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Regulatory change threatens US LNG

2/7/2024

by Seth Haskell, Research Analyst

Expectations that the US would fortify its position as the world’s leading LNG exporter are being reined in after reports of an upcoming change in the regulatory process that would prioritise energy sustainability and have far-reaching implications for the long-term price of gas.

On 26 January, the White House confirmed reports that the Biden administration would ask the Department of Energy (DOE) to consider the climate impacts of new LNG export projects when reviewing applications for non-free-trade-agreement-nations (NFTANs) export permits. The White House also said it would pause the issuing of permits while it updated the review process to be in line with the revised policy.

The new criteria will be an extension of the DOE’s remit to consider whether LNG projects are “in the public interest”, which in the past has largely meant considering the effects of LNG exports on domestic gas prices in the US. The White House’s statement also said the effect of export terminals on consumers would face an updated review process. The impact of this decision will be momentous for the US’ LNG buildout.

About 80mt/yr of LNG export capacity is under construction in the US, and projects totalling c.100mt/yr are judged by Global Energy Infrastructure to be candidates for positive FID in the near term. This compares with existing export capacity in the US of around 90mt/yr and global export capacity of 477mt/yr.

While under construction and already operating terminals will not be affected, a major obstacle facing most pre-FID US projects is outstanding applications for export permission from the DOE. In addition to Venture Global’s CP2, the policy change will impact major US LNG exporter Cheniere’s two expansion projects at its Sabine Pass and Corpus Christi liquefaction plants. Also in need of permits are the second stage expansion to Cameron LNG, the independent Commonwealth LNG project and smaller terminals including Delfin Midstream’s first deepwater FLNG vessel. Several projects in Mexico that plan to import US feedgas, including the large Mexico Pacific Saguaro LNG facility, will also be affected as they require DOE permits to export US gas.

Exactly how the DOE will approach its new responsibility to consider climate impacts is unclear. It is possible the decision to consider carbon emissions will function as an outright ban on the issuing of new LNG export permits. And if the DOE does continue to issue permits, the regulatory process is likely to delay projects significantly, as the agency may face a learning curve in exercising its expanded role.

Climate conscious

Climate has been a top issue for the Biden administration. Its crowning achievement has been passage of the $1t Inflation Reduction Act, which introduced strong incentives for developing hydrogen, CCUS and renewables infrastructure. An expanded regulatory process considering the climate costs of LNG exports fits with this focus, but until now the administration has rarely intervened to put constraints on fossil fuel investment, and US oil and gas production has soared to new heights since Biden entered office.

There has been consistent pressure on the administration from climate activists to halt export permitting, with many organisations arguing vociferously against issuing permits in official filings with the DOE. The decision to amend the regulatory process has won plaudits from climate activists. Bill McKibben, who has played a key role in campaigning against new LNG terminals, said on his blog that “this is the biggest thing a US president has ever done to stand up to the fossil fuel industry”.

The risk of radical change in policy for the DOE has been discussed within the LNG industry since last year. Warning signs appeared in April, when the agency denied Dallas-headquartered Energy Transfer’s application to extend the 16.45mt/yr Lake Charles LNG project’s export commencement deadline, forcing the company to apply for an entirely new export authorisation. The decision was accompanied by a policy change that would see the agency deny extensions to export commencement deadlines unless applicants could show they have “physically commenced construction” and that the delay was caused by “extenuating circumstances outside of [the project’s] control”.

Commonwealth LNG also unexpectedly struggled to obtain its NFTANs export authorisation last year, with the permit not granted even after receiving FERC approval in November 2022. Previous NFTANs export authorisations for terminals have been granted within weeks or months of a project receiving final FERC approval.

At the time it was unclear if this was a sign of bigger shifts in the agency’s approach to permitting or merely a small policy shift in response to the long-development cycles for some LNG terminals during the decade before 2022. Lake Charles LNG first received its export authorisation in 2017, and the terminal is targeting a 2028 startup.

The DOE’s policy on extending export commencement deadlines will make it difficult for terminals that already hold NFTANs export permits to extend their licences, which most would need to do as they will be unable to complete projects in the time available to them. While developers might think to start construction in order to satisfy the DOE’s requirement to do so, the lack of precedent and clarity as to what circumstances the DOE will consider “extenuating” makes investing in developing projects before receiving a permit extremely risky, and pre-FID projects will have a hard time finding financing without a new or extended export authorisation as a result.

The upcoming US presidential election will also affect policy. A Republican administration is likely to be far friendlier to LNG projects, although the chaotic and transactional political style of presumptive nominee Donald Trump may present its own challenges to the industry. If the Biden administration’s DOE does continue to issue export permits, the election may impact timing.

Winners and losers

The new policy change will benefit those US projects that have already been granted DOE export permits and have time to begin operations before their export commencement deadlines, such as developer Glenfarne’s Texas LNG. With a commencement deadline of 2027, the 4mt/yr project could find itself supercharged as the only one with time to begin operations before its export authorisation expires. Glenfarne signed a heads of agreement with EQT for use of 0.5mt/yr of the facility’s capacity in December and is targeting a 2027 startup date.

The final two trains of NextDecade’s Rio Grande LNG project may also benefit from the change in policy. Last year, NextDecade took FID on the first three trains of its project, representing 17.6mt/yr of capacity, but it holds permits to build and export from two additional trains for an extra 9.4mt/yr. The company will be hard pressed to complete construction of two trains, in addition to the three already under construction, before its export commencement deadline in February 2027. However, the company may be able to extend its deadline if substantial physical work on the trains has been completed by then.

For smaller projects without NFTANs export authorisations, New Fortress Energy’s (NFE’s) FLNG project near Altamira, Mexico will prove a worthwhile experiment to watch. The project is almost ready to begin operations, with the vessel having arrived at its mooring point in December. The project does not yet hold an NFTANs export authorisation but is expected to begin operations shortly, exporting only to free-trade-agreement nations (FTANs). This list includes Bahrain, Canada, Chile, Colombia, Dominican Republic, Jordan, Mexico, Morocco, Oman, Peru, South Korea and Singapore as well as most Central American countries.

An FTANs export authorisation is not subject to the same public interest review and is much easier to obtain than an NFTANs authorisation. Most projects in the US have already been approved. If NFE’s project is a success, it may indicate a way forward for small plants, although the size of the FTANs markets makes this an unlikely strategy for large developments. NFE is unusually well-positioned in this role. The company owns a regasification terminal in Mexico and is developing another regasification terminal in Nicaragua.

Reduced new export capacity in the US, or even delayed startups, is generally good news for LNG projects outside of the country. While some Mexican developments will be negatively affected by the DOE’s new approach, Vista Pacifico—sponsored by TotalEnergies, San Diego-based Sempra and Mexico’s CFEnergia—holds a permit to export US gas with a commencement deadline in 2029, giving the early-stage project plenty of time to progress. Further afield, globally another 120mt/yr of LNG capacity is planned but has not yet taken FID. This includes projects in Australia, the UAE and Indonesia. Additionally, c.200mt/yr of capacity is in the early stages of development.