Qatar and Mexico Big Winners of Biden’s Attack on American LNG

The $2 billion conversion of Mexico’s Energia Costa Azul gas terminal into an LNG export facility will open a new, faster means for U.S. natural gas producers to access Asian gas markets, circumventing the Panama Canal. Costa Azul’s conversion is the first of several gas export projects proposed in Mexico, but President Joe Biden’s recent pause on LNG export approvals casts uncertainty over their timelines and development, as these ventures need Energy Department authorization to ship U.S. gas abroad.

By next year, American natural gas could start flowing by pipeline from the United States to a major export terminal on the Mexican Pacific coast, be converted to LNG and shipped to Asian markets. The new route could cut travel times to Asian nations roughly in half, bypassing the drought-ridden Panama Canal. The U.S. hydraulic fracturing boom has made the United States the world’s largest natural gas producer and exporter and world demand for U.S. natural gas has risen as the world has begun using more gas in power plants, factories and homes, substituting for coal in some cases. Natural gas demand is growing in China, India and Southeast Asian countries.

Mexico’s Energía Costa Azul, located between Baja California’s agave-covered mountains and the Pacific Ocean, was originally operated  as an import facility to supply gas to California and Arizona for electricity production. It is undergoing a $2 billion conversion into an LNG export facility for U.S.-produced gas to be shipped to Asia. It is the first in a network of gas exporting facilities planned along Mexico’s West coast.

Last month, the Biden administration paused the approval process for new export-terminal projects in the United States while its Department of Energy considers the effects of gas on greenhouse gas emissions. The pause affects several proposed Mexican LNG projects because they would be exporting U.S. gas. Costa Azul is not affected as it already has its approvals and is mostly complete, following an agreement between President Trump and Mexico’s president in 2020 under the United States-Mexico-Canada (USMCA) trade agreement. If all five planned terminals in Mexico were eventually built and operated at their proposed volumes, Mexico would become the fourth-largest exporter of gas in the world with each terminal theoretically operating for decades.

Besides being closer to Texan gas fields than states along the U.S. West Coast, Mexico’s less arduous environmental rules and cheaper construction costs are some of the reasons these export terminals are being proposed there rather than along the U.S. West Coast where states have opposed them. Mexico will get the investment and jobs instead. The terminals are essentially American as they are mostly owned, operated and supplied by U.S. gas companies. The United States has seven operating LNG export terminals and five more under construction, and is forecast to double its export volumes within the next four years.

Up until recently, tankers could make it through the Panama Canal relatively quickly, and journey times from U.S. Gulf of Mexico export terminals to Asia were reasonable. But drought in Panama has severely curtailed the number of ships passing through the canal each day.

Despite gas being cleaner to burn than oil or coal, environmentalists note that the emissions from liquefying the gas, which is energy intensive, and shipping it long distances around the globe should be considered. Despite that, state and federal officials in Mexico have touted the proposed export terminals as job creators.

Projected demands for gas in Asia have attracted investors from around the world and proposals for new export terminals have proliferated. Well before construction even begins, gas contracts have been signed for deliveries decades into the future.

According to Muthu Chezhian, the C.E.O. of LNG Alliance, a Singaporean company planning to build an export terminal in the Mexican state of Sonora, Biden’s directive has made potential Asian buyers nervous. Previously they had been excited about this LNG project and had felt assured of ample supplies due to nearly a decade of reliable U.S. gas expansion. Biden’s directive, however, sent shock waves through Asian demand markets. Because Chezhian’s project already has Department of Energy approval, there is a good chance it still will be built as long as its investors do not back out or unless it cannot meet a 2028 deadline to start operation. Missing the deadline would require applying for an extension from the Department of Energy, as extensions are also part of Biden’s pause directive.

The biggest proposed export terminal along the Gulf of California, called Mexico Pacific, faces tough odds. It would be roughly 10 times as large as Costa Azul if all its proposed phases were to be built. But while it also has Department of Energy approval, its deadline to start exporting is next year. Since construction takes years and has not yet begun, the project most likely would need to apply for an extension. If all of Mexico Pacific’s proposed phases were to be built, it would be even larger than the largest proposed project on U.S. soil, Venture Global’s CP2 project that caused environmentalists to push Biden into the pause to LNG approvals.

Since LNG projects are enormously expensive and need investment certainty, delays to construction are major problems and could result in huge cost increases. The ripple effects on the global gas market by President Biden’s directive are still shaking out. And it is unclear how long the pause will remain in effect, though some are speculating it will remain until after the election. Because the LNG industry often sells its product through long-term contracts decades in advance, investors are likely to look toward U.S. competitors in the gas market or to current operators in the United States and Mexico that have room for growth. Biden’s pause will help other big LNG producers like Qatar and Australia, placing the United States last. Within the United States and Mexico, projects that have received approval and do not need an extension will see a rush of interest because the unapproved projects will probably have at least a year of delay.

House Bill on LNG

The House of Representatives has a proposed bill to reverse the pause on LNG export approvals. H.R. 7176, Unlocking our Domestic LNG Potential Act of 2024, would give the Federal Energy Regulatory Commission, an independent agency, exclusive jurisdiction to approve LNG facilities. The bill is up for a floor vote. House law makers argue that the pause could have deleterious effects on national security and the climate. The bill is sponsored by Rep. August Pfluger (R-Texas) and Democrats Henry Cuellar of Texas and Mary Peltola of Alaska, along with 17 other House Republicans.

The White House has expressed strong opposition to the bill, but stopped short of issuing a veto threat. According to European Commission Executive Vice President Maros Sefcovic, U.S. LNG supplies to Europe will be unaffected for the next few years, but emphasized the U.S.’ responsibility for energy security beyond Europe. Sefcovic said the United States is now the “global guarantor of energy security” and its responsibility goes beyond Europe. Southeast Asia, India, Latin America and Africa need gas supplies to phase out reliance on coal. Biden’s pause directive could result in more coal being burned instead of natural gas.

Conclusion

The world is looking to American natural gas as the United States is now the largest producer and exporter of natural gas due to innovations in production through hydraulic fracturing and directional drilling. LNG export terminals are being constructed in the United States and in Mexico to ship LNG abroad. But President Biden has put a pause on approvals from the Department of Energy (DOE) so that that agency can evaluate the climate impacts of approving such projects.

DOE approvals not only affect the United States but also Mexican export terminals as they are fueled by U.S.-produced gas. Biden’s pause has the world worried and exporters troubled by the length of the delay, increases in costs, and prospective buyers going elsewhere for supplies such as to Qatar and Australia. President Biden is clearly not putting U.S. interests first. The House of Representatives has a bill that would put all approvals on the jurisdiction of FERC, which is an independent agency. The White House opposes the bill, but has not yet said that Biden would veto it.

*This article was adapted from content originally published by the Institute for Energy Research.