Helping U.S. LNG Projects Remain Well-Positioned in the Global Market
Published in Morning Consult, Oct. 11, 2018
By Fred H. Hutchison[*]
Much digital ink was spilled after the recent decision by Shell and partners to proceed with Canada’s first liquefied natural gas (LNG) export facility, with some wondering if the LNG Canada decision might alter the prospects of the next wave of U.S. LNG export projects. The short answer is no, it won’t.
For starters, the LNG Canada announcement wasn’t a surprise. Much of the gas produced in Western Canada would be “stranded” without construction of one or more LNG export terminals on the Pacific Coast (including Oregon) and thus a decision to proceed was always more “when” than “if.”
In addition, the global natural gas market is expanding at a phenomenal clip as countries on every continent recognize the many virtues of natural gas as an energy resource and a raw material.
While gas demand in China is a key driver (up an estimated 37% in 2018), many other nations are also demonstrating heightened interest in using natural gas as a complement to solar and wind, to limit air pollution from burning coal and/or fuel oil, and to reduce greenhouse gas emissions.
Soaring demand is coming just as production in many regions (e.g. Europe) is shrinking, and a serious global supply/demand imbalance is predicted for early next decade. Since LNG export projects take 42 months or more to build, this means that LNG consumers worldwide are waking up to the fact that they need to join forces with producers right now to sanction more global liquefaction capacity.
Fortunately, the United States has many world-class runners in this race, but as the LNG Canada decision shows, we’re not the only ones on the track. The competition from Qatar, Canada, Russia, and Australia will intensify in the critical months that lie ahead.
What steps can the U.S. government take to help our LNG runners? There are several things:
First, it is imperative that the Federal Energy Regulatory Commission (FERC) stick to the ambitious (but achievable) schedule announced on August 28 to finish its National Environmental Policy Act reviews for the LNG export applications. Making sure that other federal agencies provide the “cooperation” that FERC needs will be crucial in this regard.
Second, the Senate must act this year on the nomination of Bernard McNamee to be the fifth FERC commissioner. While the agency can approve LNG and other projects with less than a full slate, past experience has shown that FERC performs most efficiently with five commissioners sitting on the dais.
Third, the administration needs to give serious consideration to our request that imported steel products used in LNG export projects be granted a blanket exclusion from the tariffs and/or quotas imposed earlier this year. The current item-by-item exclusion process used by the Commerce Department is cumbersome, costly, and imposes product supply uncertainties that can impede the launch of new LNG export projects.
Fourth, U.S. LNG exports are now subject to 10% Chinese tariffs. Both governments need to come back to the negotiating table as soon as possible. The uneasy nature of trade relations between the two nations is an unnecessary impediment to the long-term LNG deals that Chinese importers and American exporters have been hammering out over several years.
Fifth, the Senate needs to promptly approve the nomination of Kimberly Reed to lead the Export-Import Bank (EXIM), the first step towards restoring a fully operational agency. There are numerous ways EXIM can support U.S. LNG exports—such as providing credit enhancements. Agency staff are ready to move forward, but are hamstrung by the current Senate stalemate.
Sixth and finally, the new International Development Finance Corporation—which was established last Friday when the BUILD Act became law—will replace the Overseas Private Investment Corporation and can greatly accelerate the construction of LNG import terminals and gas infrastructure in developing countries. Accordingly, the administration must make LNG projects a top priority for the new agency.
U.S. LNG exporters enjoy many advantages vis-à-vis our global competitors: the capital costs of our facilities are very low (»50-60% of Canada for example); our natural gas is (and will remain) extremely affordable; we have a stable, predictable, and functional regulatory regime; our LNG projects enjoy strong state and local community support; and our development teams are topnotch.
But, the global natural gas market is brutally competitive, and the U.S. government needs to continue to do all it can to help our runners reach the finish line.