By Reza Yeganehshakib.
President Trump’s statements about deregulating energy production in the US, as well as recent developments in US LNG capabilities (such as Cheniere Terminal’s first export last spring and the growth of Sabine Pas Terminal), could transform the US from a net LNG importer into a net exporter. This may be a factor in the US acquiring an unprecedented controlling power in the LNG market, enabling it to influence prices.
According to some analyses, LNG will become one of the world’s most used energy by 2035. Besides the market-influencing power that a rise in US LNG exporting will create, it will increase US geopolitical supremacy over its LNG consumers. This may create a new arena of competition between the US and the other world gas giants such as Russia and Iran. The latter countries are pursuing ambitious plans for their LNG sector, especially since they have the world’s top two proven natural gas reserves. However, Russia and Iran do not have an amicable relationship with the US, compared to other active and potential LNG producers such as Qatar and Australia. Even if the new US Administration develops a closer relationship with Russia and Iran, it would probably not eliminate competition in the energy-exporting arena.
Although LNG could be the cause of a new rivalry between the US, Iran and Russia, it could also create a new spirit of cooperation among them. Consider that there is already an organization like OPEC among the gas exporting countries, called the Gas Exporting Countries Forum (GECF). Closer cooperation between these countries could significantly reduce security costs and arms competition, especially between Russia and the US. Because of the good relationship that Trump and his Secretary of State Rex Tillerson have with Vladimir Putin, the world may witness an era of more constructive cooperation between these traditional rivals. This may significantly impact the lucrative business of the giant weapons manufacturing corporations and security contractors, especially those who have already made massive amounts of money by selling the idea of a Russian and Iranian threat to governments from Europe to the Persian Gulf.
Besides the security contracting and arms sales business, the growing cyber security industry may also be hurt by an amicable US-Russia or US-Iran relationship. The media controversy about Russian cyber attacks during the US election, inflamed by some US officials and the cyber security lobby, showed how paranoia about Russia is stoked in the US political environment by partisan interests.
Nevertheless, a sudden jump in LNG exporting could adversely impact its global price. By massively reducing the volume of natural gas and increasing the portable storage capacity, LNG has enabled exporters to reach out to more remote markets, something unprecedented and commercially impossible under the traditional pipeline systems. As much as these developments in natural gas exporting technology appear to be positive, in an oversupplied market like the current one, it could be a disaster, pushing the spot prices even lower. Studies show that there is no near term future growth potential in areas such as China, India, and South East Asia. The reality is that the LNG industry requires substantial capital investment, and its distribution and delivery are especially costly endeavors. The new US administration should realize that any spike in export amounts may cause irreversible damage to the investments in this industry, similar to what happened to the crude oil market in recent years. Other non-conventional and costly segments, like shale gas (and oil) are no exception.
The administration’s political and commercial decisions could also affect investments in the US LNG industry. The US administration’s recent statements have raised some serious concerns about a trade conflict with China. This may not involve any military action, of course. But since the US is China’s largest trade partner, any non-military trade confrontation with the country, since it is a significant oil and gas consumer, could affect US investments in the LNG sector.
If Trump imposes a higher tariff on Chinese goods coming into the US, it could cause China to switch to other energy suppliers such as Australia, Russia, and Iran. Some, like Australia and Iran, may not be capable of large scale exporting right now but due to their investments in LNG industries, they could become some of the world’s major exporters in a few years. Moreover, a tariff increase on Chinese imports may reduce other US potential LNG clients’ confidence by disturbing the pre-existing trade balance and convince them to switch to other suppliers.
On the other hand, China relies very much on its revenue from exports to the US. Hence, it may not initially react to threatened US tariff increases, so as not to hurt Chinese imports to the US. But if a situation occurs where the tariffs undermine China’s long-term policy of keeping the Yuan value low to ensure export competitiveness, they may lose effectiveness. After all, no one wants to export if there is no opportunity for a profit over and above manufacturing and distribution costs. If China feels that the US market is still a lucrative place for its goods, it has a motive to import LNG from the US; otherwise, it is best to get supplies from suppliers in Asia or Oceania.
How long will it take for the global LNG market to see the consequences of Trump’s energy policies? Tim Daiss, an energy and geopolitics expert, believes that it takes at least a decade to see the results of such decisions. He has cited the US Energy Information Administration report of January 2017, which claimed that by reaching 64.7 mtpa in 2020, the US would become the world’s third major LNG exporter after Australia (85 mtpa) and Qatar (77 mtpa). He argues that since America’s five major LNG projects already have long-term offtake supply contracts for the largest part of their volumes, the first stage of transformation in the US LNG industry will not be affected by Trump’s decisions. Daiss believes that the second stage will occur in a decade, and at that time the market will see the real consequences of Trump’s decisions.
Regardless of the time frame, energy regulations in general and LNG policies in particular are delicate decisions that the new US administration should look at pragmatically, along with a set of balanced commercial and political decisions that won’t jeopardize US relations with its trade partners.