DOE will likely follow a familiar process of commissioning a study and submitting it for public comment before finalizing. This study will be complex — tackling an LNG market fundamentally changed by the war in Ukraine, robust climate change goals, and increased supply among other new factors. Meanwhile, inability for facilities to obtain non-FTA authorization creates uncertainty in the market, which is the enemy of investment confidence.
What’s the issue?
On January 26, 2024, the Biden administration announced a “temporary pause” on pending decisions on LNG exports to non-Free Trade Agreement (non-FTA) countries until the Department of Energy (DOE) can update its underlying analyses for these authorizations.
Why does it matter
It is easier for those terminals with non-FTA authorizations to contract for service and reach FID than for those that don’t. Inability to obtain non-FTA authorization creates uncertainty, which is the enemy of investment confidence.
What’s our view?
While non-FTA authorization holders are riding high, it is a waiting game for those yet-to-apply or with applications pending, and it could be a while. DOE will likely follow its past process of commissioning a study, submitting it for public comment, and finalizing it, and the study will need to tackle an LNG market fundamentally changed by the war in Ukraine, robust climate change goals, and increased supply among other new factors. Plus, it's an election year, and the Biden administration is clearly using this initiative to send a strong message about climate change. Given that the administration has little to gain by finalizing the study before the election concludes, and considering the practicalities of the DOE process, it is unlikely that we will see a finalized study before the end of the year.
On January 26, 2024, the Biden administration announced a “temporary pause” on pending decisions on LNG exports to non-Free Trade Agreement (non-FTA) countries until the Department of Energy (DOE) can update its underlying analyses for these authorizations.
It is easier for those terminals with non-FTA authorizations to contract for service and reach FID than for those that don’t. Inability to obtain non-FTA authorization creates uncertainty, which is the enemy of investment confidence.
While non-FTA authorization holders are riding high, it is a waiting game for those yet-to-apply or with applications pending, and it could be a while. DOE will likely follow its past process of commissioning a study, submitting it for public comment, and finalizing it, and the study will need to tackle an LNG market fundamentally changed by the war in Ukraine, robust climate change goals, and increased supply among other new factors. Plus, it's an election year, and the Biden administration is clearly using this initiative to send a strong message about climate change. Given that the administration has little to gain by finalizing the study before the election concludes, and considering the practicalities of the DOE process, it is unlikely that we will see a finalized study before the end of the year.
LNG Studies and Theatrics
Mere weeks ago we discussed potential changes to DOE’s export authority in Terminating Terminals? New LNG Export Authorization Headwinds, and provided a deep analysis of DOE’s export authorities. To summarize — DOE must conduct a public interest analysis under the Natural Gas Act (NGA) in order to grant the authority to export LNG to non-FTA countries. We touched briefly on the broad factors DOE considers when conducting this analysis — economic impacts, international considerations, security of natural gas supply, environmental impacts — and since then, the administration has officially announced this “temporary pause,” which sheds more light on what exactly DOE is planning.
In essence, the DOE relies on "LNG studies" from its Office of Fossil Energy to inform its public interest analysis for non-FTA authorizations. Currently, DOE is postponing decisions on pending non-FTA authorizations as it embarks on a new study. This practice is not new — DOE initiated its first study in 2012, with subsequent updates in 2014, 2015, and 2018. Given this regular cadence of updates every two or three years, it's unsurprising that DOE seeks an update to its now five-year-old review. Of course the timing of this review in an election year is also unlikely to be an accident.
The notion of a "pause" is also not particularly surprising, and seems more like political posturing than a new strategy. Back in 2018, the stated purpose of the Federal Register notice for the 2018 LNG Export Study was to enter it into the administrative record of the then 25 pending non-FTA export proceedings, along with inviting comments for use in both pending and future non-FTA application proceedings. The Biden administration's current proposal looks like it will mirror this process. And if it does, we would expect DOE to commission a study, give the public an opportunity to comment on a draft, and then finalize it, as it has done previously. While the Trump administration did not explicitly label this process a "pause" in 2018, the practical effect would have been similar, necessitating a halt to consider the findings before proceeding with pending non-FTA proceedings. What would likely be different this time around is the extent of public comment given the projected emphasis on climate change.
