The LNG Export Pause is Irrelevant

Industry and gas-producing states are furious about the Biden Administration’s announcement to temporarily pause new approvals on pending Liquefied Natural Gas (LNG) exports.

“Instead of addressing America’s real energy challenges, your administration has decided to double down on a reckless environmental agenda through this TikTok-inspired ‘pause’…This surprise freeze is (1) unlawful, (2) harmful to our economy, and (3) detrimental to our national security.”

Attorneys General of Texas, Louisiana, Oklahoma and twenty other gas producing states

U.S. gas producers seem to have learned nothing about the consequences of oil and gas growth at any cost. Natural gas companies were profitable from 2000 through 2008 when gas production was relatively flat. Since then, production has increased 40% and gas prices have fallen 45% (Figure 1).

This week, natural gas futures prices fell below $2/mmBtu for the first time since the 2020 Covid pandemic. Markets are using price to send producers the strongest signal possible to stop drilling and reduce supply.

Investors have been abandoning U.S. natural gas for at least the last five years. This is reflected in a decrease in net long positions (Figure 2). U.S. natural gas has become a long-term over-supplied market with limited prospects for higher prices. Why shouldn’t investors flee?

Now, faced with low prices and limited domestic consumption growth, companies have turned to exports as a way to continue the production party. U.S. natural gas exports have increased from 2.6 bcf/d in 2008 to 20.6 bcf/d in 2023 (Figure 3). Imports have decreased from 12.6 bcf/d in 2007 to 8.1 bcf/d in 2023. Ninety-nine percent of imports are from Canada.

U.S. LNG exports are expected to increase +6.4 bcf/d by 2030, and by another +7.1 bcf/d by 2035 (Figure 4). Total net exports are projected to increase +15 bcf/d by 2035 from 13 to 29 bcf/d. That will provide a market for gas producers but will put a higher price burden on U.S. consumers.

On the other hand, international prices for LNG are substantially higher than producers can get for their product in domestic markets. U.K. natural gas futures prices have fallen since the 2022 Ukraine invasion but remain more than 50% higher than 2018-2020 average levels (Figure 5). Almost half of U.S. exports go to Europe where futures prices are roughly $9 per mmBtu.

The simple arbitrage trade is certainly profitable on a point-forward basis but that does not include the cost of the LNG liquefaction plants. Rystad Energy estimates a full-cycle LNG break-even price range of $7.50 to $9.00 per mmBtu for U.S. Gulf Coast plants depending capital costs. That introduces some tangible risk into the investment at least based on current falling price trends.

On the other hand, projections suggest that global gas consumption will increase. EIA expects global natural gas consumption to increase 44 Tcf (+29%) by 2050 (Figure 6).

That suggests that the U.S. gas industry is making a reasonable bet that its investment will be profitable. Still, larger questions remain. Do increased gas exports make sense for carbon emissions and for consumer prices in the United States?

“Critics of new LNG projects…argue that building plants with a lifespan of 25 years or more will lock in gas consumption for decades, conflicting with long-term climate goals…They assert that the methane emissions associated with production, processing, transportation, and liquefaction of natural gas make the lifecycle emissions of LNG exports even worse than coal, although the assumptions underlying these estimates are questionable.”

Center for Strategic & International Studies

Does the U.S. even have enough natural gas to meet 25 years of LNG export expansion? In a recent post, I noted that most U.S. shale gas plays are in decline.

“Shale gas plays are beginning to look like a graveyard. The once world-class Barnett and Fayetteville are no longer included in discussions of U.S. shale plays. The Utica looks like it is headed for the same zombie status.

“This study suggests that expectations for future U.S. shale gas production may be too high and that reserves may be overstated. Plans to increase exports by 15 bcf/d will put serious pressure on future supply regardless of whether or not production has started to decline.”

Draining America First—The Beginning of the End for Shale Gas

A non-partisan study published this month concluded that,

“The LNG export terminal pause could insulate American consumers from up to $18 billion in new annual energy costs from volatile gas prices.”

Forbes

There’s a good chance that the Biden Administration’s announcement to pause LNG export approvals was politically motivated as it tries to make a climate statement ahead of the 2024 U.S. elections. There is an equal probability that opposing viewpoints are similarly designed to produce negative press for Biden and his party.

In the final analysis, the pause announcement and subsequent debate are irrelevant.

The “pause” applies only to “pending decisions on exports of Liquefied Natural Gas (LNG) to non-FTA countries.” Already-approved projects will add 28 bcf/d of capacity even if all pending decisions are canceled. That almost doubles existing U.S. export capacity (Figure 7).

Declining well performance in exanding shale plays adds uncertainty to long-term supply for approved facilities. A new report by Novi Labs concludes that without higher gas prices and higher rig counts, there is little chance that supply will meet approved plant capacity.

The problem is that U.S. producers are incapable of facing the reality that exports are not a solution to anything. Oil companies finally got the message from investors that they needed to abandon production growth. Gas companies need to get that memo.

The LNG export pause is a distraction.