Guarded Optimism on LNG Expressed at Senate Hearing

This story appears as published in Foster Report No. 3257

The U.S. has a great opportunity to capitalize on exporting natural gas to foreign nations, but there are pitfalls to avoid, lawmakers and witnesses said July 11 at a Senate hearing on the U.S. role in the global LNG market.

The potential for stranded assets, putting too much faith in the Chinese market, and domestic price impacts if LNG exports climb too high were three of the concerns discussed at the Senate Energy and Natural Resources Committee hearing.

Several witnesses sought to downplay the concerns, noting that U.S. natural gas production is setting records each month and the rising level of LNG exports is not expected to affect natural gas prices to U.S. consumers. Dennis Arriola, executive vice president and group president at Sempra Energy, Charlie Riedl, executive director of the Center for LNG, and Steven Winberg, assistant secretary for fossil energy at the Department of Energy (DOE), tried to assure Sen. Angus King (I-Maine), that the increased LNG exports will not affect domestic gas prices.

King was not persuaded. As he has at other hearings, King said he would like to see frequent analyses on domestic price impacts from DOE and some type of limit on the level of LNG exports allowed, relative to U.S. natural gas production. One of the largest LNG exporters in the world, Australia, saw gas prices climb to nearly $10/Mcf, and for DOE to authorize LNG export permits without studying domestic price impacts is irresponsible, King said.

The Australian market impact reflects infrastructure challenges in moving gas within the nation, not a scarcity of supply issue due to LNG exports, said Winberg.

With U.S. production at about 92 Bcf/d and current exports around 4 Bcf/d, the amount being exported is below 5%, Winberg said. All five previous analyses by DOE, the most recent of which was from 2018, concluded that LNG exports would be positive for the U.S. economy, he said. DOE and FERC have approved projects to push the export capacity higher, with about 14 Bcf/d either in operation or under construction, and more than 30 Bcf/d possible.

When King questioned the wisdom of exporting one-third of U.S. supplies, Winberg said production is likely to go above 100 Bcf/d, and Arriola said not all of the projects approved by DOE will reach a final investment decision.

The stable gas prices consumers enjoy today in the U.S. are an advantage and King does not want to see gas prices set as an international commodity like oil. “I think we’re making a historic mistake” unless some type of limit is placed on the level of LNG projects approved based on production capabilities, he said.

Towards the end of the hearing, Committee Chairman Sen. Lisa Murkowski (R-Alaska), noted that global gas markets have changed dramatically in the last 10 years, with the U.S. building LNG import projects that are turning into export projects, and floating LNG storage and regasification adding competition to LNG shipments. The changes present the potential for the multi-billion-dollar U.S. LNG export facilities to become stranded assets, Murkowski said, asking witnesses if they have such concerns.

Because he knows energy market forecasts can be wrong, “I worry about this a little bit,” said Nikos Tsafos, senior fellow at the Center for Strategic and International Studies. Riedl and Arriola sought to moderate such concerns, noting that LNG project developers will have diversity in buyers and adapt to market conditions.

Melanie Hart, senior fellow and director of the China program at the Center for American Progress, added that China is moving to more renewable resources – with a goal of 50% renewable supplies by 2050 – which should be taken into account before getting too excited about China being a major buyer of U.S. LNG.

Because U.S. LNG is costly in China compared with other gas supply options, and China can leverage LNG purchases for ulterior geopolitical gains, LNG project developers should be wary of putting too much emphasis in the Chinese market, said Hart. If Chinese firms are willing to pay a premium for U.S. supplies or investments in infrastructure, “we have to ask what their intentions are,” because political leaders in Beijing will expect to receive something in return, she said.

Other witnesses noted that U.S. exports to Japan, South Korea, Vietnam, and European nations are increasing, bringing down power generation emissions in those countries and making them less beholden to Russia, China, or other suppliers who use energy as a geopolitical weapon. Sen. Bill Cassidy (R-La.) and others touted the economic benefits to the U.S., reduced trade deficits and national security benefits associated with LNG export projects being built.

But Hart and Sen. Joe Manchin (D-W.Va.) said China should be watched closely and not allowed to use energy resources and infrastructure investments to gain political or economic leverage. For certain commodities, China has become a price setter and can exert enormous influence, Manchin said. “We have got to get back in the game and lead in order to promote American energy independence and serve as a bulwark against Russian and Chinese aggression,” he said.

Hart said arguments that the U.S. should export large amounts of LNG to China “reflect deep misunderstandings about the global LNG market. They also reflect a deep misunderstanding about China’s own national interests and how Beijing seeks to position China in global energy markets.”

Tsafos emphasized the transformation taking place in the global LNG market, with increasing complexity and countries involved compared with a few years ago when it was a handful of buyers and sellers. Twenty countries export natural gas and 40 countries import it, and while long-term purchase contracts still are prevalent, short-term deals are growing and “this is going to be a very competitive market” for U.S. suppliers, he said.

