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Natural Gas Infrastructure: Bright Promise and Looming Threats

U.S. LNG exports remain the key driver of future growth in natural gas production and infrastructure development, with seven terminals in operation, four under construction, and twelve more fully permitted and awaiting financing. LNG exports have grown from nothing five years ago to nearly 13 billion cubic feet per day (bcf/d) today, adding about 15% to total U.S. demand.

Three terminals are under construction on the Gulf Coast, along with one in Mexico that will draw U.S. natural gas.They will add another 9 bcf/d, to be put in operation between 2024 and 2026. For the next two years, exports will not grow further and will drive little additional upstream production beyond today's levels. But between 2024 and 2026, U.S. production will need to grow 9% above today's rates just to supply these new terminals.

After 2026, that number is likely to grow significantly. Six more terminal developers have announced they expect to reach final investment decisions this year or next, for a total of another 10+ bcf/d to be brought online beginning in 2026. If all these projects are built as planned, between 2024 and 2027 there will be nearly 20 bcf/d of new export-driven demand for natural gas - a 20% increase over today's production.

The current industry average for investment needed to build and bring 1 bcf/d of export capacity on stream is $4.5 billion. Adding 20 bcf/d means over $90 billion of investment, much of which will be for engineering, construction, equipment and materials.

Beyond the construction investments for export capacity, this much additional natural gas production - potentially 20+% beyond current levels - also promises tremendous new investment potential in upstream production complexes, gathering systems, and processing and storage facilities.

Although it's not certain how much additional production growth potential exists in Gulf Coast shale plays, it is likely that significant new volumes will also need to come from our biggest producing area - the Appalachian Basin - which now accounts for over 40% of U.S. shale gas production.

That is a bright outlook for natural gas infrastructure. But what are the risks to this scenario?

First, there is the European demand outlook, in context with what it takes for an LNG terminal developer to secure long-term financing for what is typically a $5 to $15 billion project, before it can be committed to construction. With rare exception, lenders have required firm long-term purchase agreements to be in place - typically for 20 years - from a terminal's prospective customers, whether they be energy companies, LNG traders or sovereign states.

Europe however, despite its current drive to replace Russian supplies of roughly 35 bcf/d, claims it is maintaining its commitment to eliminate fossil fuels over the next 10 years. This adds risk for traders and energy companies, which, to secure a firm supply source, must bet that Europe will either abandon or fail to achieve that goal, or that unknown customers in Asia will take up any slack from lower or no European demand after 10 years has passed. Therefore, long-term purchase agreements have been hard to come by, and so has financing, which is why many final investment decisions on our side have been delayed.

There is also a significant timing risk. While American developers are vying for supply contracts from European and Asian customers, so are developers in Canada, Australia, Qatar, and Africa. If American projects are delayed, foreign competitors may beat us to market. And if U.S. natural gas prices stay high relative to other countries, we may lose some of our competitive advantage.

Another uncertainty is on the supply side. If production capacity from the Gulf Coast shale plays is maxed out after another 10-15 bcf/d of production is added, more new gas will have to come from the Appalachian Basin. That is a problem because all pipelines out of that basin are running near full capacity. New ones will need to be built to supply the LNG market or to replace gas from elsewhere being diverted to LNG terminals.

However, as we have seen over the last couple years, opponents of pipelines in the Northeast have stopped several major new projects, mainly by challenging permits in court. Add new permitting hurdles, such as a likely new FERC permitting regime regarding greenhouse gas impacts and mitigation, along with tougher Clean Water Act permitting requirements, SEC carbon footprint scoring, Endangered Species Act challenges, National Forest crossing hurdles, and so on seemingly endlessly. These factors add risk into the equation making operators reluctant to propose new pipeline projects leading out of the Northeast.

Another growing risk, and one we are increasingly concerned about, is the possibility that fossil fuel opponents will prevail upon the current Administration to limit or ban gas and/or oil exports on the premise that the recent run-up in prices amounts to a national emergency, which could confer authority for an administrative ban without action by Congress.

This ignores the fact that a primary cause of the rapid rise in natural gas prices is that midstream capacity is maxed out while demand continues to rise - and not from LNG exports, which as noted earlier are capped for now at current levels.

On the bright side, we are optimistic that political pressure in favor of increasing natural gas production and infrastructure will grow, potentially from such factors as energy cost inflation and/or the threat of electric supply disruptions. For example, the New England grid relies on natural gas for 60% - 70% of its electricity generation, at the same time new pipelines from the Marcellus have been blocked. With growth in electricity demand, the status quo may be unsustainable over a hot summer or a cold winter.

Much of the uncertainty around the energy infrastructure investment environment hinges on the political context of the day. There will be many opportunities over the next two years for campaigns to make the case to voters about why their energy costs have soared and why their energy security is threatened. How this plays out in terms of control of Congress and the White House, as well as at the state level, will have much to do with the future direction of our industry, as it did with tremendous impacts when control changed in 2020.

That is a clear mandate for energy infrastructure industry stakeholders to stay fully engaged in politics, because as we saw in 2020 elections have consequences, especially for the outlook for natural gas infrastructure.

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