In the US, companies that want to build liquefied natural gas (LNG) export terminals need to get advance approval for their plans from the US Department of Energy. There was a recent news item saying, “Biden pauses LNG export approvals under pressure from climate activists.” After looking into the situation, I 100% agree with Biden’s decision. There is no sense in the US adding more approvals for added LNG capacity at this time. This is the case, completely apart from climate considerations.
When looking into the situation, I found that the US already has a huge amount of LNG export capacity approved but not yet under construction. The likely roadblock is the need for debt financing. One obstacle is the need to find investors willing to make very long commitments–as long as 25 years, considering the time to build the LNG plants, plus the time that they are expected to be in operation. Issues that could be expected to get in the way of long-term investment would include:
- Today’s relatively high interest rates.
- Today’s low US natural gas prices (Henry Hub natural gas price is currently $1.64 per million Btus, a near-record low), discouraging investment in natural gas extraction.
- The possibility that US oil and natural gas extraction from shale formations will reach limits within the next 25 years.
- The possibility that overseas buyers will not be able to afford exported LNG at the prices needed to make extraction profitable. For example, a selling price of $25 per million Btus would probably greatly reduce the quantity of LNG that could be sold in the EU.
- The possibility of construction delays caused by broken supply lines.
- The possibility of fires causing significant down-time in operating facilities.
- Even if natural gas is available for export, and even if LNG export facilities are built, there is the possibility that the rest of the system, including specialized LNG transport ships, may not be available in sufficient quantities.
In this post, I will try to give some background on this issue.
[1] Many people seem to believe that the US can easily ramp up natural gas production for export if it chooses to do so.
There seems to be a common belief that the US has an almost unlimited supply of oil. Natural gas is produced together with oil, so a corollary to the high supply of oil is that the US has an almost unlimited supply of natural gas.
At the same time, there are many parts of the world with an inadequate supply of natural gas. Many of these countries are trying to add wind and solar power generation. Natural gas is very helpful for balancing wind and solar because electricity production from natural gas can be ramped up and down very quickly, filling in when intermittent sources of supply are not available.
The European Union (EU) is one area that has very inadequate natural gas supply (Figure 1). The EU is also known for its use of wind and solar power, so it needs natural gas for its balancing ability.
If it is true that the US has a huge supply of US natural gas, all that would seem to be needed to solve the EU’s wind and solar balancing problem is for the US to export natural gas to the EU.
The modern way of exporting natural gas seems to be as LNG, transported by specialized ships at a very low temperature (about – 260°F (-161.5°C)). It appears that all that the US needs to do is to ramp up its natural gas production, and with it, its LNG export infrastructure.
[2] Natural gas prices vary widely around the world. US prices are much lower than elsewhere. These differences would also seem to support building more LNG export facilities.
Figure 2 shows that US natural gas prices are much lower than elsewhere. This has especially been the case since 2008 when the shale boom began, making it look as if the US can easily export natural gas if it likes. Even with the cost of shipping included, it looks as if consumers in the EU and Japan might find US LNG attractive in price.
[3] Natural gas tends to be cheap to extract but getting it to the customer and storing it until the right time of year is an expensive headache.
Natural gas is a fuel that is disproportionately used in winter to heat homes and businesses. This heat can be provided by burning the natural gas directly, or it can be provided by first burning the natural gas to produce electricity, and then using a device, such as a heat pump, to provide heat.
If natural gas can be utilized close to where it is extracted, there tends to be a huge cost advantage over long-distance transport. Clearly, one reason is that utilization near the point of extraction reduces transit costs. Also, empty gas caverns that can be used for storage are often available near the point of extraction. This storage approach is much less expensive than building specialized tanks for storage. These cost advantages are one reason why US natural gas prices shown on Figure 2 are much lower than those in the EU and Japan.
[4] Low natural gas prices in the US are now well “baked into the system.”
With natural gas prices remaining low for around the past 16 years, individuals and businesses have adjusted their consumption patterns based on the assumption that an abundant supply of inexpensive natural gas will be available permanently. US natural gas production has approximately doubled since its low point in 2005, and consumption has almost kept up.
