Sunday, May 19, 2024

Biden’s LNG pause creates further uncertainty for investors

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Public relations professionals will often advise on burying potentially bad news on a Friday, which is perhaps the advice President Joe Biden was given at the end of January, when he announced a “temporary pause on licences for new LNG export terminals to non-free trade agreement countries”. 

There would have been plenty of cheerleaders for that policy, and indeed, the administration published some of those reactions from environmental groups in another announcement the following day. Yet this was significant, not least of all for how the decision was framed, with Biden stressing the need “to protect the future for generations to come”. 

That was quite a slant from the president to an industry that last year alone raised $40 billion in equity and debt commitments to take projects to final investment decision (FID), according to consultant Wood Mackenzie, including from infrastructure fund managers and sovereign wealth funds such as KKR, Global Infrastructure Partners, GIC and Mubadala.  

Indeed, the LNG market has become a significant destination for capital from some of the asset class’s largest players. Biden’s announcement also came three weeks after figures revealed the US had overtaken Qatar as the world’s largest exporter of LNG for the first time. 

It is this changing landscape that contributed to the decision, according to Biden. 

“The current economic and environmental analyses Department of Energy uses to underpin its LNG export authorisations are roughly five years old and no longer adequately account for considerations such as potential energy cost increases for American consumers and manufacturers beyond current authorisations or the latest assessment of the impact of greenhouse gas emissions,” the statement said.  

To be clear, the pause affects only those projects whose approvals from the DOE are still pending or those who have yet to seek approval. Projects that are under construction or operational are free to continue exporting LNG.  

There are 18 projects, according to figures released by the Federal Energy Regulatory Commission at the start of April, that have been approved and are under construction, or are waiting to commence construction. A further six that have been proposed to FERC or are in pre-filing, as well as other projects that have yet to reach these stages, are slated to experience the most immediate impact of the pause as projects need to obtain licences from both FERC and the DOE. 

The administration, however, has not publicly stated when the pause will be lifted, although several sources Infrastructure Investor spoke to expect this to go beyond the US election in November. Cynics have suggested the election is a key reason Biden announced the pause in January in a bid to shore up votes on the left. 

“I think the climate concern behind the policy probably is real,” says Allan Marks, a partner within law firm Milbank’s global project, energy and infrastructure finance group. “I think there’s also a recognition of the fact that you couldn’t do this two years ago. The LNG terminals were built for the most part to import gas. Then came the shale fracking revolution, we had massive supplies of gas, prices fell and gas capacity surged, so converting import terminals to export terminals suddenly made sense. The economics of it were solidified when Russia invaded Ukraine.” 

Part of the status quo? 

There is a view that by and large, there’s nothing to see here. As Biden said himself, this is the first time these rules are being reviewed since 2018 and 2019, and LNG exports are in a rather different market position to what they were then. Prior to that, the previous review came in 2014. This is certainly a view taken by Matthew Hutton, managing director for infrastructure in Brookfield Asset Management’s Houston office. 

“This latest update to the public interest criteria is the fourth [such] update. This isn’t really anything new,” he argues.  

In addition to the aforementioned, prominent infrastructure investors who have invested in this space, Brookfield has also been an active player, holding a 42 percent stake in Cheniere Energy Partners alongside Blackstone Infrastructure Partners. Cheniere owns the Sabine Pass LNG Terminal in Louisiana, consisting of six liquefaction trains. Brookfield’s super-core fund also owns a stake in Cove Point LNG, an import, export and storage facility in Maryland.  

“[Previous changes weren’t] as definitive as a pause, but under the regulations, the DOE grants licences unless not doing so is in the public interest. It has to have a view of what that public interest is,” adds Hutton. “Over time it updates that public interest criteria. This one probably has more attention given to it than prior. Putting that aside, when you look at the facts and what’s happening on the ground, this is just the latest iteration in something that’s happened over time.” 

“There may be a long-term impact if this pause goes on longer than a year… Other countries could benefit in the very long term if there’s a loss of trust in US LNG export” 

Pawel Michalczyk
Fitch Ratings 

Pawel Michalczyk, director for North America energy and industrials, global infrastructure and project finance at Fitch Ratings, believes the timing of the pause is likely to be a combination of both necessary reviews and politics. 

