On Jan. 26, 2024, the Biden administration announced a temporary pause on pending decisions about the export of liquefied natural gas (LNG) to non-free trade agreement (FTA) countries until the Department of Energy (DOE) can update the underlying analysis for authorization, and review the impact of LNG exports on domestic energy costs, U.S. energy security, and the environment.

The pause impacts the 17 U.S. projects awaiting approval to export LNG to non-FTA countries (20 billion cubic feet per day [bcf/day]), projects that are currently approved but will require extensions (about 13.7 bcf/day), and potentially any Mexican and Canadian projects that source feedstock gas from the U.S. All LNG projects S&P Global Ratings rates are either operational or fully permitted. In this report, we discuss what this pause could mean for companies' expansion plans and the broader LNG industry.

Frequently Asked Questions

What is the permitting process for U.S. LNG export facilities?

The permitting process for U.S. LNG export facilities is complex and laborious. It entails many permits from various state and federal agencies and requires environmental studies, consultations with Native American tribes, and importantly, authorizations from the Federal Energy Regulatory Commission (FERC) and the DOE (see table 1). The FERC authorizes facility construction while the DOE authorizes export. The latter is the subject of the Biden administration's pause.

Table 1

What are the business implications of the pause?

The pause is meaningful because it slows the pace of development of new U.S. LNG facilities. The vast majority of LNG contracts are with non-FTA nations (such as Japan, China, EU member states, and the U.K.). Limiting the pool of potential buyers for LNG developers could obstruct future financing and have meaningful implications for market dynamics.

Further, it sharply contrasts with historically supportive practices. The DOE is required to grant export authority to non-FTA countries unless it finds the proposed exports will not be consistent with the public interest or if trade is prohibited by law or policy. As recently as 2020, it extended authorizations to 30 years (to 2050) from 20 years, indicating that the U.S. would economically benefit from a longer export period. We viewed this as a key competitive advantage for U.S. LNG projects as buyers are looking for long-term certainty in terms of supply. Notwithstanding the pause, we still expect U.S. export capacity to nearly double from current levels by 2028 even if no new projects are approved.

How much export capacity has the DOE approved to non-FTA countries?

To date, the DOE has approved the export of 42 billion cubic feet per day (bcf/day) or 309 million tons per year (MTPA) of LNG to non-FTA countries.

Chart 1 

There are currently seven large-scale operating LNG facilities with a combined DOE authorization totaling 14.29 bcf/day (106 MTPA). We note that export authorization exceeds baseload nameplate capacity used for underwriting most debt financings. Each of the currently operating facilities commenced exports within their original seven-year commencement period without extensions.

Table 2

Five additional large-scale U.S. projects with DOE authorization totaling 11.64 bcf/day (83 MTPA) are currently under construction, and we expect them to begin exporting LNG by 2027.

The DOE has authorized an additional 16.2 bcf/day (119.5 MTPA) to export to non-FTA countries, but these entities have not yet made final investment decisions (FID) or begun construction. As current permits require exports to begin within seven years of DOE approval, many of these projects could require extensions and could therefore be at risk.

Below, we list these projects along with the relevant deadlines for exporting LNG per the DOE seven-year rule. By the end of 2027, eight of the nine U.S. based projects' (pre-FID) authorizations will expire. Notably, of our rated entities, Freeport train 4 and Cameron train 4 are included in this list, and we expect they will likely require extensions on their export commencement deadlines.

In April 2023, the DOE reaffirmed its seven-year export commencement deadline and underscored the fact that each of the current operating LNG export facilities all began exports within the seven-year time frame. The DOE further announced it will no longer consider applications for extensions unless the facility is already under construction and can demonstrate extenuating circumstances outside of its control, therefore potentially limiting U.S. LNG export capacity further.

Table 3 

Another 20 bcf/day (50% of currently approved capacity and 1.4x currently operational U.S. export capacity) is awaiting approval and is explicitly affected by the announced pause. Table 4 lists these projects awaiting approval.

Table 4

How is U.S. supply/demand balance affected?

In 2023, the U.S. produced about 103 bcf/day of dry natural gas and exported 11.8 bcf/day (about 11.5% of production). Total exports will grow 85% to about 21 bcf/day (26 bcf/day fully authorized for export) once facilities already under construction come online (by 2028), and U.S. natural gas production is forecasted to increase to about 111 bcf/day by 2028. Therefore, we estimate LNG exports will nearly double to about 20% of U.S. dry gas production by 2028, even if no new facilities are approved or constructed.

One of the reasons cited for the pause is to examine the impact of each additional facility on domestic gas prices. As mentioned above, we estimate at least 12-14 bcf/day of the 16 bcf/day in approved pre-FID projects will require extensions to their permits. The DOE could decide to approve other projects instead of granting extensions or decide not to approve any additional projects beyond the 26 bcf/day currently operating and under construction.

With a reduction in demand from the LNG sector, investments in the gas sector will be thwarted with unintended consequences in the upstream and midstream sectors. This would lead to a supply glut in the U.S., depressing domestic gas prices and therefore power prices. Trapped gas would be materially credit negative for the independent power producers we rate and moderately negative for the existing LNG contracts indexed to Henry Hub prices. As an aside, secular low gas prices will also impact renewables because low gas generation will compete with renewable generation and it will take longer for co-located renewables with batteries to compete with gas-fired generation in several regions. In our view, absent major shifts in domestic production and consumption, some level of LNG exports is needed to balance supply and demand in the U.S.

In the medium to longer term, restricting the supply of LNG would likely increase global prices until they can be moderated by new supply from countries such as Qatar, Australia, and others. Thus, longer term this could be a positive to incumbent LNG producers as it effectively eliminates domestic competition and ensures negotiating and pricing power in future offtake negotiations.