Many changes have taken place since gas prices fell. The US electrical system has significantly reduced its reliance on coal and instead increased its utilization of natural gas. People have built oversized homes based on the assumption that cheap natural gas will be available to heat them. Businesses have built factories in the US under the assumption that electricity costs of the US will continue to be low compared to those in Europe, Japan, and many other parts of the world, indirectly because of the US’s inexpensive supply of natural gas.
These low electricity and natural gas prices give the US a competitive advantage in making goods for export. With the shift away from coal for electricity production, the US can now say that it has reduced the carbon intensity of its electricity. Politicians like the competitive advantage for the US as well as the lower carbon intensity. Few of them would vote to go back to earlier ways, even if it was possible to do so.
[5] Natural gas tends to be utilized close to where it is produced. The early form of natural gas export was by pipeline. In recent years, LNG exports have increased.
Figure 4 shows that, consistently, about 75% of natural gas is used in the region where it is extracted. This happens because natural gas tends to be inexpensive close to the point of extraction. The use of inexpensive resources helps make an economy competitive in the world market, making them attractive for local use.
Pipeline trade tends to be inexpensive if the distance is short. The disadvantage is that pipeline gas tends to be inflexible; prices are often locked in for long periods. Pipelines can be a disadvantage if they pass through another county. The country allowing transit will likely want to make a charge for this service; this can lead to conflict. Pipelines can easily be blown up if countries start fighting with each other.
LNG is the newer approach to exporting natural gas. Its advantage is its flexibility; its disadvantage tends to be its higher cost when the entire cost of the operation is considered. There need to be export facilities where the natural gas is chilled and loaded into specialized tankers. Investors, quite possibly from another country, need to invest in the specialized tankers used to transport the LNG. At the other end, there is the need for regasification plants and for gas pipelines to the facilities where the gas is to be utilized.
Recouping the total cost of the system can be a problem with LNG. If prices are set under long-term contracts pegged to the price of oil, as has been the case between Japan and Russia, advantageous prices for the producers can be obtained. (Note the high prices Japan has been paying in Figure 2.) Of course, with long-term contracts, the flexibility of the system is lost.
In some years, there has been more LNG capacity than required in Europe. Exporters without long-term contracts started selling natural gas at spot prices, depending upon the balance between supply and demand at the time of the sale. (Notice the lower natural gas prices for Europe in Figure 2). It is not clear to me that investors can earn enough on their investments, if they are forced to depend on spot prices, which can easily fall too low if there is excess supply.
On the other hand, if the LNG market gets tight, as it did in 2022, spot prices can jump very high, making it difficult for LNG buyers to find affordable supply.
[6] An analysis by the EIA indicates that the US already has a great deal of LNG export capacity at some stage of development.
The most recent EIA analysis of LNG capacity in the process of being developed is shown at this link.
The above analysis was performed using data as of the end of 2022. It shows that at that time, the amount of liquefaction capacity was
- 37.0 billion cubic feet/day (Bcf/d), considering existing, under-construction and approved liquefaction capacity.
- 18.7 Bcf/d, considering existing and under-construction liquefaction capacity.
More recent information is also available. A release dated January 26, 2024, by the Department of Energy says,
The United States is the global leader in LNG exports with 14 billion cubic feet per day (Bcf/d) in current operating capacity and 48 Bcf/d in total authorizations approved by DOE to date, over three times our current export capacity.
This quote seems to imply that the total authorizations increased from 37.0 Bcf/d to 48 Bcf/d, based on an unpublished, more recent, analysis.
The 14 Bcf/d in current operating capacity is far above recent LNG export amounts. The actual quantity of US LNG produced in 2022 was 10.8 Bcf/d based on the data underlying Figure 5. Based on data through November 2023, I would estimate that amount of LNG produced in 2023 amounted to about 11.7 Bcf/d. These comparisons suggest that the actual amount of LNG produced may lag significantly below the stated export capacity.
