The curious incident of the gas and the turbines

There’s plenty of uncertainty around natural-gas supplies at the moment. Observers worry that Russia won’t resume operations of its Nord Stream 1 gas pipeline — and the thought of a winter in Germany without Russian gas makes worrying about “crypto winter” sound a bit silly.

Before winter arrives, however, there is a question in the commodity chaos involving the US: What should traders make of rumours about a regulator-imposed cut in US exports?

The discussion started in earnest this month because of news that Cheniere Energy has asked the Biden Administration for an exemption on certain US environmental regulations for its liquefied natural gas terminals. The report prompted CreditSights to write the alarmingly titled note: “Could EPA Regs Shut Down 50 per cent of US Exports?”

Luckily, Betteridge’s Law probably applies in this case. But a closer look shows how important it is to read about US energy policy and regulation with a critical — and perhaps political — view. Until November’s midterms, at least.

We won’t go too far into the details of US administrative law, but for a simplified summary: when the US Environmental Protection Agency created the National Emissions Standards for Hazardous Pollutants (NESHAP) in 2004, it didn’t decide whether or not it would impose those standards on carcinogen emissions from stationary combustion turbines, while it considered taking those turbines off its list. The EPA decided earlier this year to remove the stay. Both the Reuters article and the CreditSights note say the decision is the result of environmental groups threatening lawsuits.

The EPA’s decision would affect 62 of Cheniere’s turbines at two of its Gulf coast LNG facilities, according to a March letter to regulators seen by Alphaville.

Cheniere is, by far, the largest US LNG exporter, which our readers already know is the globally transportable liquid version of natural gas. (Think boats, not pipelines.)

That clearly has some significance for global markets. Cheniere’s lawyers argued in their letter: “Potentially imposing significant costs and operational disruption on the U.S. LNG industry at the same time the Administration is focused on Europe’s strategic need to break its reliance on Russian gas is counterproductive.”

And while US natural gas is more important than ever to Europe — it has inarguably been sending a much higher share of its LNG exports to the EU than last year — it may not be as crucial to Europe as the energy industry and Cheniere’s lawyers claim. The US was Europe’s fourth-largest supplier of natural gas in 2021, but provided just 7.3 per cent of its supply.

For context: Russia provided the EU with almost as much natural gas as the next three largest suppliers (Norway, Algeria and the US) in 2021. Combined.

There are reasons for US commentators and analysts to be a bit confused about the US’s gas exports, however. A February 2022 post from the US Energy Information Administration ( “Independent Statistics and Analysis”) focuses on statistics about liquefied natural gas, where the US has a slight advantage. But liquefying gas is the only way the US can get natural gas to Europe, while Russia can simply use pipelines. Russia does export some LNG, but for now the Arctic is slightly less amenable to boat transportation than the US Gulf Coast.

Another question raised by this story: Why are environmentalists suing over formaldehyde emissions from a type of turbine that the EPA has considered (and may still be considering) removing from its list? Environmentalists must have more pressing concerns as the temperature in the Greater London area reaches 37 degrees.

In fact, the EPA’s fact sheet on the rule change doesn’t cite lawsuits as a reason. Instead, it says it has evaluated “recent case law . . . and has been unable to identify any authority for the stay.”

We can check the EPA’s list of lawsuits to see who sued and why. But a survey of that list poses challenges as well.

The only lawsuit threats we could find in 2018, 2019, 2020 or 2021 that mentioned the emission standards (NESHAP) focused on different subsections of the rule. Some were pushing the EPA to update its standards for pollution-controlling flares, for example. Others were to force updates on regulations for emissions from . . . argon-oxygen decarburisation vessels in steel plants? Or for activities like paint stripping operations and lead acid battery manufacturing. (The agency’s site says its list isn’t guaranteed to be comprehensive, to be fair, and we have contacted the EPA for comment and will update if we hear back.)

It also isn’t clear where exactly word of a shutdown came from. In its letter, Cheniere said there could be “significant costs and operational disruption” as the result of the regulations, but that doesn’t necessarily mean a halt. While the phrase “shut down” is nowhere to be found in the Reuters article of July 11, the Wayback Machine does show that a July 8 version says it could force the LNG to “shut for an extended period”. 

Shutdowns were probably on reporters’ and traders’ minds, after a June accident led to a full shutdown of a Freeport LNG facility, and sent US natural-gas prices careening lower.

The consequence of Freeport’s shutdown highlights one important point: The biggest consequence of a reduction in US natural-gas exports would be domestic. And while it would certainly be bad for Europe’s economy, it wouldn’t be bad for the US.

US natural-gas prices slid 6.4 per cent when the Freeport accident first happened June 8. And the news that the plant won’t reopen until later this year, on June 14, sent US natural gas prices down more than 16 per cent in a day.

A sudden backlog of un-exportable gas could be described as a supply glut, but remember — the US is facing near-double-digit inflation, with a significant amount of that driven by energy prices. And midterm elections are later this year.

From the BLS’s latest CPI release, with our emphasis:

The index for natural gas rose 8.2 per cent in June, the largest monthly increase since October 2005 . . . The energy index rose 41.6 per cent over the past 12 months. The gasoline index increased 59.9 per cent over the span, the largest 12-month increase in that index since March 1980. The index for electricity rose 13.7 per cent, the largest 12-month increase since the period ending April 2006. The index for natural gas increased 38.4 per cent over the past 12 months, the largest such increase since the period ending October 2005.

We should point out that gasoline prices are more important than natural gas for inflation, and as you can see above, they climbed by the most in more than 40 years. Even so, the US has a larger share of Europe’s petroleum imports, so the economic effects of a slowdown in exports would, presumably, be larger.

A Cheniere spokesperson sent Alphaville a statement that said the company is “approaching this with the EPA in a factual and science-based way . . . [and is] confident that an acceptable path forward can be found on this issue.” 

Still, even if commodity traders aren’t interested in politics, Europe’s predicament with Russia and Nord Stream 1 shows that politics can easily become interested in them.