October 11, 2023
Energy is the bedrock of North American society, providing it with light, heat, fuel, and an outsized dose of global economic competitiveness.
The United States, Mexico, and Canada all boast world-class hydrocarbon reserves and long histories of producing and distributing them as raw materials, fuel, and refined products.
Not all hydrocarbons are created equal, of course, so there is a clear mutual interest between the three nations for energy cooperation to enhance their economic and energy security.
As decarbonization shifts the global demand pattern, natural gas stands at the forefront of that collaboration effort—representing a significant opportunity for regional infrastructure development and expansion.
However, within each of the nations’ borders, energy is highly politicized and at times controversial.
Nowhere would this come into sharper focus than if domestic gas supplies became insufficient to meet both in-country and export demand.
Who gets the molecules when an international buyer is willing to pay a significant premium to wrest them away from domestic customers?
LNG is poised to have a huge impact on our energy supply.
With the world looking to diversify away from Russian gas, demand for US shale gas will only continue to grow.
This has encouraged construction of LNG plants in various parts of the US, as well as plants in Mexico that will be served by US supplies.
The US is on track to exceed 22 Bcf/day of liquefied natural gas export capacity this decade, counting every project in operation, under construction, or sanctioned.
The number is even higher when considering the Mexican LNG projects under development that would tap into feed gas from the US.
Those projects will increase pipeline demand from the United States, which has the same effect as LNG exports do from the Gulf Coast.
The magnitude of this development is seen in an offshore pipeline extension being constructed from South Texas to Tuxpan, Veracruz, demonstrating the ability of Mexican state-owned entities, PEMEX (Petroleos Mexicanos) and CFE (Comision Federal de Electricidad) to collaborate with US companies.
Concern is growing as to whether there will be enough gas to go around.
US consumers will be forced to compete with major international companies—or in some cases, countries—that are willing to pay whatever they need to get natural gas.
In the dead of winter, when the US has lower inventories, will those entities still be allowed to buy molecules and take them out of the country?
The US industrial sector accounts for about one-quarter of the nation’s natural gas and electricity consumption.
The total dollar value of industrial natural gas and electricity markets in the US is larger than gasoline, and even the motor fuels industry more broadly.
Industrial Energy Consumers of America (IECA) represents manufacturing companies with more than $1 trillion in sales and 11,700-plus facilities.
It is increasingly concerned that IECA members will be adversely impacted unless pipeline capacity and domestic production keeps pace with growing demand.
So long as domestic production increases in a way that can consistently meet demand, and there is adequate pipeline capacity to get it to where it is needed, then everything will be fine. But, in IECA’s opinion, the impact of LNG exports on U.S natural gas prices continues to be underestimated.
This will be especially true when there are dislocations of supply. For example, when severe weather increases demand, it draws down natural gas inventories and prices for gas and electricity go up.
What can be done to head off this potential crisis?
The Natural Gas Act provides a public interest determination for exports to non-free trade agreement (FTA) countries (while exports to free trade countries don’t have to pass this determination, a vast majority of US LNG goes to non-FTA countries.)
And yet, the government hasn’t holistically evaluated applications to export LNG.
Applications are considered individually—for example, approving a project to export 2 Bcf/d and finding it to be in the public interest without really considering all the other projects that have been approved.
If all the currently proposed projects were to move ahead, it would account for about 40% of today’s US gas supply. Looking at them individually and not holistically is a recipe for disaster.
The US Department of Energy (DOE) recently announced that it won’t extend LNG export authorizations if a project is not constructed within seven years of receiving export approval, unless it can show good cause for an extension.
This has the potential to stop some export projects, like Lake Charles LNG, altogether.
When Lake Charles LNG went through the approval process, the DOE determined its exports were in the public interest. But things have changed. Given the capacity that’s already operating or under construction, the export volumes from Lake Charles might no longer be in the public interest.
On the distribution side of things, the nation needs more pipeline capacity.
A prime example of regional pipeline constraints occurs on the East Coast, where manufacturers can’t secure firm pipeline capacity and can’t expand manufacturing as a result. Some companies have been forced to build in other parts of the country, compromising their international competitiveness.
Pipeline constraints also impact the supply of gas for power generation. These issues are being addressed by the Federal Energy Regulatory Commission, including permitting reforms so that new infrastructure projects can get approved more easily.
The recent Debt Ceiling Bill included a provision to favorably legislate approval of the Mountain Valley Pipeline (MVP), a carve-out that substantially increases the chances of the project getting completed.
The bill also includes common sense permitting provisions and deadlines for National Environmental Policy Act reviews, all of which should help new pipelines get built.
As the US enters a fractious election cycle, with renewable power generation dominating the energy debate, it is hard to imagine conventional natural gas supply or LNG export regulations getting much airtime.
And yet, unless coordinated action is taken, the nation could find itself facing domestic fuel and power shortages even while natural gas production hits all-time highs.
Investment in both production and distribution infrastructure is needed, something that higher domestic gas prices—which have crept above $3 at Henry Hub this week—should help to support as capital rotates back into the sector.
However, we must be alert to the growing risk of a “tragedy of the commons” as disconnected projects compound to place an unsustainable draw on US gas supplies.
At Trellis Energy, we believe that a modern natural gas supply chain should be digital, efficient, and easy to manage, ensuring the delivery of clean energy when and where it’s needed. We’re in business to make that a reality for natural gas in North America.
Talk to us about Digital Simplification for your climate, trading, and logistics goals.