Geopolitical Significance of U.S. LNG

Kunro Irié, Ben Cahill, and Joseph Majkut

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The Biden administration has announced a temporary pause on new liquefied natural gas (LNG) export authorizations for proposed projects. This decision will not affect current exports or projects that are under construction, but a longer-term policy shift would have implications for both markets and geopolitics. This commentary addresses some geopolitical concerns associated with the pause in LNG export approvals.

Shifting Geopolitical Role of U.S. LNG

When Russia’s war on Ukraine in 2022 created a scramble for alternative gas supplies, U.S. LNG featured heavily in the transatlantic response. The United States and the European Union formed the U.S.-EU Task Force on Energy Security to help reduce EU reliance on Russian energy, diversify EU gas supplies, and accelerate the transition away from imported fossil fuels in Europe. The Biden administration pledged in March 2022 to ensure at least 15 billion cubic meters (bcm) of U.S. LNG supply to Europe that year, and the European Commission agreed to work with member states to ensure “stable demand for additional U.S. LNG until at least 2030 of approximately 50 bcm/annum.” The market delivered. LNG exports to Europe far exceeded targets for 2022 and 2023, reaching 56 bcm and 63 bcm, respectively. Today, about 50 percent of Europe’s LNG imports come from the United States.

U.S. LNG as well as Norwegian pipeline gas helped Europe withstand the economic shock of Russia’s weaponization of gas supplies and kept solidarity behind Ukraine. Mild weather and prudent stockpiling have calmed immediate concerns in Europe about lost supplies. Russian imports still constitute 20 percent of Europe’s gas supply, but Ukraine’s last remaining contract for transit volumes from Russia is due to end in 2024 and governments across Europe have no intention to resume larger gas imports from Russia. However, as European buyers seek a full divorce from Russian gas, the pause on new LNG project approvals will raise some longer-term concerns. Scarcer supplies from the United States after 2030 could make this more challenging.

The Biden administration has argued that Europe, which is trying to reduce gas imports by investing heavily in renewables and electrification, has been able to secure sufficient supplies through short-term buying, and that additional LNG export capacity after 2030 would be of limited geopolitical value. But other regions are more central to the long-term outlook. Asia rather than Europe will account for most post-2030 LNG demand growth, and U.S. allies and trade partners in Asia are concerned about signs of long-term supply constraints from the United States. Current and under-construction LNG projects should meet most of the demand in this decade, but as Asian demand grows, more projects could be necessary to offset declines from existing suppliers.

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Security of supply is a concern for Asian LNG buyers. Australia is a dominant supplier to the region, but it may institute its own export controls due to domestic supply constraints. Northeast Asian buyers are long-standing buyers of gas from Indonesia, Malaysia, and Brunei, but their supplies are depleting fast. Asian buyers previously considered Russian LNG a potential supply source, due to its proximity and the lack of sea lane choke points, but the Ukrainian crisis and subsequent sanctions have dimmed that prospect. This leaves the United States and the Middle East. Qatar and other Middle Eastern countries already account for 15 percent of imports to Japan and over 21 percent of supplies to South Korea, and the Middle East supplies more than 90 percent of Japan’s and 60 percent of South Korea’s crude oil imports. Further dependence on the Middle East is a concern for policymakers. Without additional U.S. volumes, LNG buyers in Asia face limited options and the United States could be leaving both export value and political ties on the table.

Buyer Perspectives on the Value of U.S. LNG

The U.S. LNG industry has several distinguishing factors that elevate its geopolitical and market significance. U.S. LNG adds significant volumes to the global market, helps mitigate supply risks from other sources around the world, and offers unique flexibility and pricing mechanisms that are important to buyers. U.S. LNG also helps allies cope with energy sanctions on other hydrocarbon exporters.

