consumption hit a record high in 2023. As a result, the export of more US LNG to countries which simply do not have sufficient domestic gas to displace their current level of coal use still makes environmental sense and will continue to do so for a long time. Retarding LNG supply, conversely, does not.
Owing to the declining emissions intensity of US LNG and increases in coal use outside of the US, a reassessment of US LNG’s environmental impact could well show the fuel in an improved light.
The problem is encapsulated best by China, now the largest national import market for LNG. It has more renewable energy capacity than any other country, but is also the world’s biggest user of coal. It has limited domestic gas supplies; increased LNG imports will help it reduce coal use, while it builds low carbon energy capacity.
But, as with other countries looking to use LNG to displace coal use and/or provide basic energy security, importers want certainty that LNG will be available and that it will be affordable.
Biden’s pause creates uncertainty and that is damaging for an industry with a long investment cycle on both the supply and demand sides. So go-ahead and reassess the situation by all means. Hopefully, once the presidential elections are out the way, permitting can revert to a more science-led approach.