U.S. LNG Industry's Business Model Doesn't Work

Analysis
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In mid-July, Secretary of Energy Dan Brouillette signed an order authorizing the export of liquefied natural gas, or LNG, from a proposed $10 billion terminal and gas pipeline project in Oregon.ย The news releaseย accompanying Brouillette’s order hailed the approval as having โ€œprofound economic, energy security, and environmental implications, both at home andย abroad.โ€

Although the project, known as the Jordan Cove LNG terminal,ย has struggled to obtain stateย permits and faces vocal opposition from tribes and others, this consistent Trump administration refrain has not changed.ย The Obama administration made similar claimsย about natural gas production andย energy security, jobs, and the environment, when it oversaw a rapid expansion of the LNG export industry.ย 

Presidentย Obama and President Trump were on the same page about LNG exports. They also share something else in common: They were both deadย wrong.ย 

The LNG export industry is an economic disaster and is also a climate disaster,ย factors that are both contributing to its downward spiral. And while the Department of Energy has talked about exporting โ€œfreedom gasโ€ to American allies to improve energy security, when the largest potential customer is Chinaย and current headlines highlight a potentialย new U.S.-China cold war, that isn’t a very credible argument,ย either.ย 

Just two weeks after Brouillette signed his order, and toured the Jordan Cove site in Coos Bay,ย the project appears to be dead in the water because the economics donโ€™tย work.

Congressman Peter DeFazio (D-Ore.) recently declaredย Jordan Cove to be โ€œdeader than a doornail,โ€ย saying thatย โ€œdemand has tanked and there are a couple other plants under construction on the Gulf Coast. I don’t think there will be a market for [liquefied natural gas] if [Jordan Cove] is built and there are a lot of hurdles toย jump.โ€

โ€œItโ€™s not going to be built,โ€ Sen. Jeff Merkley (D-Ore.) told Axios in a recent interview. โ€œIโ€™ve talked to a whole number of folks โ€” several people who have been deeply involved in international finance of energy projects โ€” and they donโ€™t believe that the company can lock down the sales needed to justify the $6 billionย investment.โ€

Jordan Cove is just one of many proposed or under constructionย LNG export terminals in the U.S. and around the world. But since the realities are that the world already has a glut of LNG, and gas is losing out to renewables, this additional LNG export capacity isnโ€™tย needed.ย 

U.S. LNG Export Numbers Donโ€™tย Work

The reason for the malinvestment in expanding U.S. LNG export capacity was the excess of natural gas produced by the malinvestment in the U.S. oil and gas fracking industry. One massive money-losing industry spawned a second that is now facing the same problem: How to exist when you sell your product for less than it costs you to makeย it?

While Secretary Brouillette conveniently left China off the list of potential countries that Jordan Cove might supply with LNG, selling to China is the goal of any West Coast export facility, as it is the biggest potential market. And that is the big problem for U.S. LNG exports: The price that China and other Asia-Pacific countriesย are willing to pay is less than the breakeven cost forย exporters.ย 

An article in Oilprice.com recently summed up the structural problem in U.S. LNG export economics: China isnโ€™t willing to pay more than $7/MMBtu and yet โ€œ$7/MMBtu is likely to be too low for U.S. LNG exporters.โ€ย  (Current Asian prices are under $3/MMBtu.)

A report released in July by the Institute for Energy Economics and Financial Analysis (IEEFA) details the many reasons why the U.S. LNG export industry is so poorly positioned to succeed financially, as well as why expanding export capacity with projects like Jordan Cove makes no economicย sense.ย 

One important reason is that while the U.S. LNG export market has been a financial disaster, the same is true for the Chinese LNG import market as well. Both markets need the prices to go in opposite directions to have a chance to make money. A move in either direction in price will be good for one market but a fatal flaw for the other. As the IEEFA analysis concludes, there is โ€œno upsideโ€ to U.S. LNG exports to China.ย ย 

Clark Williams-Derry, one of the authors of the new IEEFA report, explained the economic reality of the U.S. LNG market to CNBC. โ€œIt is not so much that the coronavirus crisis is going to last for a long time,โ€ Williams-Derry said. โ€œIt is more that the โ€˜new normal,โ€™ post-COVID, may be one in which the U.S. LNG export dream seems out ofย reach.โ€

Deceptive Bridge Fuel Marketing Failingย Too

Along with the faulty economic analysis that has driven the U.S. fracking boom and expansion of LNG export capacity, the industry and its promoters haveย used the false claim that natural gas is โ€œcleanerโ€ than coal and thus a climate solution, a so-called โ€œbridge fuelโ€ between fossil and renewableย energies.