However, this announcement does have an impact both substantively and by how it is framed in an election year. When the White House Fact Sheet frames the initiative as a "pause" in urgent response to climate change, it resonates differently in the polarized political landscape. Climate change advocates view it as a significant victory, reflecting consistent pressure on the administration. Conversely, some stakeholders, particularly those without non-FTA authorizations, perceive it as detrimental to future LNG prospects. The key question revolves around the magnitude of victory versus the extent of damage inflicted. To answer this, we must set aside hyperbole and focus on the substantive changes, the current status of the process, and the potential impacts on projects.
What is New?
Secretary Granholm provided a more pragmatic viewpoint on this initiative in an interview, which resonates with DOE’s announcement describing it and sheds light on the projects affected by the pause while forecasting what DOE will consider in its new study. As we predicted, the impact will primarily affect projects awaiting non-FTA applications at DOE, whether because they haven't applied yet or are pending review. Already authorized exports, which total 48 Bcf/day, will not be impacted.
In anticipation of the study, it's worth noting that previous DOE LNG studies have predominantly focused on economic factors, aiming to provide a comprehensive analysis of LNG exports' effects on domestic energy markets and the broader economy. Secretary Granholm emphasized critical economic aspects like domestic prices and the significant surge in exports since 2018, positioning the nation as the world's leading LNG producer with 14 Bcf/d in service, an additional 12 Bcf/d under construction, and a total authorized capacity of 48 Bcf/d, as pivotal points for analysis.
However, there's a notable shift in focus towards climate change impacts and national security considerations, both of which introduce new dimensions to the discussion. Climate change, in particular, emerges as a paramount concern. Secretary Granholm questioned whether future export demand would really be 52 Bcf/d, in light of global climate pledges aimed at curbing fossil fuel-based generation. This query arises in light of the 2018 study's conclusion that up to 52.8 Bcf/d could be in the public interest, suggesting a potential misalignment with evolving global environmental goals.
Additionally, the 2018 LNG study was embraced by the LNG industry as a concrete step towards streamlined permitting and reassuring global LNG markets, in large part because of its removal of volumetric limits from the analysis, which were components of earlier studies. This removal also reduced the need for frequent subsequent iterations of the study, which explains why it has not been updated in five years. With new emphasis on global supply and demand forecasts in light of climate change goals, we could see volumetric limitations come back in this new DOE initiative.
Impacts to Winners and Losers
While the climate change constituents celebrate this as a massive win, practically speaking, the ink is not dry and a lot can change before it does. We will all have to wait for its completion and the DOE's subsequent actions to inform future non-FTA public interest analyses. Given that the Biden administration has little to gain by finalizing the study before the election concludes, and that, as a practical matter, the study must be drafted, submitted for public comment, and finalized, the likelihood of seeing a complete study this year is slim to none. It will also matter who is president when the election dust settles, but even then, either administration will have to navigate the complex and conflicting policy considerations of climate change, national security, domestic pricing, and the practicalities of global supply and demand, among others.
Within the LNG industry, a clear divide exists between those with secured non-FTA authorizations and those without. Entities possessing existing authorizations, especially those actively seeking contracts and Final Investment Decisions (FIDs), are in a more advantageous position. Conversely, those lacking authorizations may face challenges in sustaining agreements as uncertainty casts a shadow over negotiations. To delve deeper into this process, we collaborated with East Daley Analytics experts who closely monitor the market dynamics.
Certainty is the name of the game when going to market, especially for foreign investors concerned with their state's future energy security. The process typically entails securing non-binding Heads of Agreement (HOAs), converting them into binding Sales Purchase Agreements (SPAs), and ultimately reaching an FID. A project generally achieves FID status upon securing SPAs for 80% of its planned capacity, at which point these SPAs become binding. However, entering into enough SPAs to support an FID often hinges on a project's progress at FERC, as well as FTA/non-FTA approval by DOE. Potential partners typically seek assurance of significant governmental approvals before committing to binding SPAs.