If we compare the total exports authorized of 48 Bcf/d to the actual production amount (about 11.7 Bcf/d for 2023), the ratio is over 4, implying a very high amount of authorized additional LNG production capacity.
[7] The EIA model shown in Figure 5 indicates that several conditions need to hold for LNG exports to ramp up substantially.
(a) Figure 5 indicates that for NGL exports to increase significantly, both oil and natural gas prices need to be high. With low oil and low natural gas prices, exports do not increase much at all, regardless of the infrastructure built. (As I noted in the introduction, US natural gas prices are now very low. World oil prices are not very high, either. Thus, the model indicates that not much ramping up in NGL exports should be expected, even if more export capacity is added.)
(b) To enable export of the maximum amount of LNG overseas, “Fast Builds” of the rest of the infrastructure also needs to be high. In other words, there must be rapid growth in the number of LNG transport carriers and in receiving facilities for the exported LNG.
(c) The fact that the gray shaded area (indicating the scenarios the modelers thought likely) does not extend to the Fast Builds scenario means that the modelers consider this scenario unlikely. Even if infrastructure is built on this end, other parts of the system likely won’t be in place.
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(d) Hidden in the assumptions is the fact that the citizens at the receiving end of the LNG must be able to afford electricity made with high-priced natural gas and products such as fertilizer, made with high-priced natural gas. If citizens at the receiving end cut way back on their use of natural gas (by not heating their homes as much, or by doing less manufacturing using electricity, or by making less fertilizer with natural gas), export prices are likely to fall.
[8] The reason why oil prices need to be high for high LNG exports is because much of the natural gas extracted is produced at the same time as oil.
If oil prices fall too low, US production of oil from shale is likely to drop (as it did in 2020), and with it the production of natural gas. With low oil prices, US natural gas extraction is also likely to lag. In this scenario, the natural gas necessary to support the hoped-for rise in natural gas exports won’t be available.
With both high oil prices and high US natural gas prices, consumers in the EU and elsewhere will have an especially difficult time affording the high cost of imported natural gas from the US. The problem is that if natural gas costs are already high before all of the cost of processing it to make LNG and shipping it long distance are incorporated, its cost will be doubly high for buyers in the EU (and elsewhere). Furthermore, the budgets of EU consumers will already be stretched by high oil prices, making high-cost LNG even more unaffordable.
[9] People believe that fossil fuels can rise arbitrarily high, but this is not true. Unaffordably high prices are the limiting factor for LNG exports.
Farmers are particularly strongly impacted by high oil and natural gas prices. High oil prices tend to make the cost of the diesel used to run farm equipment very high. High natural gas prices tend to make ammonia fertilizer very expensive. If both oil and natural gas prices are very high, the combination will tend to lead to very high-cost food. Citizens generally get very unhappy about very high-cost food. Farmers tend to protest, as farmers in Europe have done recently, because it becomes impossible for them to pass their high costs on to consumers.
There are clearly many other parts of the economy affected by high oil and natural gas prices. With high natural gas prices, electricity prices tend to be high. Families find their budgets stretched because of the high cost of both home heating and transportation. Food costs are likely to be high also. Economies tend to be pushed into recession by high oil and natural gas prices.
[10] A wise approach would be to go slowly in building LNG export capacity.
If excess LNG export capacity is built, those building the liquefaction plants will find the return on their investment very low.
In a self-organizing system, new technology is usually slowly adopted. Investors see a niche that appears to be profitable and build a little at a time. They wouldn’t try to put a huge amount of LNG export capacity in place without making certain that a little bit works. This same approach is used by manufacturers trying any new technology; they start on a small scale and then gradually scale up the process.
The US has already approved a very substantial amount of future LNG liquefaction capacity. It seems to me that there is a need to pause the acceptance of new applications for a while to see whether the many LNG facilities in the queue can actually be built and can sell the LNG they produce profitably. Perhaps profitable new LNG plants can only be built if firm long-term contracts at quite high prices can be signed.
Going slowly would seem to be an appropriate approach for now.
By Gail Tverberg via Our Finite World
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