However, natural gas (ย i.e., methane) and LNG are both dirty fuels, as researchย shows, and not part of any climateย solution.ย 

โ€œPolitically, natural gas is no longer seen as a bridge fuel,โ€ Josh Price, a senior analyst on energy and utilities at research firm Height Capital Markets, told S&P Global. โ€œOn the electricity side, there certainly appears to be a major shift away from gas due to public pressure from investors, fromย policymakers.โ€

Which is true. But the economic reality of gas has to be included in this discussion. If renewables werenโ€™t cheaper than gas and coal at this point, no one would be talking about a โ€œmajor shift away from gas.โ€ย Fossil fuel investors have consistently shown that they do not care about the environment and climate, but eventually, after they lose enough money, they do seem to care about not losingย more.ย 

This Time Just Might Beย Different

The oil and gas industry has historically been a boom and bust business, with every boom accompanied by talk that โ€œthis time is different,โ€ and that the industry has learned to not overbuild capacity for products the world isnโ€™t willing toย buy.

In 2014, the future looked bright for U.S. LNG exports. John Watson, CEO of Chevron, was among those confident that this time would be different and that the industry would not overbuild LNG exportย capacity.ย 

At the time Bloomberg reported Watson predicting that โ€œThe industry wonโ€™t overbuild LNG export capacity because the facilities are too expensive to do without signed contracts from buyers inย hand.โ€ย 

The good news for Watson is CEOs get paid exorbitant amounts even when they are 100 percent wrong. In December, The New York Times reported that Chevron would write down over $10 billion of assets โ€” consisting mainly of fracked gas assets in Appalachia and a planned LNG export facility inย Canada.ย 

However, the reality is that this time might be different for the LNG industry. The science is clear that methane is a dirty fuel, and that fracking is polluting large parts of the U.S.ย Europe has been a top destination for U.S. LNG, but is now considering the full climate impacts of LNG that is produced via fracking โ€” which increases the climate impacts due to the large methane leaks associated with theย process.

The main reason that this time will be different for the gas industry is thatย renewable energy now offers a cheaper and much cleaner alternative to power theย world.

In the past,ย the oil and gasย industry could always count on prices and demand for its products recovering because there were no viable alternatives. Now thereย are.ย 

The Federal Energy Regulatory Commission, or FERC, has just released its latest Energy Infrastructure Update,ย covering the first half of 2020. Itย illustrates how renewables are now a preferred option to coal and gas for U.S. power generation. According to FERC, renewable sources accounted for over 57 percentย of new power generation capacity, compared to 43 percent for naturalย gas.ย 


U.S. New Power Generation by Source.ย Credit: Federal Energy Regulatoryย Commission

At the same 2014 conference where John Watson got the future of LNG completely wrong, one of his fellow oil company CEOs also made a bold statement. Eni’s Paolo Scaroni said that Europe was realizing that renewables are โ€œmore a problem than aย solution.โ€

Scaroni didnโ€™t realize it at the time, but he was right about renewables being a problem. Renewables are a huge problem for the fossil fuel industry and specifically for the LNG businessย model.

Meanwhile U.S. LNG exporters have no solution for the fact that they canโ€™t sell their product for more than they pay to createย it.ย 

Main image:ย Hai Yang Shi You 301, Chinese LNG tanker ship. Credit:ย Ya, saya inBaliTimur,ย CC BYSAย 2.0

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Justin Mikulka is a research fellow at New Consensus. Prior to joining New Consensus in October 2021, Justin reported for DeSmog, where he began in 2014. Justin has a degree in Civil and Environmental Engineering from Cornell University.

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