US LNG vs ‘America first’
DEEP DIVE: Can Trump maximise American gas exports without infuriating the MAGA crowd?
A three-letter contradiction sits at the heart of Donald Trump’s ‘America first’ isolationist foreign policy agenda: LNG.
Maximising US liquefied natural gas exports is central to the ‘make America great again’ philosophy. So is keeping domestic energy prices affordable.
How can America dominate global LNG supply without exposing consumers to global price volatility and infuriating the MAGA crowd? Can Trump have it both ways?
The United States is already the world’s dominant LNG exporter, and that was always going to continue regardless of the election result. However, Trump’s stunning electoral mandate will push the envelope.
Biden’s LNG ‘pause’ might be headed for the scrap heap, but the economic trade-offs it sought to examine won’t simply disappear.
It is not hard to imagine the MAGA crowd turning on LNG exports if these are perceived as benefitting foreign allies at their expense.
This Deep Dive takes a critical look at how Trump 2.0 could alter the trajectory of domestic gas and global LNG prices, the interplay between the two, and the policy trade-offs awaiting the returning president.
ARTICLE STATS: 2,600 words, 12-min reading time, 8 charts and graphs
It is hard to overstate America’s growing dominance of the LNG market.
Operational liquefaction capacity currently stands at 93 million tonnes per annum (mtpa). Projects already under construction will almost double that to 175 mtpa by 2030. A further 196 mtpa of capacity is proposed at earlier stages of development, according to Kpler.
As if that wasn’t enough, there’s an additional expansion underway in Mexico, where LNG projects would be fed by US shale gas piped over the border.
The buildout is likely to be larger and longer under Trump, who has vowed to scrap the Biden administration’s ‘pause’ on US LNG export approvals on his first day in office.
The pause affected projects with an estimated 71 mtpa of nameplate capacity. These include Commonwealth LNG, Calcasieu Pass 2 (CP2) LNG, Lake Charles LNG, and a second phase expansion at Port Arthur LNG.
Trump and his backers derided the pause, which was launched (in part) to examine the economic impact of soaring exports on American consumers. Those same consumers came out in droves to vote for a second Trump term.
Inflation, the state of the US economy and how well-off voters ‘feel’ compared to 2020 were critical factors that seem to have swayed the result in Trump’s favour. His administration will be judged by its ability to tame inflation.
Might his policies achieve the opposite?
Follow the money
America benefits economically from LNG exports, but the lion’s share of wealth remains concentrated in the hands of investors in liquefaction and upstream infrastructure, lenders, and other financiers.
Funds trickle down to the US Treasury, state tax coffers, supply chain companies, and — finally — the blue-collar workers they employ.
Economic benefits do no flow much beyond the communities within the catchment area of project construction sites; millions of Americans will receive no direct economic benefit from Trump’s maximalist US LNG policy.
The country as a whole does benefit diplomatically and geopolitically by sharing its energy bounty with allies, but MAGA supporters do not seem to value these less-tangible benefits.
Their main concern, judging by the election results, is not the fate of faraway allies and the wars they are fighting. It is the cost of living in America in 2024.
And here, US LNG poses a risk. Export wealth is not socialised, but the costs are via higher domestic energy retail prices.
The export effect
So far, US LNG exports have had some impact on domestic wholesale prices, albeit limited. Henry Hub, the US benchmark, has traded in the $2-4/MMBtu range for most of the last decade.
The main exception was a 2022 spike during the global energy crisis triggered by a post-Covid demand crunch and Russia’s land invasion of Ukraine.
The circumstances leading up to the 2022 spike were exceptional. Covid-era lockdowns hollowed out supply chains, then the post-pandemic recovery tore them to pieces. The whipsaw hobbled industrial capacity to respond to resurgent commodity demand in 2021.
Then came Russia’s land invasion of Ukraine. Europe’s pivot from pipeline gas to LNG sucked every spare cargo out of the Atlantic basin, diverting flexible US LNG cargoes away from Asian buyers and towards European import terminals.
Heightened European demand for US coal further tightened American energy markets. As American coal was shovelled over the Atlantic, domestic natural gas prices surged to temper coal-to-gas switching in the power sector and keep the power market in balance.
Explosive evidence
The story might have ended there, had it not been for an explosion at the Freeport LNG project at the height of the post-invasion turmoil.
The untimely incident in June 2022 laid bare the trade-offs inherent in maximising America’s exposure to global energy markets.
As Energy Flux reported at the time:
Market reaction was as dramatic as the explosion itself. The month-ahead price of gas on Henry Hub crashed from a peak of $9.57 per million British thermal units (MMBtu) to $8.15/MMBtu within just a few hours. Why? Freeport’s outage made 2 Bcf/d of US shale gas unexpectedly available to the domestic gas market, which was running hot due to record demand for feed gas from the seven LNG plants in operation across Texas, Louisiana and Georgia.
