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12 October 2021

Justin Gerdes

Opinion: LNG exports are backfiring on the US oil and gas industry

LNG exports are sending an increasing share of the US’s natural gas production overseas, exposing the domestic market to higher global prices. Surging gas prices make renewables even more attractive.

Until recently, the US natural gas market stood apart from the world. Exports by pipeline to Canada and Mexico increased steadily over the past decade, but North America remained a regional market. Booming production from the Marcellus, Permian Basin and other large shale gas plays kept US natural gas prices well below those in Europe or Asia.

LNG tanker at dawn moored to a gas terminal. (Photo by Wojciech Wrzesien via Shutterstock)

However, that closed system has cracked open. In 2016, the first shipments of liquified natural gas (LNG) from the lower 48 states left the US by tanker. What started as a trickle has become a flood. In the first six months of 2021, US LNG exports averaged 9.6 billion cubic feet (Bcf) per day, an increase of 42% compared with 2020 and 10% of the nation’s gas production, according to the US Energy Information Administration (EIA).

With the US Henry Hub natural gas benchmark price still well below prices on the global market, gas companies could fetch much more for their product in Europe, Japan or South Korea than at home. “This price difference has supported record volumes of US LNG exports,” says the EIA’s Victoria Zaretskaya.

The flipside is that with natural gas producers chasing higher prices overseas, even the US is beginning to feel the pinch of higher prices at home. US natural gas prices have more than doubled since the beginning of the year. Over the past decade, cheap natural gas and increasingly competitive wind and solar power delivered a knockout blow to the US coal plant fleet. However, if US natural gas prices remain high, propped up by LNG exports, renewables’ next victim could be their erstwhile ally in killing coal.

“It was inevitable […] that US natural gas prices would begin to be determined by global demand after the US unlocked its market to the world, through the advent of LNG export capacity,” writes Oil Fall author and energy transition analyst Gregor Macdonald. “This is actually a good thing. And it’s especially good from a climate perspective [emphasis in original].”

“Were there no export capacity,” he adds, “US [natural gas] would remain not just landlocked but grotesquely underpriced, compared to world prices."

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“What effect did this underpricing have over the past decade?” Macdonald asks. “That’s easy: huge, new adoption of [natural gas] into the US energy system. Between 2010 and 2020, US demand for [natural gas] grew by a gargantuan 26%, from 24,087 to 30,482Bcf.” Nearly 35GW of natural gas-fired generating capacity came online between 2015 and 2019 alone, according to the EIA.

As more natural gas heads overseas, prices in the US are trending higher. By the fall of 2021, “there was strong evidence that exports are the primary demand driver for U.S. gas and thus the increase in prices,” writes Nikos Tsafos, the James R Schlesinger Chair for Energy and Geopolitics at the Center for Strategic and International Studies in Washington, D.C.

Large energy users are so concerned about rising natural gas prices, their trade group sent a letter last month urging US Energy Secretary Jennifer Granholm “to take immediate action” to limit LNG exports. “Excessive LNG export volumes are inflationary and threaten the competitiveness of trillions of dollars of manufacturing capital assets, millions of jobs, and economic growth by driving up the cost of natural gas, natural gas liquids feedstock, and electricity,” wrote Paul N Cicio, CEO of Industrial Energy Consumers of America.

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Tsafos acknowledges it is unclear if the higher prices will last. If they do, it will upend the industry’s narrative that natural gas is a long-term, low-cost source of electricity.

“If this dynamic persists, US LNG exports will no longer be an outlet for excess domestic production gas but, rather, a possible driver of higher prices in a system where production growth is slow,” says Tsafos. “With domestic demand and domestic production flat on a yearly basis, it is exports that are proving the most enduring source of incremental demand – and thus a main driver of higher natural gas prices in the United States as the country heads into winter.”

Even before the recent price spike, gas faced stiff competition from renewables in the US. Electricity from a wind energy project ($23–46 per megawatt-hour (MWh) was much cheaper than electricity from a combined cycle gas turbine plant ($41–61/MWh), according to financial advisory company Lazard’s latest levelised cost of energy analysis, and that estimate assumed a gas price of $3.45 per metric million British thermal unit (MMBtu). Meanwhile, the Henry Hub natural gas spot price closed at $5.61/MMBtu on 8 October.

Achieving US President Joe Biden’s goal of 100% carbon-free electricity in the US by 2035 was always going to be challenging. Sustained high natural gas prices would make the job much easier. It would be no small irony if oil and gas companies’ eagerness to send natural gas overseas ends up accelerating renewables’ takeover of the US power grid.

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