Trump's shifting trade stance a key question for gas exporters

Trump's shifting trade stance a key question for gas exporters
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With a tight global market currently discouraging entry and forcing new U.S. liquefied natural gas (LNG) exporters to think outside the box, a special challenge comes in the form of the somewhat erratic messaging and policy shifts of President Donald TrumpDonald John TrumpGillibrand backs federal classification of third gender: report Former Carter pollster, Bannon ally Patrick Caddell dies at 68 Heather Nauert withdraws her name from consideration for UN Ambassador job MORE’s administration.

Still, many U.S. market observers see access to financing and general pricing dynamics — rather than regulatory delays — as the key holdups for U.S. projects looking for a piece of the growing pie. Meanwhile, the administration’s ongoing assailments of the North American Free Trade Agreement (NAFTA) provides yet another twist in the LNG narrative. 

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Global LNG markets have swung over the last five years from a supply-constrained environment, which drove spot LNG prices to near $20 per one million British thermal units (MMBtu), to the well-supplied environment in place today, with prices trending down to levels equal to European gas prices plus transportation costs.

 

LNG trade is expected to triple over the next few decades, climbing from 12 trillion cubic feet (Tcf) in 2015 to 31 Tcf in 2040.

“North America is projected to become a major exporter of natural gas by 2020,” through pipeline deliveries across borders with Canada and Mexico and LNG cargoes throughout the world, said the Energy Information Administration in a recent report, pointing to Asia as a major landing spot for growing U.S. LNG exports. 

So far this year, Mexico is the largest single importer of U.S. LNG, accounting for roughly 117 Bcf, or 25 percent of all delivered cargoes. Mexico’s continued dependence on LNG is largely a result of falling domestic natural gas production and delays facing U.S. cross-border pipeline expansions.

While Mexican production is expected to continue its downward march through at least the end of the decade, the pending addition of another 3.35 Bcf/d of cross-border capacity, coupled with roughly 8.9 Bcf/d of expansions within Mexico, should drastically reduce Mexico’s need for LNG by 2019. 

While Mexico’s position as a major importer of U.S. LNG may be short-lived, it still will require increasing imports of U.S. pipeline gas over the next five years. As Mexico liberalizes its energy markets, pipeline gas figures to push out fuel oil for power generation and LNG. 

In the midst of NAFTA negotiations, U.S. natural gas exports are in a curious spot. Mexico is unlikely to place import tariffs on U.S. gas, as that country is becoming increasingly dependent on U.S. supply and has no other import options aside from higher-cost LNG.

A tax on U.S. natural gas would translate to a levy on Mexican consumers, who would end up paying more for imported gas. And while natural gas represents a nearly one-way trade between the U.S. and Mexico, it is considered unlikely that the U.S. would place an export tariff on gas. Other trade sectors, such as auto parts, are seen as more likely candidates for tariffs.

Against this backdrop, competition is fierce among pending U.S. export projects seeking to outlast the current global LNG glut. Platts Analytics expects that the six LNG export terminals currently under construction will be completed over the next five years, raising total U.S. LNG export capacity to 9.9 Bcf/d, and that U.S. LNG export terminals will reach full utilization by 2024. 

That could make the U.S. the third-largest LNG exporter by 2019, with total exports potentially nearing that of rival Australia by the mid-2020s. According to Platts Analytics, Australian LNG exports are expected to average 10.05 Bcf/d in 2024, just ahead of the U.S. at 9.3 Bcf/d.

But a big question for U.S. LNG is “do the economics still make sense?" offered Edward Chow, senior fellow for the Center for Strategic and International Studies. U.S. LNG was well-positioned when international prices were above $8/MMBtu and domestic natural gas was at $3/MMBtu or less. "At global spot LNG prices of $5 or even below, I don't see how U.S. LNG is in the money," he said recently.

However, for some new project developers, it still makes sense because by 2022, there should be sufficient demand and the spot LNG prices won't stay at the relatively low levels they are at today, he continued. 

Still, the U.S. regulatory picture continues to flicker in and out of focus, and the president’s shifting trade policy pronouncements have left some scratching their heads. 

For instance, after high-profile handshakes with China and South Korea, other signals have been less friendly, including a passing threat by Trump of a trade war with China or of tearing up South Korea's trade agreement. 

Nonetheless, industry advocates have welcomed the Trump administration's high-level cheerleading for LNG exports. In meetings with foreign leaders from Asia and Eastern Europe, Trump has touted LNG exports as a way to lower the U.S. trade deficit while bolstering energy security abroad. 

Added to that is the administration’s push to streamline the project permitting process. Also looking to grease the skids for LNG exports are Sen. Bill CassidyWilliam (Bill) Morgan CassidyCongress must step up to protect Medicare home health care Ivanka Trump to meet with GOP senators to discuss paid family leave legislation Bipartisan senators ask industry for information on surprise medical bills MORE (R-La.) and Rep. Clay HigginsGlen (Clay) Clay HigginsGOP lawmaker wants to drug test Congress Trump officials attended conference where speaker said carbon dioxide makes planet 'greener' Trump’s endorsements cement power but come with risks MORE (R-La.), who are pushing legislation that would lift the requirement that the Department of Energy make a public interest determination for exports to countries without free-trade agreements.

But it's unclear for now how much attention revamping LNG export reviews will get in the crowded political arena in Washington, as larger battles loom this fall over taxes, the debt ceiling and the budget.

Chris Newkumet is bureau chief of the Washington bureau of S&P Global Platts.