A similar reaction occurred in the Texas electricity market. The average price of power across all ERCOT locational nodes briefly fell from more than $60 per megawatt-hour (MWh) to around $26/MWh when the explosion took Freeport offline. That’s because Freeport is the only LNG plant in the US to use grid-powered electric motors to compress and chill natural gas. The incident shut down the plant’s three 75MW-rated GE motors.
In Europe, the market reaction was the precise opposite. Freeport is a critical piece of infrastructure supplying an estimated four LNG cargoes per week to gas-starved European markets. The outage prompted month-ahead gas on the European benchmark TTF to spike 12.6% to €88.70/MWh in that morning’s trade. UK day-ahead prices jumped in tandem by 22% as traders priced in the missing volumes.
Delayed impact
While wholesale prices on Henry Hub returned to pre-war levels quite quickly, residential prices did not. The delayed impact on consumers is still being felt to this day.
In regulated markets, the process for passing wholesale costs through to consumers can take months or years.
“In many states, utilities didn’t get permission to raise rates until long after wholesale prices had shot up, which means many utility customers are still paying high prices for gas that their utilities bought a year or more ago,” said IEEFA analyst Clark Williams-Derry in a 2023 paper.
Gas suppliers, utilities, consumer groups, and regulators from a variety of US states have all cited global events as a major factor in driving up domestic prices for consumers. LNG export capacity is the physical link that makes this possible.
Price excursion
Where do residential gas and power prices go from here? It is hard to know, but an unfettered increase in liquefaction export capacity will only deepen the exposure of American energy markets to global prices.
Simon Flower, chief analyst at Wood Mackenzie, anticipates an “increase in domestic gas prices” under Trump. This, he says, “could still prompt second thoughts on how much additional LNG should be exported”.
Three key factors will determine pricing outturn:
The amount of US LNG export capacity that actually gets built;
American power, heat and industrial demand for gas;
The degree to which upstream production growth keeps pace with domestic & export demand.
It is easy to see how each of these factors could conspire to tighten American gas and power markets. Let’s tackle them in turn.
1. Bankrolled by geopolitics
Not all LNG projects liberated from Biden’s ‘pause’ will achieve final investment decision (FID). They are selling volumes into a saturated market characterised by structural oversupply and, in all likelihood, a huge overhang of uncontracted (and lower cost) capacity from Qatar and elsewhere.
In a buyer’s market like the one we’re heading into, projects towards the higher end of the cost spectrum will struggle to find customers. Here, Trump’s foreign policy could help matters.
Eager to ward off a potential Trumpian transatlantic trade war, the European Union is already talking about buying lots more US LNG to displace Russian LNG from Europe’s energy mix.
This could be attractive to the Trump administration, which is widely expected to slap swingeing tariffs on Chinese electric vehicles and many other products. US LNG is a prime target for retaliatory Chinese tariffs.
We’ve been here before. During the US-China trade spat under Trump’s first presidency, Chinese imports of US LNG slumped to zero for a few months.
Spooked by a potential withdrawal of US support for Ukraine and NATO, EU leaders are evidently keen to placate the incoming administration. A coordinated effort to commit to lift long-term US LNG volumes could be exactly the mechanism to achieve this — and dig Europe out of a geopolitical hole.
In other words, geopolitics could forge transatlantic deals to support construction of US LNG projects that might, in other circumstances, have fallen by the wayside.
2. Running on empty
US LNG proponents often point to the opening of new export opportunities as stimulating upstream investment. In theory this is true, but the US shale patch is already producing record volumes of oil and gas — and the scope to do more is limited.
The number of drilled but uncompleted wells (DUCs) has fallen off markedly in recent years. DUCs are wells that have been drilled but not yet hydraulically fractured and brought into production. These wells reflect potential supply that can be tapped relatively quickly, allowing producers to respond flexibly to price changes or market demand without the time and expense of drilling new wells.
The drop-off in DUCs signals that operators are prioritising completion over drilling in order to maximise cash flow and keep capital expenditure in check. This is in keeping with the sector’s focus on shareholder value over production volume, after the epic value destruction of the first decade of American shale.
“A second Trump administration emboldens support for expanding domestic oil and gas production, but it's unlikely to spur additional growth anytime soon,” Flowers of Wood Mackenzie said.
“For the large public E&Ps that control half of the US Lower 48’s rigs and develop much of the best leasehold, it’s the return of capital frameworks that will dictate investment. And increased tariffs threaten to expose the industry to cost inflation.”