• U.S. LNG volumes grew quickly at a time when the market needed new supplies. Last year, the United States became the world’s largest LNG exporter after the return to normal operations at Freeport LNG and the ramp-up of Calcasieu Pass. Growth in U.S. exports helped buyers in Europe avoid a much worse scenario when Russia curtailed its gas supplies. Following the extreme price increases and volatility of 2021 and 2022, the global LNG market has cooled in recent months. However, the market is still finely balanced. With utilization rates at liquefaction facilities remaining quite high, unexpected outages or sudden demand increases could change things quickly.
• U.S. volumes help alleviate supply risks. For Europe, cargoes from the Middle East and Australia typically transit through the Persian Gulf and the Suez Canal. These critical choke points are vulnerable to security threats, as seen with the Houthi attacks on commercial vessels in the Red Sea. In the Pacific, Most LNG shipments to Asia must pass through the Taiwan Strait and the South and East China Seas. Japan is deeply concerned about maritime transit risk, especially if geopolitical tensions grow in the South China Sea. U.S. LNG shipping avoids some of these risks as it can transverse the Atlantic to reach Europe as well as the Pacific for East Asia (Russian LNG also avoids traversing the South China Sea to get to Japan or Korea). North American supplies are not immune to risks and unexpected events, as seen in recent problems with Panama Canal transit, but it is valuable for buyers to avoid over-exposure to volatile regions.
• U.S. LNG offers unique commercial benefits for importing companies and countries. Traditionally, LNG sales agreements included extensive contract periods and stringent delivery terms that prohibit selling to other terminals. Volumes were typically delivered ex-ship, meaning that the seller delivers the LNG to the buyer’s terminal. While buyers enjoyed security of supply, there were some drawbacks to these contractual arrangements. LNG buyers had difficulty changing from one supplier to another, and the short-term market remained relatively small since there was limited liquidity. In this regard, U.S. LNG has been a game changer. Ample domestic gas supply, extensive gas infrastructure, and relatively low supply costs helped facilitate export projects led by new sellers. Prospective LNG sellers could access volumes from the grid, as long as they could find a suitable port for a liquefaction facility. Lower up-front costs and less stringent contract terms allowed buyers to arrange their own shipping and leverage free on board (FOB) terms, enabling more flexibility on the ultimate destination of cargoes. And since cargoes can ship either to the Atlantic or Pacific, U.S. LNG volumes act as a balancing force between markets. The result has been greater convergence between LNG prices in Europe and Asia. U.S. LNG also created a new pricing mechanism since volumes are typically sold at Henry Hub-linked prices, allowing greater stability for sellers who avoid market risk between their feed gas purchase price and the FOB price. U.S. LNG helps buyers diversify their price portfolio, which in turn allows for greater optimisation of their fleet of cargoes.
• U.S. exports add security in a sanctions-constrained world, creating more options for allies and trade partners. Sanctions on energy exporting countries naturally create some challenges for oil and gas importers, and restricting U.S. energy exports makes it more difficult for importers to adapt. The United States has recently announced additional sanctions on new Russian LNG projects that have contracts with Western and Japanese companies. These actions followed earlier sanctions and embargoes on Russian crude oil and petroleum products by various countries—as well as price caps that were carefully designed to avoid major supply disruptions. Many energy-importing countries are still deeply concerned about security of supply. Suggestions that the United States will restrict future LNG export capacity may not sit well with such countries. Buyers in Japan and China may now look to either fully permitted U.S. projects or to other suppliers for alternatives.

LNG as a Transition Fuel

At the 28th UN Conference of the Parties (COP28), countries agreed to work toward “transitioning away from fossil fuels in energy systems . . .in a just, orderly, and equitable manner.” The final text also noted that “transitional fuels can play a role in facilitating the energy transition while ensuring energy security,” which seemed to recognize natural gas as a bridge fuel. The Biden administration’s pause on new LNG project approvals shows the difficulty of determining what role U.S. fossil fuel exports should play in this longer-term future, especially given the uncertainty about decarbonization pathways in various regions.

The assertion by environmental campaigners that future natural gas exports will compete only with renewable energy and not with coal in Asia is unfounded. Gas price increases in the immediate aftermath of Russia’s war on Ukraine created some suboptimal emissions outcomes, including the fact that countries like Pakistan were priced out of the market and turned to coal consumption for power generation. Naturally, the long-term role of gas in each market will vary. But all things being equal, constricting natural gas supply over the long term could make it harder for gas to replace many thermal coal applications. The net emissions impact of expanding or reducing U.S. LNG exports on emissions of other countries depends on many factors including their economic growth rates, the prices and availability of different fuels, the value chain emissions of those alternative fuels, existence of infrastructure to accommodate gas, and so on. This issue belies simple conclusions.

U.S. LNG and Energy Transitions

Beneath the analytical debates about the further expansion of U.S. LNG export capacity is a deeper question of how the United States wants to engage with the world during the energy transition. Like any other country, it seeks broad—and sometimes conflicting—objectives including global decarbonization and geopolitical influence. Which tools will the United States bring to bear and how can it use them to maximize its goals?

Europe’s 2021–2022 energy crisis showed the importance of the U.S. LNG industry to maintaining global energy security, but this could be a short-lived chapter of the energy transition. As European gas demand is likely to decline in the 2030s, the planned expansion of global LNG export capacity will principally aim to meet the anticipated rise in demand in South Asia and Southeast Asia. Energy policy decisions in these countries, many of which are quite dependent on coal, cannot be made in the United States. China, Vietnam, the Philippines, and India are willing consumers for LNG, whether from the United States or other suppliers. With a strong policy push to drive down emissions from domestic gas production, transportation, liquefaction, and shipping, U.S. LNG will be well positioned to supply these markets.

Thanks to the Inflation Reduction Act and other federal and state climate policies, the United States is on track to be a global leader in clean energy innovation. But other countries that lack the economic resources of the United States will presumably need oil and gas for a longer period. An important policy question is whether the United States can combine abundant—and lower emissions intensity—natural gas exports with financial, technical, and policy support for zero-carbon energy abroad. Doing so will enable progress on decarbonization pathways around the world.