Segrist: The LNG Pause and a Big, Dumb Question

Well short of a year into the business of covering the energy industry, I don’t kid myself about having raised my knowledge of the ins and outs of the gas and pipeline world to anywhere near sufficient levels.

The business is deep, complicated and enormous. There are days when, after learning about the existence of a major industrial sector I previously knew nothing about, I feel like I’ve somehow managed to go backwards.

On the other hand, one of my journalism professors at the University of North Texas said that you have a couple of advantages when you start out: freedom to ask anything and take risks that more experienced reporters would avoid. He did not add that this was because no one expects you to know anything, but I filled in that blank.

Even though I heard it decades and two or three careers ago, the lesson about asking the big, dumb question came to me when I was thinking about the White House’s LNG pause and about the further implications.

Mainly: Does the LNG pause also target the Permian crude business?

Quick answer: No, it does not.

More on that in a bit, but here’s how the question popped up in my head.

In January, the White House announced that the Department of Energy would pause awarding permits to new LNG export facilities seeking to sell to countries without a free-trade agreement with the U.S. Since all LNG terminals do business with countries without a trade agreement, the pause essentially delays the completion of any new U.S. LNG projects.

The government said it needed time to study the community effects caused by a facility that contributes to greenhouse-gas emissions, and that the pause would not have a large impact on LNG export capacity before it ends.

The energy industry says the move will cause more pollution as potential customers turn to coal or other, not-as-environmentally-conscious producers in place of LNG. Energy advocates said the pause sent a signal that the LNG industry was facing more political scrutiny, and the ultimate effect would be to chill further development overall.

Publicly, the move came off as straightforward political sop to the environmentalists President Joe Biden needs to win re-election, as noted in most of the stories that announced the decision.

“This pause on new LNG approvals sees the climate crisis for what it is: the existential threat of our time,” Biden said about the decision. The White House posted a press release touting the decision, with quotes from young environmental leaders and TikTok influencers above the statements of senators and senior administration officials.

Whereas I am sure that “Hulk” actor Mark Ruffalo (“THIS IS A BIG DEAL! @POTUS…”) is sincere in his support of the decision, I suspected the groundswell of support was not entirely organic.

The White House rolled out the decision in the public, yet opaque, way that causes a lot of people to resent modern journalism. “Unnamed sources with knowledge” discussing the policy change first appeared in multiple stories in Politico, Bloomberg and the New York Times starting in early January.

The publications all released stories early on Jan. 27, the day the White House formally declared the policy.

It was the largest policy announcement for the administration since the Environmental Protection Agency had released new guidelines on methane emissions in December 2023 during climate talks in Dubai. 

As both of these policies came right one after the other, I thought they might be connected.

Seeking connection

The new methane regulations seek to curb emissions through the reduction of flaring and monitoring of facilities related to the production of oil and gas. The policy continues to be developed and adopted by some other federal agencies. On March 27, the White House released finalized rules for methane emissions on public lands overseen by the Department of the Interior.

Federal lands account for almost 10% of oil and gas production, primarily in western states, such as New Mexico.

Both the LNG pause and methane regulations will have a major effect in the Permian Basin. The Permian produces more crude than any other region in the U.S., and thanks to the chemical makeup of the play, the basin also produces a lot of associated natural gas.

About one-fifth of U.S. natural gas was produced in the Permian in 2023, according to the Energy Information Administration. In 2023, gross natural gas production averaged 23.3 Bcf/d.

Takeaway capacity in the region is extremely tight—so tight that spot natural gas prices at the Waha Hub went into negative territory over a period of two weeks in early March. Prices had fallen while Kinder Morgan performed maintenance on one of the region’s primary egress lines, the El Paso Natural Gas pipeline.

Producers in the region, and throughout the U.S., are waiting for more LNG export plants to come online to vacuum up the country’s oversupply of natural gas. The EIA has been recording new storage records since December.

The thought hit me after the Waha Hub news broke: Could methane regulations and a stifling of LNG export growth cause such an oversupply of natural gas that crude producers would curb operations?

According to the analysts I asked, the answer is no, and the situation is a more complicated. First, extra natural gas takeaway for the Permian is expected soon. The Matterhorn Express Pipeline is slated to come online sometime in 2024.

“As Matterhorn comes online there will be a window of excess gas capacity through 2027, preventing the Permian from having a need for excess flaring,” said Alex Gafford, an analyst with East Daley Analytics.

East Daley also believes Permian natural gas production growth will slow from 2023 to 2024, thanks to the industry consolidation in the area. Public producers, with a larger market share, will probably have more conservative drilling operations.

Hinds Howard, a portfolio manager for CBRE, said he could see natural gas restrictions curbing production in the Permian, but not in the immediate future.

“There is a chance someday that associated gas production levels could be so high that, if there were restrictions on flaring, it could restrict production in the Permian Basin,” Howard said. “But I don’t believe the LNG export pause will be the catalyst that leads to that outcome.”

I learned one lesson from asking the dumb question. The LNG pause is most likely about election year and LNG market politics. I was reminded that complicated problems can lead to creative solutions.

“If there is abundant free natural gas in West Texas for a prolonged period of time, some enterprising business people will figure out a way to use it before it becomes so abundant as to restrict oil production,” Howard said.