Originally published for customers February 9, 2024
What’s the issue?
The Senate Committee on Energy and Natural Resources held a hearing yesterday to examine the politics, policy goals, and process of the Department of Energy’s (DOE) forthcoming Liquified Natural Gas (LNG) study and determination the Biden Administration recently directed to be completed pursuant to DOE’s authority under the Natural Gas Act to issue export licenses for LNG. At issue is: 1) the necessity of pausing approvals while completing the study; 2) the lack of a declared timeline for the study’s completion; 3) the message the pause sends to domestic and global markets and stakeholders; 4) the role of U.S. LNG in global climate efforts; and 5) its impact on planned projects and associated jobs and economies.
Why does it matter?
As the world’s largest and cleanest democratic exporter of LNG, the status of U.S. supply is a big deal. The level of uncertainty (political risk) embedded into the policies controlling U.S. LNG supply impacts global markets, climates, and ongoing armed conflicts.
What’s our view?
As we wrote immediately after “the Pause” hit the press, it is absolutely about politics more than policy, price, projects or any other issues discussed at the hearing. And while some senators don’t consider it a big deal, none dissented from the bipartisan consensus of Chairman Manchin and Ranking Member Barrasso that the goals, timing, and manner of the pause are predominantly political.
The Senate Committee on Energy and Natural Resources held a hearing yesterday to examine the politics, policy goals, and process of the Department of Energy’s (DOE) forthcoming Liquified Natural Gas (LNG) study and determination the Biden Administration recently directed to be completed pursuant to DOE’s authority under the Natural Gas Act to issue export licenses for LNG. At issue is: 1) the necessity of pausing approvals while completing the study; 2) the lack of a declared timeline for the study’s completion; 3) the message the pause sends to domestic and global markets and stakeholders; 4) the role of U.S. LNG in global climate efforts; and 5) its impact on planned projects and associated jobs and economies.
Chairman Manchin’s stated purpose for the hearing was to “get the facts” and ensure this administrative action to “pause” export license reviews would “cause no harm to families, businesses, the economy, or trading partners.” In attendance in addition to Chair Manchin and Ranking Member Barrasso were Senators Murkowski (R-AK), Hickenlooper (D-CO), King (I-ME), Cassidy (R-LA), Cortez Masto (D-NV), Hyde-Smith (R-MI), Padilla (D-CA), Daines (R-MT). The primary testimony of interest was from Deputy Secretary of Energy David Turk, whose summarized talking points were:
- The rapid growth in LNG exports has been transformational and merits a “public interest” review.
- The study will not impact current exports and authorized projects.
- Global demand forecasts don’t require the amount of exports represented by all of the planned projects.
- The pause will not impact America’s ability to supply allies.
- The technical study will be conducted “in a rigorous manner” by the National Labs and “independent data nerds” and will be expeditious, but a definitive timeline is not available.
- U.S. exports will ultimately cause higher domestic prices.
Public Interest and the Process:
While the Committee didn’t dispute the need and requirement for DOE to conduct public interest determinations, members expressed strong reservations about the lack of transparent process leading to the pause and the subsequent ambiguity regarding the path forward. Sen. Murkowski observed, “there is no strategy, scope or timeline, you just announced it on Friday, January 26th..always on a Friday.” Sen. Manchin lamented, “this would be a great hearing if we were talking about considering a pause.”
While DOE would not commit to any specific timeline, we have some indications of how long it will take based on previous studies and an important input — the number of public comments needing consideration.
The below visualization shows the total number of public comments received for previous DOE public interest studies and some recent rulemaking actions that had similar levels of interest from industry stakeholders and opposition groups. Given the global significance of LNG we expect the comments on this study to be extensive.
Reviewing the previous studies, anticipating extensive public comments, and considering DOE’s statement at the hearing that the study would be “expeditious” and take “months not years” we put together an estimated timeline. We agree with Sen. Murkowski, who said, “my guess, and I think it’s probably a pretty well-educated guess, is that it will conveniently not be concluded prior to the election.”
The Message to Allies Reliant on U.S. LNG:
Testimony cited that the European Union currently sources 12% - 15% of their gas from Russia, with a target to eliminate reliance on Russian gas by 2027. However, a question asked and not answered was whether allies were consulted prior to the pause announcement. Several members reiterated the high probability that Russia, Iran, and Qatar would supply any gas not provided by the U.S.
Projects’ Economic and Climate Impacts:
Regarding projects and economic impacts, we charted the projects needing non-FTA export authorization from DOE in “Pause” Patrol - Practical Implications of DOE’s LNG Authorization Pause. The economic impacts are straightforward and large. Industry representatives at the hearing stated that these projects on average cost between $15-$20 billion each, take approximately 10 years to complete, and employ around 6000 workers.
In terms of climate impacts, all of the familiar climate statistics were presented, which we know our readers are very familiar with. No one debated that U.S. LNG has a much cleaner profile than Russia’s.
Domestic Prices Will Rise and Demand Will Go Away:
There was a lot of discussion about whether the world needs 26 Bcf/d or 50 Bcf/d or some other number of U.S. LNG, sparking debate about the potential demand for double the export volume and its impacts on pricing dynamics.
In our assessment, since most all future price forecasts are wrong in direction and/or magnitude — especially in volatile commodity markets — relying on price forecasts as a primary driver of the pause policy is precarious. We think the Biden officials responsible for the pause understand the complexity of global energy markets where price is just one of myriad variables and that these markets may be unpredictably disrupted for short and long periods, negating price forecasts.
Deputy Secretary Turk was adamant that future demand would not materialize for 50 Bcf/d of U.S. LNG, stating, “The numbers show U.S. volumes will increase while EU demand will be decreasing. Demand from Japan has already peaked and South Korean demand will peak by 2030.” He also stated that he “was very nervous” U.S. prices would rise and converge with much higher EU prices. To paraphrase: demand will go away and prices will rise. That’s not quite how supply demand curves intersect.