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    [NGW Magazine] US LNG: Liberty or Markets?


This article is featured in NGW Magazine's Volume 3, Issue 8 - The US now sees it as a mission to export its abundant LNG to regions suffering from dominance by another major exporter, such as Europe, although markets will decide where the growing supply slate actually ends up each year.

by: Drew Leifheit

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[NGW Magazine] US LNG: Liberty or Markets?

The US now sees it as a mission to export its abundant LNG to regions suffering from dominance by another major exporter, such as Europe, although markets will decide where the growing supply slate actually ends up each year.

The idea that exports of oil and gas take with them the ideals of democracy and free market ideology of their homeland persists in US government thought. Although the US is still a net importer of oil, it is now exporting gas as LNG as well as by pipeline. The deputy secretary of the US Department of Energy Dan Brouillette told the 5th Annual Columbia Global Energy Summit in New York April 19 that the overarching energy policy objective of Donald Trump’s administration is energy dominance. “We're exporting freedom, and that matters. When you are secure, you have options. If you're dependent, you probably do not,” he said.

The moderator, Jason Bordoff, noted the stunning turnaround in the outlook for US natural gas imports, which 10 years ago had been projected to rise as far as the eye could see. “And we've just become a net gas exporter, and oil exports, even though we're a net importer, are still very very high and projected to rise.”

Why, Bordoff asked, does that enhance US strength, economically or geopolitically? “Because we believe strongly that energy security is national security,” Brouillette answered. “If we can export those products, we think it increases the security of our allies and partners around the world.” 

He mentioned the discussions with European allies on Nord Stream 2, which will deliver Russian gas to Germany, and cited the American arguments – diversity of energy supply and suppliers, for one. “If you can produce your own energy, and use it cleanly and efficiently, then that increases your own security – that's the mantra that we have shared with others.”

Europe a market for US gas

In terms of the rationale behind the US backing Europe's energy security, Brouillette conceded that part of it is due to the marketing of American gas there. “We're in the export business – we have to have markets to sell to. Of course we'd like to see US LNG be sold in Europe and see Europeans purchase our gas versus other nation state producers of gas.” The US contention with Nord Stream 2, he continued, is that “the economics do not make sense.

“There's one pipeline that already exists; there's another transit pipeline that comes through Ukraine and there are other options available not only to Germany, but other European nations.” He reiterated that any country's deep dependence upon one supplier is a vulnerability.

Jobs, he said, were also a benefit of indigenous production, something quite important for the US economy, strengthening national security as well.

Incentivising the development of more facilities, said Brouillette, is one way in which the US can increase its volumes of hydrocarbon exports. He reported that in terms of small-scale LNG, the DoE had taken steps such as reducing what is known as the “public interest determination”– basically an economic analysis – on the front end of such a project, before going to the Federal Energy Regulatory Commission (Ferc) to get a permit to build such a facility.

The DoE, he said, had decided that its own determination of the economic feasibility is not its primary function, so the requirement has been waived so that the projects can go directly to Ferc. “Anything that we can do to reduce hurdles to the construction of export facilities here in the US, we're going to pursue,” he explained. 

Infrastructure won't keep up with supply: Tellurian

Delegates at the same event asked the chairman and co-founder of Tellurian Charif Souki whether the infrastructure can be built quickly enough for what's coming online, particularly with LNG and projects emerging in other parts of the world.

“No,” he replied, explaining it takes time to build an LNG facility and takes time to get the gas to that facility. “This is not instant gratification,” he said. “You have to plan it, permit it and build it. It takes about six to seven years to finish.”

Two additional complications he cited are an unworkable business model, “because the market has become significantly liquid. As with all commodities you don't really need to enter into contracts – you know that the commodity is there. If you're a buyer, you're going to say: 'I need it three months a year during winter for peak demand – why do I have to take a stake in infrastructure or enter a long-term contract?'” 

Second, Souki said there is a geopolitical risk of who gets along with whom. “So when you put the business model problem on top of the geopolitical problem, nothing happens immediately." 

Souki said however the last thing he was worried about is the availability of capital to fund infrastructure projects. “Having the ability to access the capital at a reasonable price is a different story,” he added. Such investments are not based on a simple profit motive, but upon various considerations. 

“You shift your risk-rewards expectation – so, you want to be a low-cost provider because you're now in a commodity business. However, if you're the low-cost provider, you can go through the cycles and survive the bad times but make a lot of money in the good times. You have to accept that you're going to be on a different risk-reward profile, but I don't think there's a shortage of capital – there's capital everywhere in the world, and some of it wants simply to secure cheap natural gas,” he said. 

ConocoPhillips CEO Ryan Lance said the development of the infrastructure to deliver domestic hydrocarbons in the US appears to be the next big challenge on the horizon for the industry. It's all about delivering to the “demand centres”, or to the coasts for export, he told delegates.

“It will be being able to move the energy – generally from the centre part of the US out to the coastal part, where it's needed,” he explained, adding that it is also important to deliver cleaner natural gas to the northeast of the US to displace fuel oil there.

Eliminating the US ban on exporting crudes from North America had been a “huge event”, said Lance. “It let the free market work and let us start supplying affordable, reliable cheap energy to all four corners of the world, and in fact that's what's happening today – 2mn b/d of exports and our imports have dropped dramatically.”

Pioneer Natural Resources chairman Scott Sheffield also expressed his concerns over whether the US bears enough LNG export capacity to be able to deliver American exports. He said, “I'm worried about the next round of LNG projects that haven't been approved; we could be producing way too much gas in the Permian, Marcellus and Utica (shale basins).” Still, he reported that the US is exporting 2.3mn b/d of oil, which he said is a record.

As the Permian basin has the right geology and the companies are in place to produce, Sheffield said the basin would be producing 75-80% of the US growth over the next several years.

IHS-Markit vice chairman and oil markets guru Dan Yergin concurred that the US energy business is likely to see substantial growth in the next several years. “We are seeing two kinds of constraints: one is the infrastructure constraints – the scale, and, secondly, the demands of shareholders for returns as well as growth.”

Up until just about a year ago, he continued, the rest of the oil world had seen American exports as a disruptive thing, but now they are being seen as part of the global market – a perceptible change. 

Climate change no “serious threat”

It is debatable whether climate change is a “serious threat”, Brouillette said, terming it something that the DoE can work on. He explained, “We have some big challenges elsewhere, and right now if we had to prioritise this administration's rank order of things, climate wouldn't be a 'threat' at the top of the list. It is something we need to address, however,” adding that there is a lot of good work being done on that in DoE labs.

In terms of what can be done specifically, Brouillette said the US would continue to use coal for some time. “We're going to use fossil fuels for a long time,” he added. “so I think developing technologies that allow us to use those energy resources more cleanly, more efficiently than have been done in the past is important for us to do – if you connect that to a climate change goal, that's fine. We think that's the right thing to do, so we're going to continue to do those types of work.” 

However, he said an innovative approach should be pursued to advance those objectives swiftly, as opposed to a regulatory approach, contrasting how past US administrations had done this.

Drew Leifheit