The U.S. has such a massive resources base and production potential, LNG exports present enormous potential, said Murkowski, referencing the Alaskan LNG export project and related pipeline. Compared with Gulf Coast shipments that take up to 21 days to reach Asian markets and have to pass through the Panama Canal, an LNG shipment from Alaska would not experience any choke point and can reach Asia quicker, she noted. The cost of the greenfield project is so large that it will have a hard time competing with other projects, Tsafos said.

The U.S. has an opportunity to lead in a competitive market “but the window is narrowing,” Murkowski said. She announced a new Strategic Energy Initiative and released a white paper on global markets and U.S. competitiveness.

“We need a real strategy focused on the nexus between commodities and infrastructure, not one or the other. That’s why I’m pleased to release this paper, which provides a framework to strengthen our nation’s geopolitical posture,” she said.

Winberg said he supports the principles outlined in the white paper and that DOE stands ready to assist Congress in carrying them out. He and Arriola told lawmakers how U.S. exports of LNG are helping reduce the trade deficit, benefiting allies, and lowering energy-related carbon dioxide emissions. The International Energy Agency reported that Europe saved $8 billion on natural gas in 2018, largely due to U.S. LNG. The Energy Information Administration (EIA) predicts that energy-related carbon dioxide emissions in the U.S. will be 4% below their 2018 levels in 2050 as the use of natural gas increases, Winberg said.

Since DOE began authorizing exports of LNG, it has approved projects with a total capacity of 33 Bcf/d, he said, adding that there are nine other projects with a capacity of 15 Bcf/d under review at both FERC and DOE. DOE is committed to taking prompt action on LNG export applications once FERC completes its review, with rulings recently issued within two weeks of a FERC order, Winberg told the committee.

Using EIA projections, Winberg said LNG exports are expected to average 4.8 Bcf/d in 2019 and 6.8 Bcf/d in 2020, then climb to 14.4 Bcf/d by 2029. They are expected to stay at about that level through 2040.

Sempra has five LNG projects in the works, including the Cameron project in Louisiana that began service this year and hosted a visit by Cassidy and President Donald Trump, noted Arriola. One of those, the Energia Costa Azul project being developed on the west coast of Mexico in Baja California, can cut the shipping time to Asian markets to about 12 days compared with 21 days for exports out of the Gulf Coast that have to travel through the Panama Canal. U.S. LNG projects on the west coast will be more competitive in meeting Asian market needs, Arriola said.

Asia currently accounts for about 75% of U.S. LNG exports, with Europe accounting for roughly 15% as more European countries build new import terminals to reduce dependence on pipeline gas from Russia, Arriola said. Countries in both Asia and Europe are taking steps to improve their air quality, and burning natural gas from the U.S. can be a good substitute for coal-fired power generation and complement the growth of wind and solar power projects, he added.

Riedl referred to LNG exports from Dominion’s Cove Point facility in Maryland going to India as that country takes steps to use more natural gas and reduce emissions from coal-fired power plants.

He told lawmakers that the increased exports of LNG will not compete with domestic manufacturing and industrial use of natural gas as the production capabilities are growing and reaching all-time highs.

Globally traded LNG volumes were 37 Bcf/d in 2018, setting a new record, with global demand expected to reach 67.7 Bcf/d by 2035. There is about 15 Bcf/d of new gasification capacity under construction around the world and numerous countries are vying to compete in the LNG market. “The demand for LNG is clear, and that is why it is critical that the United States be positioned to compete on a level playing field for access to these new and expanding markets,” Riedl said.

Riedl noted that there are four LNG project in operation in the U.S., with six projects under construction and seven that have gained permits but are in need of final investment decisions. There are another 14 projects being reviewed at FERC.

FERC recently issued the draft environmental impact statement for the Alaska LNG project, which would enable North Slope reserves to access Asian markets, Murkowski said. LNG shipments from Alaska can reach Asian markets in less than 10 days, she said. The state-backed project has financial support from China but it is costly due to its size and development costs, Murkowski acknowledged.

LNG buyers look beyond price, Arriola pointed out, assigning value to things like security of supplies, shipping routes, and other risks. “There are sophisticated customers out there,” he said.

Sen. Mike Lee (R-Utah) questioned Riedl about the Jones Act and how it is preventing shipments of gas to markets in the U.S. where pipelines are constrained. The law requires ships serving domestic ports to be U.S. flagged and built, but building LNG vessels in the U.S. is cost prohibitive, Riedl said. The Cove Point project in Maryland could easily send gas to northeast markets through the LNG import facility near Boston, but the Jones Act prevents it and Northeast gas consumers are paying higher prices due to constrained supplies through existing infrastructure, Riedl said.

Lee referred to the region importing LNG from Russia when the nearby gas resource base in the Marcellus and Utica shales are so abundant. “It makes no sense for us to be importing gas from Russia,” Lee said, asserting that the Jones Act needs to be reformed. He’d prefer to see it repealed, but at a minimum is should be amended, Lee said.

By Tom Tiernan TTiernan@fosterreport.com

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