“Previous rules were set at the very beginning of an LNG boom. Now the market has moved forward, and a lot of new projects have appeared and certain projects experienced issues during development and construction,” he says.  

Michalczyk does envisage some short-term effects, but predicts that significant impacts, if any, are more likely to be seen in the very long-term. 

“Maybe the projects that were hoping to reach FID this year will have to wait till next year. There may be a couple of projects that reached FID last year and are currently going through early stages of construction. If construction gets delayed, there is a chance those projects may miss their deadlines when they become operational and then they will have to apply for extensions.” 

Delays on other projects are the only foreseen circumstance in which Brookfield becomes impacted by the new situation, according to Hutton. 

“We are in the early stages of expanding [Sabine Pass] by roughly 50 percent. Cheniere filed about a month ago our FERC application but given the timeline we are already on – FID by 2026 – we don’t view this as impacting [us] at all,” he explains. “There’s potential that by delaying some other projects that may have come online prior to us, it could put those on the same timeline we are already on and [delay us], but that’s more prospective. We don’t see this as really impacting anything we do.” 

Michalczyk adds: “There may be a long-term impact if this pause goes on longer than a year. Some potential investors who were hoping to contract US facilities, especially those under development still looking for offtake agreements, there may be a little bit of reluctance from offtakers to contract with those projects. Other countries could benefit in the very long term if there’s a loss of trust in US LNG export.” 

Amid the LNG boom that Wood Mackenzie estimates will add nearly 50 percent growth to the market, the group maintains there will be a slowdown in new investment decisions from 2024 regardless, because of how well supplied the market is. 

“If the pause is temporary and simply delays FID to 2025 and 2026, the impact on the global market would not be material and perhaps only limited to the 2028-29 period,” Giles Farrer, head of gas and LNG asset research at Wood Mackenzie, wrote.  

Every gas cloud has a silver lining 

Political interference in a market, regardless of how routine it is, will rarely be considered a good thing by investors. However, the pause might have some inadvertent benefits for those already active in the space. 

“If you look at M&A, it probably has the unintended effect of making the facilities more valuable. It insulates existing facilities from competition,” Milbank’s Marks reasons. On the operational side too, there will likely be benefits for existing asset owners. 

“There’s been some discussion over who will benefit on the price side from this moratorium,” says Michalczyk. “The moratorium benefits the existing projects. Some LNG projects have left uncontracted capacity to sell on the spot market and with new projects being delayed, this is where the demand for that uncontracted capacity will be stronger.”  

Yet aside from valuations, those with a forward-thinking mindset will also be wary of what a move like the moratorium does to push political risk further up the spectrum. Hutton, when asked, is not totally concerned by this latest development. 

“We’ve seen the outcomes of this in the past so we can see what will happen and have a view on that,” he maintains. “If you think about opportunities to deploy tens of billions into the LNG market globally, the US, given the ample low-cost underlying gas resource, the sanctity of contracts and on a relative basis, a fair and transparent regulatory environment, we continue to see North America as one of the best jurisdictions for this, despite any temporary pauses.” 

Marks, with an eye on November’s election, does not believe the public faces particularly different propositions at the ballot box.  

“One thing that’s not different between the two candidates is they both enacted policies that favour natural gas, generally,” he says. “Moratorium aside, what Biden has done for clean hydrogen, much of it is for blue hydrogen, not just for green hydrogen. A lot of what’s been done for CCS in the IRA also favours incumbent technologies which use natural gas. 

“The differences are not so much what the policy will be on energy – even though they talk very differently – the main difference is how predictable the rules will be.  

“If you have an administration which is putting things out in a way that’s methodical and based on science and economics and public consensus – that’s the current administration – you may not like them, but at least you can price around them. An administration which is more chaotic and harder to predict chills investment.” 

For an industry that depends on predictability, Marks, in a fog of moratorium uncertainty, is drawing a clear dividing line.  

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