The current global energy crisis may finally provide the cover that climate activists need to start dismantling the U.S. liquefied natural gas export industry. Even though LNG has been one of the great American success stories of the shale revolution over the past decade, with the U.S. converting almost overnight from a natural gas importer to an exporter and a major player in the global LNG market, environmentalists and Democratic lawmakers have been pressuring the Biden administration since Inauguration Day to institute a ban on LNG exports.
Now with natural gas prices surging and fears of domestic gas shortages growing as we head into winter, there have been similar calls for an LNG export ban from the business community. In a recent letter to the Department of Energy from the Industrial Energy Consumers of America, the corporate lobbying group argued for the curtailment of export volumes from existing facilities and a government halt on permit approvals for all new LNG construction.
In the last five years, the U.S. has ramped up 11 billion cubic feet per day of liquefaction capacity and currently exports roughly 12% of its domestic production to countries worldwide. New liquefaction projects currently in the pipeline would nearly quadruple existing U.S. export capacity over the coming years.
Most LNG plants have a useful life of at least 50 years (if not longer with regular maintenance), which does not work with the accelerated U.S. emissions targets and net-zero 2050 goal set by the Biden administration.
Since LNG exports represent the main source of incremental demand for U.S. natural gas supply — domestic consumption continues to grow at an anemic annual pace — LNG export facilities are the next infrastructure target for the anti-fracking, pipeline-protesting climate mob.
The surest way to cause LNG demand destruction would be to undermine the long-term contracts that backstop U.S. export capacity and underpin the global LNG market, which is where an export ban would come in.
In contrast to the liquid crude oil market, where new capacity is typically added on a speculative basis, LNG supply and demand is largely contracted out between buyers and sellers. Most liquefaction facilities are built on the back of 20-25 year sales agreements in order to facilitate the financing of the large amounts of capital required for such projects.
Any U.S. government LNG export ban, whether effected through legislative changes to the Natural Gas Act or implemented on an emergency basis by the White House based on weather and storage patterns, would violate existing LNG off-take agreements while also having a chilling effect on new contracting activity and final investment decisions for pending projects.
While standard force majeure clauses covering acts of God and government would provide some contractual breathing room, any export ban would have broad industry implications due to a recent, and largely overlooked, adverse arbitration ruling related to an LNG import terminal located in Pascagoula, Mississippi.
Like most of the other receiving facilities built during the pre-shale decade of the 2000s, when the U.S. was believed to be running out of natural gas, the Gulf LNG terminal owned by Kinder Morgan has remained idle and unfilled since being placed into service in 2011, while still generating steady revenues due to its contracted reservation charges.
In 2016, the Italian company Eni brought an arbitration claim seeking to break the 20-year, fixed-payment terminal use agreement that it had signed for Gulf LNG, arguing that “changes in the U.S. natural gas market” had “frustrated the essential purpose” of the agreement since its signing in 2007. Basically, the energy shipper asked for a mulligan after making a very bad LNG market call.
Shockingly, an arbitration panel agreed, terminated the contract in 2018, and allowed Eni to walk after paying a break-up fee, although the matter is still subject to litigation related to the enforcement of a parent corporate guarantee.
LNG contracts are designed to off-load market supply, demand, and price risk to contractual counterparties over very long operating and investment horizons. The Gulf LNG arbitration ruling upended this core project finance principle. It sets a terrible precedent for other LNG projects, both regasification and liquefaction, and could prove an Achilles’ heel for the U.S. industry.
If an LNG export ban were to be put in place, a similar “frustration of essential purpose” case could be made going the other way with take-or-pay sales agreements signed for exporting U.S. liquefaction plants. The argument would go something like this: The combination of structurally higher domestic natural gas prices (caused by tighter U.S. climate regulations) and intermittent supply (due to a federal government on-off switch for exports) has fundamentally changed the economics and rationale for sourcing LNG from the U.S. and should allow sales counterparties to terminate their long-term purchase commitments.
As a further incentive to switch, U.S. LNG is increasingly being scrutinized and criticized by overseas buyers, especially in Europe, for its larger carbon footprint (due to system-wide methane leaks) and “unconventional” feedstock natural gas. Another motivating factor would be the range of supply alternatives that disaffected U.S. LNG buyers would have over the medium term, given that Qatar, the world market leader and lowest-cost LNG producer, is currently increasing its export capacity by 40% over the next five years.
A U.S. LNG export ban, however temporary, has the potential to trigger a downward spiral of contract cancellations, arbitration, and litigation, with the resultant internecine legal fighting across the energy industry requiring an environmental and regulatory confrontation on a site-by-site basis.
Such a scenario would represent one of the worst self-inflicted economic wounds of the Biden administration and would cement the image of the U.S. as a third world country when it comes to the rule of law and contract sanctity in the energy sector. It would also place America in the company of Russia, Argentina, and Bolivia as a fair weather and wholly unreliable supplier of natural gas exports.
Paul Tice works in investment management and is an adjunct professor of finance at New York University’s Stern School of Business.
