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

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. The news release accompanying Brouillette’s order hailed the approval as having “profound economic, energy security, and environmental implications, both at home and abroad.”

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

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

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

Just two weeks after Brouillette signed his order, and toured the Jordan Cove site in Coos Bay, the project appears to be dead in the water because the economics don’t work.

Congressman Peter DeFazio (D-Ore.) recently declared Jordan Cove to be “deader than a doornail,” saying that “demand 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 to jump.”

It’s not going to be built,” Sen. Jeff Merkley (D-Ore.) told Axios in a recent interview. “I’ve talked to a whole number of folks — several people who have been deeply involved in international finance of energy projects — and they don’t believe that the company can lock down the sales needed to justify the $6 billion investment.”

Jordan Cove is just one of many proposed or under construction 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 isn’t needed. 

U.S. LNG Export Numbers Don’t 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 make 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 countries are willing to pay is less than the breakeven cost for exporters. 

An article in Oilprice.com recently summed up the structural problem in U.S. LNG export economics: China isn’t willing to pay more than $7/MMBtu and yet “$7/MMBtu is likely to be too low for U.S. LNG exporters.”  (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 economic sense. 

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 “no upside” to U.S. LNG exports to China.  

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

Deceptive Bridge Fuel Marketing Failing 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 have used the false claim that natural gas is “cleaner” than coal and thus a climate solution, a so-called “bridge fuel” between fossil and renewable energies.

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

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

Which is true. But the economic reality of gas has to be included in this discussion. If renewables weren’t cheaper than gas and coal at this point, no one would be talking about a “major shift away from gas.” 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 losing more. 

This Time Just Might Be Different

The oil and gas industry has historically been a boom and bust business, with every boom accompanied by talk that “this time is different,” and that the industry has learned to not overbuild capacity for products the world isn’t willing to 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 export capacity. 

At the time Bloomberg reported Watson predicting that “The industry won’t overbuild LNG export capacity because the facilities are too expensive to do without signed contracts from buyers in hand.” 

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 — consisting mainly of fracked gas assets in Appalachia and a planned LNG export facility in Canada. 

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. 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 — which increases the climate impacts due to the large methane leaks associated with the process.

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

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

The Federal Energy Regulatory Commission, or FERC, has just released its latest Energy Infrastructure Update, covering the first half of 2020. It 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 percent of new power generation capacity, compared to 43 percent for natural gas. 


U.S. New Power Generation by Source. Credit: Federal Energy Regulatory 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 “more a problem than a solution.”

Scaroni didn’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 business model.

Meanwhile U.S. LNG exporters have no solution for the fact that they can’t sell their product for more than they pay to create it. 

Main image: Hai Yang Shi You 301, Chinese LNG tanker ship. Credit: Ya, saya inBaliTimurCC BYSA 2.0

U.S. LNG Industry's Business Model Doesn't Work
Justin Mikulka is a freelance writer and audio and video producer living in New York. Justin has a degree in Civil and Environmental Engineering from Cornell University.

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