The advent of hydraulic fracturing, or ‘fracking’, facilitated the US’s transformation into an oil and gas superpower. Horizontal drilling combined with the hydraulic fracturing of bedrock enabled drillers to extract oil and gas trapped in shale formations. By 2011, booming production from shale plays pushed the US past Russia as the world’s largest natural gas producer.
The US set annual records for natural gas production in 2018 and again in 2019 before production declined slightly in 2020 amid the Covid-19 economic slowdown. As production soared, so did exports – to Mexico by pipeline and overseas via tankers, after conversion to liquified natural gas (LNG).
The US became a net LNG exporter in 2016 and now supplies more than 30 countries. LNG exports averaged five billion cubic feet per day (Bcf/d) in 2019 and exporters added 2.7Bcf/d of new export capacity in 2020. LNG exports hit a record 9.4Bcf/d in November 2020, or 93% of the US’s peak export capacity, says the US Energy Information Administration (EIA). After additional liquefaction units come online this year, peak US LNG export capacity will reach 10.8Bcf/d.
US shale gas producers face shrinking demand at home. President Joe Biden has pledged to transition to carbon-free electricity by 2035. Cheap renewable electricity is already beginning to shave natural gas’s share of the US power mix. Natural gas will account for 34% of US electricity generation in 2022, down from 39% in 2020. In parallel, non-hydro renewables will increase their share from 12% to 16%, says the EIA. If US producers cannot sell their surplus gas at home, they will look to offload it in Asia, Europe or elsewhere.
While there are pipelines in place for Russia to send its gas to Europe, US gas needs to be sent across the Atlantic on ships. European ports need special LNG facilities to receive it. Spain has the greatest number of LNG import terminals, but other countries such as France and the UK are looking to build more. Rotterdam in the Netherlands, Europe’s largest port, has an LNG storage capacity of 180,000m3 and plans for growth.
US oil and gas giants, as well as US politicians, have been pushing for European countries to increase their capacity to receive LNG, framing it as an energy security issue. Europe is a net importer of gas. The more LNG it buys from the US, the less Europe will be reliant on Russian gas.
Stopping Nordstream 2
“It is a big asset for the US because they have a lot [of LNG] and it is way cheaper than probably everywhere else in the industrialised world,” says Lucio Miranda, president of ExportUSA, a consulting firm specialising in EU-US trade. “The US is getting more and more LNG export terminals ready; they are totally set on exporting.”
My feeling is that LNG will also be used as a tool for US foreign policy. Lucio Miranda, ExportUSA
Miranda adds: “The Trump administration laid on top of that commercial factor a policy factor. When Rick Perry, the former US energy secretary, was speaking in Italy about importing American LNG, one of the questions was that Russian gas was cheaper. Perry said it doesn’t matter, we are going to match the price. So my feeling is that LNG will also be used as a tool for US foreign policy.”
Until 2018, the price of Russian gas imports was usually about 30–40% cheaper than US LNG, but increased competition between US LNG and Russian pipeline gas has significantly driven down the price of both in the past two years. US gas imports were a negligible proportion of European imports two years ago, but made up 6.7% in 2020 – and that figure is growing.
One of the big questions for Europe is whether the Biden administration will oppose the almost-completed Nord Stream 2 pipeline bringing Russian gas to Germany as ferociously as the Trump administration, which has launched sanctions against the project. The US says the pipeline will make Europe more dependent on Russian gas. On this Washington has been united with climate campaigners, who oppose the pipeline because they say it would make the EU more dependent on gas full stop. They want to see the Russian gas replaced with renewables, not US LNG, however.
“At the beginning there might be some similarities,” says Jennifer Tollmann, a senior policy analyst at the climate think tank E3G. “There isn’t an expectation of a complete step change in the US approach to gas and gas policy. I am sure the US will remain not keen on Nord Stream 2, but I question whether sanctions will be the first tool the Biden administration turns to.”
Stranded assets fears
The future of EU-US LNG trade may also depend on what EU and US policymakers decide is the place of gas in the energy transition. This is a fierce ongoing battle in Brussels, with climate campaigners fighting efforts to make gas count as a “transition fuel” that will be used alongside renewables to help decarbonise the EU in the next two decades.
“In the EU there is still a substantial debate around gas and what its future should be,” says Wendel Trio, director of the campaign group Climate Action Network Europe. A number of people are convinced gas is important and that LNG facilities are necessary for the energy transition, while others are very opposed to that scenario, Trio adds.
The big concern is that any new infrastructure, be it pipelines or import terminals, will lock the EU in to fossil gas for decades to come. This concern is more pronounced for LNG than for pipeline gas because while the process of piping natural gas to market is relatively straightforward, the LNG value chain is more complex. This is due to the relatively high energy (and carbon) intensity of the liquefaction of natural gas and the requirement for any contaminating CO2 to be removed from feedstock gas, shows analysis by energy consultancy Wood Mackenzie.
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Industry associations in Europe such as Gas Naturally are pushing for new infrastructure, arguing gas has lower carbon intensity than other fossil fuels like coal and oil, and that this infrastructure could later be used for carbon-free gas like hydrogen. So far, policymakers in both the EU and US seem sympathetic to that argument even though analysis, even by the gas industry, shows falling gas demand in Europe in the coming years and climate campaigners continue to cite the risk of stranded assets — infrastructure that will never be used.
“I wouldn’t expect too many changes in the short term, but if there are substantial changes in policies around gas, that might create additional pressure on the Biden administration to change its thinking,” says Trio.
In Washington, this discussion is likely to just be getting started as the Biden administration seeks to balance its ambitious climate rhetoric with the economic potential of LNG exports.
“This is a big pickle for the Biden administration,” says Samantha Gross, director of the Brookings Institution’s Energy Security and Climate Initiative. “Gas is important in the US and the industry is hurting in the recession. LNG would be a great way to monetise gas that is being flared now, an epic waste that must stop, as well as keep an important industry moving.”
She adds: “However, gas is still a fossil fuel and the new administration is pushing for mid-century net-zero emissions. The administration will be facing opposing forces with respect to gas policy and I am not sure which way they will go.”
Tollmann says the Biden administration could focus on reducing the climate impact of gas or putting research into new forms of gas like hydrogen, to alleviate concerns about building new gas infrastructure. “I have been hearing that Biden is interested in tackling methane standards, and that is a big interest for the EU since it recently revamped its methane strategy,” she says. “The new administration may also look at the quality of various types of gases that could be offered to Europe.”
There isn’t an expectation of a complete step change in the US approach to gas and gas policy. Jennifer Tollmann, E3G
This week the International Energy Agency released a warning about the potential rise in methane emissions as the global economy recovers from Covid-19 and gas production increases.
“Biden’s imposition of new, strict methane performance standards could end up serving, in part, as a government imprimatur for US cargoes bound to regulated markets,” says Kevin Book, managing director at research firm ClearView Energy Partners. “At the same time, tighter production controls could raise the price of those cargoes, diminishing their competitiveness in a less auspicious market than the one we are in.”
The Biden-Harris transition team failed to reply to Energy Monitor about these issues before this article went to press. However, at a 19 January confirmation hearing for secretary of state nominee Antony Blinken, US Democrat Senator Jeff Merkley asked Blinken whether the Biden administration would push international lending institutions to stop funding new fossil fuel projects.
“Yes. This is an area we want to focus on,” said Blinken. “We want to make sure we are not doing anything to facilitate countries exporting dirty technology around the world – including something we see from China, which is, in part, through the Belt and Road Initiative and by other means, getting this technology around the world. It should not benefit from international financing to do that.”