After reading Art Berman’s excellent summary of how fast-growing U.S. natural gas exports are likely to reduce domestic supplies significantly over the next several years as shale gas output begins to decline, I want to assure you that everything has been going according to plan for the natural gas industry, that is, until now.
On Friday the Biden Administration announced a freeze on new permits for liquefied natural gas (LNG) export facilities that could last up to 15 months. The administration said that during the freeze it will review the environmental effects of such exports on climate and the communities in which the facilities are located. It is also possible that despite the industry’s assurances, the administration may believe that supply problems and therefore higher prices lie ahead, something that voters won’t like.
When U.S. oil and gas producers successfully lobbied the federal government for an end to restrictions on the export of crude oil and natural gas in the middle of the last decade, they loudly proclaimed that America could produce so much of both from the country’s shale fields that the United States would have plenty left over for export—and that would boost the American economy while addressing the country’s trade imbalance. They promised that this boom would go on for decades.
Of course, what those producers were really angling for was to integrate domestic oil and gas markets more fully with world markets in order to benefit from higher world prices and make a lot more money. In fairness, what they were asking for is what almost every other industry in the United States enjoys, the right to sell their products to the highest bidders no matter where those customers are on the globe.
Naturally, that argument would not have appealed to members of Congress whose constituents prefer low energy prices to high ones, so it was never advanced with any vigor.
We are now a decade into the U.S. experiment with largely unrestricted exports of oil and natural gas and as Berman suggests, the boom is leveling off and setting up for what looks like a decline. I’m focusing on natural gas in this piece, but you can read Berman’s excellent coverage of the approaching decline in U.S. oil production here and here.
For context, the U.S. oil market was already integrated into the world market before the changes in U.S. policy except for a restriction on crude oil exports that tended to suppress domestic crude oil prices. U.S. refiners had long been allowed to export as much finished product (gasoline, diesel, etc.) as they liked.
Natural gas producers, however, were generally unable to access the world market as their gas was delivered by pipeline to domestic customers and to some customers in Canada and Mexico. This kept U.S. natural gas prices much lower than world prices for many years. So, the change in policy is having a much bigger effect on natural gas prices.
As the international LNG market expanded dramatically, U.S. gas producers saw their opportunity. If they could only get their gas turned into LNG, it could be shipped to higher-paying customers abroad. The more gas that went abroad as LNG, the higher prices would be for U.S. consumers and ultimately for LNG exporters, a double win for domestic producers.
The move has led to mixed results. This is in part because U.S. natural gas producers have shot themselves in the foot showing little discipline and overproducing. (The reason is often that the wells are drilled with borrowed money and therefore the producers must sell all the gas they can produce to pay back their creditors rather than wait for better prices.) There have been periods when U.S. natural gas prices jumped in the past 10 years, but those prices are currently stuck at levels reminiscent of the 1990s. World LNG prices, however, remain consistently and considerably above U.S. prices.
This differential has been driving a huge expansion in U.S. LNG export facilities, facilities that are likely to double the combined export capacity of the United States, Canada and Mexico by 2027, according to the the U.S. Energy Information Administration (if that expansion is allowed to proceed). Including all three countries in any assessment of LNG exports makes sense because of the dense network of natural gas pipelines that connect them and therefore affect the supply of natural gas available in all three.
It’s important to understand that LNG delivery contracts usually run for 20 to 30 years. The customers receiving LNG are unwilling to invest the billions it costs to build and run a regasification facility without being guaranteed a consistent supply of LNG. That means that most of the natural gas leaving American shores cannot simply be held back and kept at home if America’s natural gas supplies get low. And, some of those contracts are with America’s gas-hungry allies in Europe. So, declaring a national emergency and depriving those allies of contracted natural gas supplies would have major geopolitical implications.
It now appears that the Biden administration may have figured all this out. The ostensible reason for the just announced moratorium on the permitting of new LNG export facilities is, of course, the environmental effects on climate and communities hosting LNG export sites. It seems likely, however, that someone whispered into the administration’s ear something about the possibility of much higher domestic prices in the coming years if the U.S. LNG export juggernaut is allowed to continue.
Given the uncertainties surrounding U.S. production of both oil and natural gas, it seems likely that the United States will start putting more emphasis on making sure enough domestic production remains in the country to meet domestic demand and, in the case of natural gas, to keep prices down. (U.S. oil prices will continue to be linked to world prices under pretty much any scenario except price controls or extraordinary new export restrictions, both of which seem unlikely.)
My guess is it will take a major crisis for U.S. export policies to actually go into reverse (rather than merely halt the expansion of exports as the Biden administration is considering). Producers have until then to maximize their gains before the curtain falls on the current U.S. export system that is now plumping up their profits.
