Investment in US LNG is booming. But projects that have not taken FID could be hit by new export rules

Ed Crooks, Vice-Chair, Americas, Wood Mackenzie

When Steven Winburg of the US Department of Energy described LNG as “molecules of US freedom to be exported to the world” in 2019, he attracted derision. In the aftermath of Russia’s invasion of Ukraine, it is clear that the geo-political significance of US LNG exports is nothing to laugh at. Europe was hit hard by soaring natural gas prices last year, but without US LNG supplies the impact of losing pipeline supply from Russia would have been much worse. 

In the current wave of investment in new LNG capacity, prompted by the need to meet rising demand and replace Russian gas in the longer term, the US is continuing to play a central role. Over 2022-23, Wood Mackenzie expects about 84 million tonnes per year of new LNG export capacity to be given a final investment decision, about 73% of it in the US. 

One of those investments is NextDecade’s Rio Grande LNG project in Brownsville, Texas, which formally gave FID for its first three liquefaction trains last week. It is being described as the largest greenfield energy project financing in US history. 

However, the surge in investment comes as the Biden administration is tightening up the rules for authorising exports of gas to countries that do not have a free trade agreement with the US. The policy shift has created fresh uncertainty over the outlook for US projects that have not yet taken FID. 

At the LNG2023 conference in Vancouver last week, the mood was bullish, buoyed by expectations of further demand growth into the mid-2030s. But questions are being raised over how far the US will be able to contribute to meeting that demand. The issue of political risk in US LNG exports is certainly back on the agenda. 

The US administration set out its new position on permits for gas exports to non-FTA countries in a policy statement from the Department of Energy in April. Since it started awarding these permits back in 2011, they have come with a seven-year deadline. Projects were given seven years from the award of the permit to start operations and begin exporting gas, or the authorisation would be lost. 

All seven of the large-scale LNG export projects that have come into service since then have been able to keep within that seven-year deadline to finish construction and commence operations. But aligning the sales agreements, financing, EPC contracts and regulatory approvals needed for an LNG plant is a complex business, and many proposed projects that have been awarded export approvals have been running into trouble with hitting that deadline.  

Under the Trump administration, some projects were awarded extensions to their permits, giving them more time to take FID, complete construction and start operations. The Biden administration says it will in future award such extensions only if a project has started physical construction, and if there are “extenuating circumstances outside of the authorisation holder’s control” that have caused a delay. 

The Department of Energy’s reasoning is that having a large and growing overhang of projects with export approval but that have not yet even started construction makes it hard to assess the impact on gas markets. As of April, US LNG export capacity in operation or under construction was 24.2 billion cubic feet per day, while the total volume permitted for non-FTA exports was more than double that, at 49.8 bcf/d. That volume with permits is about 40% of current US gas production. 

An example of what the new policy might mean for US LNG projects came on the same day it was announced: the Lake Charles LNG project, which is wholly owned by Energy Transfer, was denied an extension for non-FTA export permits, based on the previous DoE policy. A request for a rehearing was similarly rejected in June. 

Lake Charles LNG argued in that request that without the extension it would not be able to take a final investment decision in 2023 as planned. About US$350 million has already been spent on the project. Offtake contracts have been signed for about half the project’s capacity discussions about equity financing have begun. But the DoE ruled that this progress “did not rise to good cause warranting an extension.” 

Lake Charles LNG has not given up hope. Earlier this month, It signed three non-binding Heads of Agreement for further LNG offtake. The energy department has said the project is “welcome to resubmit” a request for permission to export to non-FTA countries. But its decision has added to the uncertainty over the project’s future. 

Rio Grande LNG also has a non-FTA export permit with a deadline that is likely to be reached before it starts exporting gas. But given that construction is now getting under way, it will meet one of the two criteria needed for securing an extension. It will still need to explain the extenuating circumstances beyond its control that meant it could not hit its deadline. 

More generally, the new policy has raised questions about how the Biden administration will in future use the public interest test to decide whether to approve non-FTA exports.

At the same time as the export approval policy announcement, the DoE published a statement on “LNG exports and methane emissions mitigation”, underlining that one of its policy objectives is to support “decarbonisation and mitigation of methane emissions across the natural gas value chain.” That objective could have greater impact on LNG export authorisations in future. 

The more significant question may be the impact of LNG exports on US gas prices. That issue has come under greater scrutiny after the surge in prices last year, when benchmark Henry Hub futures peaked at over US$10 per million British thermal units. 

The Industrial Energy Consumers of America group, which represents leading US manufacturers, argued a year ago that “LNG exports have already resulted in substantially increased inflation via higher natural gas and electric power prices nationwide.”  

The energy department’s new policy looks like an indication that it could give greater weight to concerns about gas prices in future decisions about export permits. At the very least, the administration wants to put a tighter rein on approvals, bringing the previously laissez faire system under control so that the impact on prices can be monitored more closely. 

The new policy is still less than three months old, and it will take time for its full impact to emerge. Next year’s elections could bring another change. President Trump, who is running for re-election, took a more straightforwardly positive view of LNG exports, emphasising their benefits not only for global energy security, but also for domestic investment and jobs. His energy department said in 2020: “Increased LNG exports means more American energy production, more energy security, and more American jobs.” 

But while the lasting impact of this policy shift remains unclear, it is a reminder that political risk, often neglected as a factor in the US LNG industry, could potentially be a significant factor even here. 

In brief 

The first week of July was the earth’s hottest seven-day period on record, according to preliminary data published by the World Meteorological Organization. New records for global average temperatures have been shown by data sets going back to the 1940s, which are consistent with estimates that the earth has been on a warming trend since the 19th century. Some estimates suggest the earth is now the warmest it has been for about 125,000 years. 

Professor Christopher Hewitt, the WMO’s Director of Climate Services, said: “We are in uncharted territory, and we can expect more records to fall as El Niño develops further. And these impacts will extend into 2024.” El Niño conditions, a pattern associated with warmer seas in parts of the central and eastern Pacific Ocean, began in June and typically leads to higher atmospheric temperatures. 

The heat has been putting strain on businesses and on infrastructure including power grids, in the US and around the world. 

ExxonMobil is making a big move to strengthen its position in carbon capture, use and storage (CCUS), agreeing a US$4.9 billion all-stock deal to acquire Denbury, an oil and gas company with extensive expertise in handing carbon dioxide. 

Tom Ellacott, Wood Mackenzie’s senior vice-president of corporate research, commented that Denbury’s extensive carbon dioxide pipeline infrastructure and storage made it a natural fit with ExxonMobil’s plans to develop carbon-as-a-service. Denbury is a leading CCUS player with over 1,300 miles of carbon dioxide pipeline infrastructure in the US Gulf Coast and Rockies. 

Original article   l   KeyFacts Energy Industry Directory: Wood Mackenzie