Below we provide a snapshot of projects lacking non-FTA export authority, focusing on those with the largest Bcf/d capacity and physical footprint. We also provide the capacity requested for authorization at DOE and the total building capacity, reflecting the project’s planned construction scale. Before we jump in, it is worth noting that two large projects — Delta LNG and the Sabine Pass Stage 5 Expansion — are in pre-filing stages at FERC, each with a planned capacity of about 2.7 Bcf/d. While these projects would not be as advanced in the contracting process, they represent a substantial amount of future capacity that could be at risk.
Venture Global CP2 (Blocks 1-9) is getting the most press, and for good reason — it would be the second largest facility in the nation. From a regulatory perspective, the FERC Environmental Impact Statement (EIS) is complete, but the project has yet to receive its final authorization at the Commission. Currently, it holds 46% of SPA for a total build capacity of 2.67 Bcf/d. These SPAs would not yet be binding, heightening the risk to CP2 of contract loss as the pause persists.
Following CP2, Lake Charles is the next largest project, and from a regulatory perspective, it is in a similar situation to Magnolia — both have secured FERC approvals. However, Lake Charles lost its non-FTA authorization for failure to ship by the export commencement deadline. It is highly probable that Magnolia will face a similar fate. Both projects have filed new applications at DOE. Zooming in on Lake Charles, its contract footprint looks very similar to CP2 with 50% SPA on 1.1 Bcf/d of planned capacity.
Another project of note is Commonwealth, as its contracting profile in particular showcases risk of contract loss. It currently holds 30% SPA for 1.12 Bcf/d of planned capacity, yet it possesses enough HOAs to fulfill contracts for all remaining capacity. Before the pause, this sort of a contracting profile looked very promising, but the current situation may prompt potential partners to explore other options.
Having profiled the unfortunate projects without non-FTA authorizations, we now shift to the winner’s circle, where projects with secured non-FTA authorizations are in a commercial advantage. All of these projects have their FERC authorizations in place, and those that have not yet secured 80% SPA could have a less obstructed path towards that goal. An excellent example of this is Texas LNG, which although is a smaller project (0.56 Bcf/d), currently holds some HOAs but no SPAs. Should contracts for at-risk capacity begin to shift, projects like Texas LNG could find it easier to reach FID.
Reading the Tea Leaves
As discussed, there is still a lot that could happen to influence where this initiative ultimately ends up, with a shift in administrations among the biggest uncertainties. But assuming a Biden reelection, there are a few factors pointing towards a potentially more assertive approach to addressing climate change, which could measurably affect the public interest analysis. Chief among these is the administration's stance on denying export commencement deadline extensions, a topic we discussed in DOE Changes Rules on LNG Export Licenses, But Will It Matter?. This is one of many climate related initiatives championed by the administration, but worth highlighting because of its practical impact. The new policy, aimed at canceling non-FTA authorizations unless construction progress and extenuating circumstances justify deadline extensions, as in the Lake Charles project and likely in the Magnolia project, illustrates the administration's willingness to actually cancel non-FTA authorizations.
Additionally, there has been a notable increase in awareness regarding methane emissions associated with natural gas production since 2018. In an era marked by political polarization, both industry and environmental sectors recognize the urgency of addressing this issue. The Biden administration’s focus on methane emissions, exemplified by the final rule announced at COP28, suggests that methane emissions could become a significant factor in any greenhouse gas (GHG) analysis adopted by the DOE as part of its public interest assessment. As we have discussed at length, FERC flirted with a similar concept for its public interest analysis of natural gas pipeline approvals under Commissioner Glick.
Practically speaking, it is very difficult to craft a standard for actually denying a project on purely GHG grounds. This complexity was evident in deliberations at FERC under Commissioner Glick. And given the intricate dynamics of global LNG supply and demand alongside the other multi-faceted global factors we have discussed, what a more aggressive stance at DOE would look like at this stage is unclear. We will continue to monitor this initiative as it develops.