U.S. natural gas producers and liquified natural gas (LNG) operators have a golden opportunity to boost exports to Europe as the E.U. weans itself off Russian piped natural gas supply.
The opportunity is not without risks, however. As more LNG is shipped abroad, less gas supply will be available for domestic users. Benchmark U.S. natural gas prices are already near 13-year highs, around $7 per million Btu.
And that means higher prices for American consumers who heat or cool their homes with gas and U.S. manufacturers who rely on the fuel as feedstock.
Thanks to the shale gas and fracking boom, the United States has been blessed with low natural gas prices of $2 to $3 per million Btu for most of the last decade.
But those days look to be over. A new, more volatile era for U.S. gas is setting in, marked by higher prices. And shipping more gas to Europe and other countries abroad when domestic production is no longer growing at the rapid pace of previous years will exacerbate market tightness and volatility.
The question is: Can America manage to expand LNG exports to gas-thirsty Europe while keeping prices at home low enough so that domestic manufacturers don’t lose their competitive advantage?
In the short-term, the Biden administration has pledged that the United States will send 15 billion cubic meters of LNG (the equivalent of 11.1 million tons) to Europe this year, with “expected increases going forward.” The U.S. government and the European Commission also set a goal of expanding the European Union’s annual imports of U.S. LNG to 50 billion cubic meters (37 million tons) by 2030. That would be about one-third of the European Union’s gas imports from Russia in 2021.
The U.S. oil and gas industry is rightfully joyous about the Biden administration’s sudden embrace of LNG. Before the Ukraine war, Biden appeared unsure about the role of natural gas in the energy mix. The fossil fuel did not fit cleanly in the President’s ambitious climate agenda, even though gas’ displacement of coal in U.S. power generation has been most responsible for declines in greenhouse gas emissions over the past decade.
But the bottom line is that the pace of new natural gas production projects, gas pipeline schemes, and LNG export terminals will need to increase to achieve higher exports while maintaining low prices at home.
Analysts at Bernstein estimate the U.S. must sanction up to 80 million tons per year of new LNG export capacity in the next year or two to help bridge the European supply gap — double what was expected to move forward before the war.
That means the Biden administration will have to fast-track approvals of new export projects to ensure they can start up in the coming years as European demand for non-Russian gas ratchets up.
That is where Biden’s recent mixed messages on gas and other fossil fuels become problematic.
Indeed, Biden’s Federal Energy Regulatory Commission (FERC) recently unveiled a policy statement that would raise the bar for environmental reviews on LNG facilities.
Some energy executives say the shortest path to approval is, at best, 15 to 18 months.
Cost and availability of materials and U.S. labor is another major bottleneck for big construction projects, whether a liquefaction terminal, a pipeline, or anything else in the current market.
On the “upstream” gas production side, the same concerns exist.
Even as U.S. natural gas prices have soared to 13-year highs, significant production growth may lie beyond the horizon as supply-chain woes, pipeline constraints, and investor pressure to control spending remain front of mind for gas producers.
Raising U.S. gas output has proved complicated since output fell from record highs of around 97 billion cubic feet per day in December. Dry gas output has sputtered at about 95 billion cubic feet per day since severe winter freeze-offs took their toll on volumes.
Output is again showing signs of steady growth, but progress has been slow due to infrastructure constraints and investor demands for capital discipline.
The U.S. Energy Information Administration expects domestic dry gas production to remain relatively unchanged this year at 96 billion cubic feet per day and only increase slightly in 2023 at 97.6 billion cubic feet per day.
The situation has U.S. industrial manufacturers worried about sky-rocketing gas prices – a matter regular Americans can sympathize with from recent soaring gasoline pump prices.
Last month, the Industrial Energy Consumers of America (IECA) filed comments with FERC opposing Venture Global’s application for long-term authorization to export LNG from its proposed CP2 project in Louisiana to non-free trade agreement nations. The fear is that state-controlled buyers in global LNG markets like China could capitalize on expanded U.S. LNG exports by outbidding European players for cargoes in the globalized gas market.
The IECA argued that LNG export growth would increase domestic natural gas prices and endanger power and gas reliability in America.
“The global LNG market is not a free market. U.S. consumers cannot compete with foreign government-controlled entities with market power and can pay any price for LNG, no matter how high,” the IECA maintained.
The White House has the right idea to expand LNG exports to help Europe get off Russian gas. But it must make the right decisions at home to help expand production and ensure prices stay in check here, too.