With no additional DOE approvals, authorized U.S. export capacity would be capped at 26 bcf/day (total of facilities operating and under construction). If all projects currently pending export authorization and FID are approved, financed, and constructed, U.S. export capacity would nearly triple to more than 62 bcf/day. Furthermore, there are additional projects in various stages of development that have not yet applied for export authorization and are not included in this list.

Chart 2 

What does this pause mean for existing credit ratings?

For the LNG developers we cover, we view this pause as largely credit positive depending on the status of their current project pipeline. All LNG projects we currently rate are either operational or fully permitted. A pause on approvals and construction of additional LNG facilities would curtail any planned expansions for projects that have not yet secured their permits, but it would also eliminate increased domestic competition and cement incumbent producers' market power. Existing projects may benefit from greater bargaining power in negotiations of future offtake contracts because the existing export license is valid until 2050.

From a financial standpoint, credit metrics could somewhat improve, depending on capital allocation priorities. Potential deleveraging would be driven by much lower capital expenditure spending needs and higher revenues. Building LNG facilities requires substantial capital investment, with a significant debt component. Companies with operating projects could shift their discretionary cash flows in favor of share repurchases, dividends, or debt paydown, as they would no longer be financing those large projects.

On the revenue front, LNG developers are largely contracted under long-term agreements, which results in a high degree of visibility on future earnings. However, they could capture higher prices on their merchant cargoes if global LNG prices rise due to reduced supply. We saw this with Cheniere Energy Inc.’s EBITDA increasing to $11.6 billion and $8.8 billion in 2022 and 2023, respectively, from 2021 EBITDA of $4.9 billion and a run-rate level of $5.5 million-$6.0 billion. The company used excess cash to repay $6.6 billion in debt over these two years, and we upgraded the issuer credit rating by two notches to 'BBB' from 'BB+' in late 2022.

From a qualitative perspective, this limits any upside on our view of the business because growth would be capped at the existing projects that have already been approved. Many issuers we currently rate have expansion plans that could be in jeopardy if this pause is sustained. Some have already funded these expansion plans with equity, and that investment would be at peril. The additional 20 bcf/day currently awaiting DOE approval are largely new entities that we currently do not rate.

Rated issuers that have applied for approval and would be potentially impacted by the pause include Cheniere Corpus Christi Holdings LLC (applied for 0.47 bcf/day for midscale trains 8 and 9) and Venture Global LNG Inc. (applied for 3.96 bcf/day for Venture Global Calcasieu Pass Phase 2). Venture Global also applied for an additional 0.5 bcf/day in design increases. We note that other rated entities have announced expansion plans but not yet submitted applications to DOE for approval, so we exclude these from this list.

What do we expect for LNG pricing and future offtake contracts?

Given the temporary nature of the pause, whether there will be any price adjustment to global LNG cargoes in the long run is unclear at this stage. Spot prices, as expected, are unchanged from the announcement because this directive affects projects not coming online in the near term, given the lengthy construction period for these facilities. Even if the U.S. permanently stops any new LNG development, it is difficult to forecast the effect on long-term prices, given the global nature of the product's demand and supply.

For now, the global market is moderately tilted toward undersupply given the displacement of Russia's energy output (which has disturbed the global demand and supply balance for the commodity), the increasing use and role of natural gas as a bridge fuel, and the fact that existing LNG plants are operating at capacity, with marginal supply growth in the near term. These dynamics are attracting significant investment into the sector, which continues to be reflected in momentum around the development of new facilities worldwide, as well as the commercial success that developers have achieved in signing long-term (15-20 years) offtake agreements for these projects.

How LNG prices react to lost U.S. capacity over the long term depends on how much of that capacity is replaced (if replaced at all) by alternative suppliers, as well as where it is replaced. There are a number of new liquefaction facilities undergoing construction or in advanced stages of development globally (in addition to the U.S. facilities detailed above). These will add considerable capacity to the global supply in the second half of the decade. This wave of new supply additions are widely seen as an inflection point for the industry, where supply will converge to (or exceed) demand and moderate prices. If the lost capacity from affected U.S. projects is not replaced in a timely fashion, we believe it will be at least supportive for global pricing, if not positive. With Qatar's recent announcement that it will increase production of natural gas to 142 MTPA by 2030, the U.S. would likely remain the largest global producer with approximately 160 MTPA of nameplate LNG export capacity and 12 large scale facilities online by 2028.

Other suppliers with the potential to increase capacity include Qatar, Australia, Canada, and Mexico. Canada and Mexico's relative proximity to the U.S.' core export markets and their favorable geographic location for global buyers seeking to mitigate geopolitical risks are advantages relative to Qatar and Australia. Although Qatar and Australia are well-established players that have abundant resources and the cost base to compete with U.S. LNG, their distance to European markets is a limiting factor.

Mexico is an alternative, geographically, although the pause limits its potential because its LNG industry is reliant on low-cost natural gas feedstock from the U.S. Permian basin, and therefore its export to non-FTA countries, requires DOE approval. Energy infrastructure projects in Canada, on the other hand, have been difficult and expensive to build due to heightened environmental scrutiny and a lengthy regulatory approval process, which resulted in long development schedules and significantly increased costs. For example, we estimate LNG Canada's total cost at US$30 billion, or more than US$2,100/MTPA. This compares with US$900/MTPA to US$1100/MTPA of build cost for facilities in the U.S. Gulf Coast and around $1200/MTPA to $1400/MTPA for facilities in Australia.

Finally, while this will ensure U.S. energy security, Europe's energy shortage would be higher. That increases the draw on other fuels for oil burning. Apart from domestic energy security and environmental considerations, a permanent halt to new approvals could have implications for global allies and climate goals.