Adam Rozencwajg of investment advisory Goehring & Rozencwajg says American shale gas basins “are simply running out of high-quality drilling inventory”. This is plunging the US gas market into “a sharp and sustained deficit”.
Rozencwajg wrote in a note: “As new LNG demand comes online and production continues to disappoint, inventories will continue to tighten, pushing prices toward the global benchmark.”
3. American gas is hot!
On the demand side, a confluence of factors is supporting the bullish narrative.
Anne-Sophie Corbeau, global research scholar at the Center on Global Energy Policy at Columbia University, said these factors could precipitate a repeat of the events of 2022.
“The strategy of industrial reshoring, combined with less clean energy (unless it is nuclear) would lead to higher gas demand growth. Also the additional demand for AI/data centers may — all other things being equal — lead to higher gas demand in the power sector,” she told Energy Flux.
“I don't see Trump making a lot of efforts on energy efficiency, so that’s another driver for lower gas demand gone. And all the additional LNG exports plus high exports to Mexico also require a lot more gas production.”
(Un)welcome scrutiny
The US Department of Energy is reportedly fast-tracking its report into the impact of US LNG exports ahead of Trump’s inauguration in January.
Trump would probably ignore any negative findings, but that does not detract from the fact that the scrutiny “was actually relevant and needed,” Corbeau said.
“I am not sure Trump and the Republican administration would listen to unfavorable results (if the results are such...), but maybe they should!”
“Otherwise, we will have the same thing that happened in September 2022. Unhappy industrials asking the White House for a reduction in LNG exports. Well, I don't know how the President can do that unless he tells the facilities without long-term contracts to stop exporting,” she added.
Hedging against basis risk
America’s LNG dominance is elevating Henry Hub’s influence in global LNG markets. This shift brings complexities, as Asian and European buyers must weigh the advantages of flexible cost-effective US gas against the risk of basing their energy strategies on Henry Hub, a benchmark susceptible to US domestic dynamics.
US LNG buyers face ‘basis risk’ — the gap between Henry Hub prices and those on regional hubs like TTF and JKM. Since late 2021, TTF and JKM have traded at much higher levels than Henry Hub, reducing this risk. There’s been scant chance of US LNG indexed to Henry Hub becoming more expensive than the market price in Europe or Asia.
However, as the US LNG export market expands, Henry Hub will increasingly reflect global gas dynamics as well as local/regional factors. This increases basis risk for international buyers.
To mitigate this risk, US exporters and gas producers could structure deals with more pricing indexed to TTF or JKM, aligning better with importing markets.
This ‘quid pro quo’ approach has been used before and could become more common as buyers demand more protection from Henry Hub price swings. Upstream producers love the exposure to global pricing and the generous margins available compared to the domestic market.
MAGA bag-holders
Over time, as the Trump administration greases the wheels of US LNG expansion, Henry Hub may gain enough prominence to partially de-risk itself for global buyers.
By pushing Henry Hub pricing into LNG-importing regions, Trump’s America could make the American natgas benchmark a more balanced global yardstick for the fuel, in much the same way that Brent evolved from the North Sea to become the global crude oil benchmark.
The only way to achieve this energy market dominance is by erasing the discount against Asian and European gas prices that domestic American consumers currently enjoy. Fortunately for Trump, US liquefaction capacity is ramping up into an oversupplied global market for gas — so the domestic effects of the strengthening Henry Hub-global linkage may not be noticeable for some years.
By the time structurally higher gas and electricity prices manifest on consumer bills, Trump himself might have left office. But his legacy could be an increasingly fraught and unpredictable domestic energy market, and burgeoning consumer awareness of the cost of unfettered natural gas exports.
Seb Kennedy | Energy Flux | 13 November 2024
More from Energy Flux:
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US LNG is becoming a zero-sum game
The US is on track to become the world’s biggest liquefied natural gas exporter, but the spoils of LNG market dominance are increasingly coming at the expense of US consumers via higher domestic pric…
Pause for the cause
Much has been said about the Biden administration’s snap decision to pause LNG export approvals to countries without a US free trade agreement. While the policy would probably be rescinded if Donald Trump prevails at the polls in November, there are many angles to consider. This post weighs up what it could all mean for European energy security and the decarbonisation agenda.
Back in May in my Substack blog , and also in my book ‘Energy Revolutions’ I argued that major increases in US LNG exports could benefit renewable growth in the USA. This could happen if LNG exports push up the domestic price of US natural gas, something that you suggest is a possible outcome. Increases in natural gas prices will make solar and wind etc more competitive. See https://davidtoke.substack.com/p/how-trump-may-unitentionally-boost