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Will Trump make the US the top LNG exporter?

Mon 16 Jan 2017 by Mike Corkhill

Will Trump make the US the top LNG exporter?

The swearing-in of Donald J Trump as the US’ 45th president on 20 January will launch a new era in the country’s politics. 

His headline-grabbing campaign promises will make his administration unlike any other in US history. The startling – some would say outrageous – features of some of his stated foreign and domestic policy initiatives make it difficult to gauge the impact of his presidency on the US natural gas and LNG sectors with any degree of certainty. 

However, on balance, the prospects are positive. 

Trump’s basic energy blueprint, like all his stated policies, is an America-first plan. He pledges to make the US energy-independent, create millions of new jobs and protect clean air and water. 

Trump has identified the country’s energy dominance as a strategic economic and foreign-policy goal, and achieving it will be facilitated by unleashing its US$50 trillion worth of untapped shale oil and natural gas resources, plus its hundreds of years of coal reserves, including on newly opened federal lands.

The new president’s choices of former Texas governor and pro-oil and gas man Rick Perry to head the US Department of Energy and Rex Tillerson, until recently ExxonMobil chief executive officer, as Secretary of State indicate which way the wind is set to blow. 

Another appointment makes Oklahoma attorney general Scott Pruitt the top man at the US Environmental Protection Agency. Mr Pruitt is known for his opposition to President Barack Obama’s initiatives to combat climate change. 

Increased use of natural gas is favoured because it offers the lowest emissions of the fossil fuels and it is a power source much in demand. Nevertheless, the drives to reduce the price of energy and increase US economic output also pave the way for increased coal consumption. The new president aims to eliminate his predecessor’s moratorium on coal leasing.

Ostensibly, the new energy plan bodes well for increasing volumes of US LNG exports. The country is now virtually self-sufficient in natural gas, making it likely that any new shale gas output directed to newly constructed liquefaction plants will be shipped overseas as LNG. 

 

US advantages

When the time is deemed right for final investment decisions (FIDs) on additional LNG export projects, US sellers will enjoy several fundamental advantages over their global competitors.

For a start, US drillers and producers have honed their fracking skills over the past decade, to boost gas production volumes with among the lowest costs in the world. The price of US LNG is also kept low thanks to the world’s most extensive gas pipeline distribution network and the ability, in many cases, to utilise existing import terminals.

Several terminals are being provided with a bi-directional capability through the simple expedient of building on-site liquefaction trains.

The US offers reliable and abundant supplies of LNG to the global market under particularly attractive terms. The price of the LNG is competitive and – unlike that for volumes from elsewhere – is delinked from the price of oil.

Moreover, the flexible nature of US sellers’ sale and purchase agreements (SPAs) enables LNG buyers to direct shipments to the destinations and end-customers deemed most appropriate.

Business-friendly Mr Trump is unlikely to do anything to upset the attractiveness of exporter SPAs. Indeed, he could boost prospects for overseas gas sales by pushing through measures to streamline the US federal regulatory hurdles facing proposed new LNG-export schemes. 

 

Trouble ahead?

Despite the initially positive signals over the prospects for US LNG emanating from the new Trump team in Washington, DC, some of the early optimism could be misplaced, however. Everything depends upon the rigour with which President Trump implements his America-first policies and the extent to which the new administration can override states’ rights.

The new man in the Oval Office has vowed to carry out a trade war with China and to levy heavy tariffs on imports from that country. Strong protectionist measures could prompt a tit-for-tat response, limiting US access to an important and growing LNG import market and reducing the competitiveness of US energy products.

Aside from Mr Trump’s well-publicised doubts about climate change and his vow to extricate the US from its formal acceptance of the United Nations’ December 2015 Paris Agreement to limit greenhouse gas emissions, many US states, companies and cities are developing renewables. Texas, a traditional oil and gas producer, now has the highest installed wind turbine capacity of any US state.

Over the past six months Trump has taken pains to develop a good relationship with Russian president Vladimir Putin and the pair are reportedly looking forward to greater co-operation. Yet east-west relations are now as politically fraught as at any time over the past 25 years, and compromise is unlikely to feature high on the agenda of either of these two hardline leaders.

US LNG exporters are targeting European gas buyers for some of their output but Russia’s Gazprom, whose pipeline deliveries captured a record high 33.5 per cent of Europe’s gas market last year, can match the US on price and is unlikely to relinquish market share without a tussle.

More and more European nations are lining up to become LNG importers and the continent’s utilities are awake to the gas supply diversity, security and flexibility advantages that US product offers.

 

'What is LNG?'

During the presidential campaign, when a coal executive asked Donald Trump whether he would allow more US LNG export terminals to be built to capitalise on the growing US natural gas supply glut, Mr Trump famously replied, “What is LNG?”

It is fairly safe to assume that the new president, given his desire to make the country’s abundant energy resources a key driver of his economic and foreign policies, has reconsidered this gaffe.

His experts will have made him aware of the role LNG is able to play in reducing the US trade deficit and enhancing energy security, domestically and internationally.

The US is already well down the path to becoming a leading LNG exporter, having started shipments from Cheniere Energy’s initial liquefaction trains at Sabine Pass in Louisiana last February.

The first five terminals under construction are capable of producing 64.7 million tonnes per annum (mta). When all are operational in 2021, America will be the third-largest LNG exporter, behind Australia and Qatar.

If only a small percentage of the proposed additional LNG production plants get the necessary approvals under the Trump regime in the next year or two, the US could well be the world’s biggest LNG exporter by 2025.

The US is set to become a leading global gas player thanks to the shale revolution and the flexibility inherent in LNG exporter SPAs.

Early signals from the Trump camp indicate that the new administration will do much to increase LNG production. However, this new golden era for US LNG will not realise its full potential until it finds more overseas buyers for its growing output.

Donald Trump has the opportunity to optimise this potential with reasoned, pragmatic policies that recognise the benefits that free trade can bring to all parties.