State of the USLNG Industry
United States Energy Association
Fred Hutchison, founder, president, and CEO of LNG Allies.
I am honored to appear at this important event to report on the state of the U.S. liquefied natural gas industry at the beginning of a new decade.
2020 will indeed be a momentous year for U.S. LNG because it marks the end of the beginning of our nascent industry.
By mid-year, the first wave of U.S. liquefaction and export facilities will be fully operational. By then, the industry will have completed initial development of two large LNG projects in Louisiana, two in Texas, one in Maryland, and one in Georgia.
What does this mean for the United States?
It means that about 11 billion cubic feet per day of new natural gas demand—some 12 percent of U.S. dry natural gas production in 2019—has been created in just five years.
It means that some $44 billion dollars was invested in these six projects with peak construction employment in the range of 30 to 40 thousand jobs.
It means that tens of thousands of Americans have found good, permanent jobs upstream of the LNG export facilities and thousands more now receive indirect or induced employment.
It means that America has joined the top ranks of global LNG producers… In five short years we have gone from zero to third place behind Australia and Qatar. As the first wave of U.S. LNG peaks later this year, we will be producing 77 million tons per annum!
But beyond these impressive statistics—and they are truly remarkable—it means that U.S. LNG is literally changing the world… for the better!
U.S. LNG has brought new business models to the global energy marketplace, challenging legacy LNG producers who sold their gas under long-term contracts with strict destination restrictions, expensive take-or-pay requirements, and oil-linked pricing mechanisms.
U.S. LNG has expanded the global availability of natural gas, a truly versatile commodity, driving down spot natural gas prices around the world.
And, in close coordination with our allies in Central and Eastern Europe—who have built new import terminals and pipelines—U.S. LNG has helped Poland, Lithuania, and other nations break free of the predatory pricing practices of a state-owned gas monopolist.
Poland, for example, has gone from nearly total dependence on Russian pipeline gas to a situation where a new pipeline through Denmark to the North Sea and expanded LNG import infrastructure will soon give it the freedom to walk completely away from Russian gas… Talk about a chill development!
U.S. LNG means other things as well, and in the months ahead you will hear LNG Allies say a lot more about the environmental, economic, and climate benefits of American natural gas exports.
U.S. LNG is facilitating coal-to-gas switching in the electric power sector, which is reducing conventional air pollutants such as SOx, NOx, and particulate matter, as well as carbon dioxide in Europe, Asia, and elsewhere.
Why is coal-to-gas switching important? Well, the International Energy Agency estimates that coal-to-gas switching in the last decade—primarily in the United States and China—saved more than 500 million tons of CO2, an effect equivalent to putting an extra 200 million electric vehicles running on zero-carbon electricity on the road over the same period.
According to IEA: “While there is a wide variation across different sources of coal and gas, an estimated 98 percent of gas consumed today has lower lifecycle [greenhouse gas] emissions intensity than coal when used for power or heat, taking into account both CO2 and methane emissions… on average, coal-to-gas switching reduces emissions by 50 percent when producing electricity and by 33 percent when providing heat.”
In addition to its climate and environmental advantages, U.S. LNG is also lifting people out of poverty. It is facilitating the construction of dozens of new, highly-efficient gas-fired powerplants which will bring electrons to some of the one billion people without electricity. And, it is providing clean energy to fuel new manufacturing and industrial capacity, essential elements of real, lasting economic development.
If the U.S. LNG industry never expanded further than where we are right now, ours would be an energy success story of enviable magnitude. But, we’re not standing still.
In 2019, two new U.S. LNG export facilities and one project expansion took final investment decisions and began construction. While not as large as the first wave, these three facilities will produce another 30 million tons per year of LNG when they are fully operational in the 2023 to 2025 timeframe, creating another 4.5 billion cubic feet per day of gas demand.
This extra liquefaction capacity should catapult the United States to top spot on the LNG leader board by 2025… From last to first place in less than a decade! But, we’re not done yet… not by a longshot.
The Federal Energy Regulatory Commission has authorized 11 more U.S. LNG projects and three project expansions, representing a potential 170 million tons per year of LNG capacity which could stimulate about 24 billion cubic feet per day in additional U.S. natural gas production.
How many of these export facilities will get built? Well, obviously, I don’t know the answer to that question, but I do know that several are only a few long-term deals away from taking a final investment decision.
The most viable of these projects have their ducks lined up. They have their government permits in hand. They have fully-wrapped, lump-sum, turnkey engineering, procurement, and construction contracts in place. They have secured needed pipeline capacity. And, they have strong financial partners with ready access to the requisite equity and debt capital.
The only mallard that’s not in the queue for these companies is enough long-term customers to meet debt service requirements.
Given the enormous cost of new LNG export facilities, it is the rare project which can be financed solely on the owner’s balance sheet. The only time this happened was for the Golden Pass project in Texas, a joint venture of Qatar Petroleum and ExxonMobil.
Every other U.S. LNG project has needed project financing. Unfortunately, that means that the bankers who provide these construction loans continue to call most of the shots, and no one should be surprised to learn that said bankers want to know how their money will be paid back over the term of the note.
Furthermore, they insist that debt payments be covered by revenue from “creditworthy counter-parties,” a requirement which dramatically limits the number of customers considered “bankable.”
So, as I stand here this afternoon, this is what separates the known from the unknown about the U.S. LNG industry in early 2020:
The known: We are liquefying and shipping a tremendous volume of U.S. natural gas to more than three dozen nations around the globe and we are continuing to build additional LNG export projects.
The unknown: Future growth of the U.S. LNG industry depends entirely on global LNG demand and the willingness of LNG purchasers to step up and make long-term commitments.
The global LNG market is fiercely competitive. Qatar and Russia recently announced ambitious expansion programs and two major greenfield projects, in Mozambique and Canada, were sanctioned in 2019.
Against this competitive backdrop, let me outline a few things that the federal government can do to help assure the further expansion of the U.S. LNG export industry:
First, we simply must avoid further frictions with our trading partners, especially tariffs. When those countries retaliate, energy is often in the crosshairs. Just look at China… despite their recent pledge to buy more U.S. energy in the next two years, they still have a 25 percent tariff on U.S. LNG. While the phase I trade deal with China should help our industry, there were several long-term deals for Chinese companies to buy U.S. LNG or invest in U.S. LNG export projects that were put on hold more than 18 months ago.
The Export-Import Bank of the United States can create new products to make non-investment grade LNG customers “bankable,” and it can fund gas and power infrastructure in emerging LNG markets. The Bank may also be able to help finance LNG export projects here in the United States as well.
Likewise, the new Development Finance Corporation and USAID can help finance construction of LNG and natural gas infrastructure in the developing world.
The U.S. Commercial Service and the State Department can continue to promote U.S. LNG exports through America’s global network of embassies and consulates. Along with the Department of Energy, they have identified many good opportunities and are superb cheerleaders for our industry.
The U.S. Trade and Development Agency can continue to bring LNG and gas reverse trade missions to Houston and to finance feasibility studies in developing countries.
Finally, all of our federal partners should continue to join us in singing the praises of U.S. LNG exports, which can significantly enhance the energy security of our allies, reduce global emissions, lift millions out of poverty, and bring further growth and prosperity here at home.
Thank you very much for time and attention. I stand ready to take your questions.