The U.S. Department of Energy’s (DOE) pause on new export project permits is not expected to impact the bottom lines of LNG equipment manufacturers in the mid-term, but others across the value chain are still assessing the temporary suspension’s potential effects.
Following last week’s decision by the Biden administration to pause DOE approval of worldwide exports of U.S. liquefied natural gas, market speculation has swirled about the future of global supply and U.S. export capacity. The authorization freeze potentially impacts more than a dozen pending export projects on DOE’s docket, but is likely to immediately delay at least 10 proposed terminals in the United States and Mexico that haven’t reached a final investment decision.
Researchers at Evercore ISI wrote in a recent note that the administration’s action would cloud the future of U.S. projects until the November presidential election or beyond, but “has no real impact on near-term results for companies leveraged to LNG” like Baker Hughes Co. or Chart Industries Inc.
‘Other Locations’
Atlanta-based Chart, which makes equipment for large-scale LNG projects and other industries, released a presentation with CEO Jillian Evanko earlier in the week after receiving questions from investors.
Evanko said potential delays aren’t forecast to affect Chart’s project pipeline or its medium-term earnings outlook. Chart hasn’t included any additional large-scale LNG equipment orders in its outlook that weren’t already announced last year, leaving the firm with a backlog of 29 projects worldwide worth $8.5 billion.
Evanko added that Chart could confirm that almost all of its large-scale LNG projects booked so far have been given final federal approval to proceed. It excluded one project booking announced last fall that has not been publicly disclosed.
However, aside from its long list of already approved LNG bookings, Chart is betting on its diversification outside the United States and LNG to shield any possible long-term impacts from canceled U.S. projects.
“At a very macro level, if the U.S. isn't exporting LNG, importing countries are going to get it from other locations; we serve those locations…,” Evanko said. “A different way to look at it is, if not gas, the need for other sources of energy will need to be addressed in some cases.”
Chart booked orders for an international LNG project near the end of last year and has guided that orders for additional trains could come in the future. It has also expanded its exposure to hydrogen with the acquisition of Howden last year, and has been competing for federally-backed hydrogen hub projects in the United States.
Evercore researchers also posited that the supply and demand relationship of LNG could mean hiccups in the development of U.S. projects could lead Asian and European buyers to look elsewhere for long-term projects, or derail new import projects that currently hinge on offtake from the United States.
Disrupting The Balance
Just a few days before the Biden administration officially announced the pause, Baker Hughes Co. management told analysts during a fourth quarter earnings call that the firm was still anticipating a massive expansion of global LNG capacity through the decade. Between 30-60 million metric tons/year (mmty) could be sanctioned annually through 2026. By 2030, Baker Hughes said global export capacity could reach 800 mmty.
However, CEO Lorenzo Simonelli said the firm opposes the Biden administration’s moratorium on new authorizations and its potential to disrupt the country’s role in balancing global natural gas supply in the years to come.
“Policies that create, rather than alleviate uncertainty for long-lead, strategic energy projects are counter-productive for the U.S., its global partner, and, ultimately, for energy development of all kinds,” Lorenzo said.
U.S. exploration and production (E&P) companies and infrastructure investment firms have also voiced concern about how a pause could impact their respective sectors and the market.
As feed gas demand from U.S. export terminals continues to grow into a significant portion of national consumption, E&Ps like EQT Corp. have moved to tie more of their production to international indexes through direct LNG supply deals.
EQT CEO Toby Rice, in a letter to DOE Secretary Jennifer Granholm said that the potential impacts to development from the abrupt authorization freeze stands to disrupt the energy transition goals of the country’s international climate accord partners and negatively impact markets.
“To unilaterally change the rules of the road has significant follow-on risks, risks that dwarf the alleged climate impacts of the planned LNG facilities,” Rice said. “If any moratorium is needed to analyze climate risks, it should be one that looks at the risks of our current approach to the transition as a whole.”
Based on the tentative agreements signed by the Pittsburgh company so far, EQT could have direct export exposure for at least 2.5 mmty worth of natural gas. That’s more than 4% of its total current production exposure, according to NGI calculations. Two of those agreements are with Commonwealth LNG and Lake Charles LNG, projects with pending export authorization decisions.
Commonwealth LNG’s precarious status during the pause has also provoked push back from energy investment fund Kimmeridge. The firm, which is also a substantial acreage holder in the Eagle Ford Shale, is an equity investor in Commonwealth. It holds a 20-year, 2 mmty offtake agreement from the proposed Louisiana facility.
“There is clear market demand and opportunities for U.S. LNG to displace high-polluting coal in emerging economies and Russian gas,” Managing Partner Ben Dell said. “At Kimmeridge, we have offered net-zero LNG cargoes to buyers that would directly cut emissions by replacing coal burn. The U.S. pledged to support Europe's energy security by expanding LNG capacity. This administration’s decision works against that promise. We urge the administration to reconsider this counterproductive stance that inhibits private sector progress on the very climate goals they aim to achieve.”
News From The Pacific
Commonwealth has also landed an agreement with Australia’s Woodside Energy Group Ltd., which has been looking to diversify its waning supplies in the Pacific with a series of agreements with North American project developers.
While most analysts have called a direct correlation between the pause and a potential shortfall in global LNG supply speculative at the moment, international allies and energy investors have also raised concerns.
Japan’s Trade Minister Ken Saito said during a regular briefing that the DOE’s climate analysis freeze isn’t expected to affect Japan’s existing contracts with U.S. producers.
"On the other hand, some Japanese companies have already concluded offtake contracts for LNG that is scheduled to receive approval and begin production in the U.S.,” Saito said, according to Reuters. “Therefore, we are concerned that the temporary suspension of export permits will delay the start of new LNG production from the U.S."
Japan is the world’s second largest LNG importer and one of the largest holders of long-term contracts for U.S. LNG. While the majority of U.S. cargoes have been diverted to Europe since early 2022, Japan was the largest Asian importer of U.S. volumes last year at 6.13 Mt, according to data from Kpler.Columbia University’s Ira Joseph, a global fellow at the Center on Global Energy Policy, called Japan’s concern “interesting” considering the expected drop in gas demand through the next two decades. However, “U.S. LNG is critical for extracting better prices out of other sellers, so any restrictions might decrease leverage,” Joseph said.
