The Trump Trio: three impacts on Australia’s LNG sector

The media doesn’t take Trump that seriously but does take him literally, whereas his followers take him very seriously but rarely that literally. This begs the question: which of the new Trump administration’s energy-related statements should Australia’s LNG sector take seriously, which ones literally, how will the global LNG sector likely evolve, and what are the impacts on Australia?
Trump and climate change: a hotbed of skepticism

In his Twitter feed, the President-elect has stated that climate change is a hoax perpetrated by the Chinese. Despite China’s assertion that the original climate change agenda was in fact launched by the first Bush administration (a Republican!), Trump has started to roll back many of the policy choices of the past eight years that are aimed at climate remediation, and to dismantle or overhaul the Environmental Protection Agency (EPA).

Targets include EPA rules related to methane emissions and CO2 regulation, US commitments to the Paris Climate Accord, the Clean Power Plan which requires coal power plants to reduce emissions, anti coal mining rules, standards for automotive fuel consumption, and so forth.

With a Republican controlled House, Senate and Presidency, the environmental lobby (whose head offices are largely located in liberal-leaning locations like San Francisco and Washington) is going to get a rough ride in Washington. This will help accelerate infrastructure approvals which will give lift to the US midstream sector and continued development of US shale resources.

As a climate change skeptic, we should anticipate favourable treatment of fossil fuels, and therefore gas and LNG.

Trump and energy development: fueling employment

A hallmark of the new administration is its unrelenting focus on improving domestic employment opportunities. Energy development isn’t that job intense, except, ironically, renewable energy (roof-top solar), but anything that can unlock employment fits the Republican narrative. So far, the new administration favours resource development, including oil, gas and mining.

In speeches, the President-elect has voiced deep opposition to continued US reliance on imported energy products from nations hostile to the US or who are benefiting from US military support without commensurate compensation, which suggests support for domestic energy resources.

While the US government does not directly control energy imports, it can set trade policies that can make sourcing from some nations more difficult (sanctions) although it would be very challenging to ban some imports entirely because of how the market is structured.

US coal mining will see its regulatory burden reduced (which translates into some cost relief) which will help coal producers recover from recent price pressures. Increased coal production could translate into more coal-fired power generation in the domestic market which may put some pressure on domestic gas markets, or perhaps expanding coal exports. More likely, coal-fired power plants will continue to convert to gas power generation or renewables for economic reasons (gas is cheap and plentiful), or from ongoing pressure from shareholders and capital markets.

The new administration also maintained throughout the campaign that it favours less regulation over energy markets. Subsidies on renewables interfere with markets and distort investments. They could be removed and the market would then determine whether renewables are truly cost competitive without pricing support (a good question). The stock market certainly thinks that deregulation of coal is coming. Stock prices for benchmark US coal producers moved sharply higher as a result of the election. Restrictions on land access for oil and gas exploration (particularly on US federal lands) are likely to be lifted which may open up new oil and gas sources.

Although US oil and gas companies have become more efficient because of low energy prices, it’s not clear that new energy development projects will be economic considering today’s commodity prices. Brown field developments and infill projects will likely be favoured.

Trump and energy-related trade: improvements start now

On energy trade, the new administration’s campaign position has been very pro energy development, and by extension, pro energy trade. Trump wants better trading terms, reflecting his world view that the nation is saddled with too many poor trade deals. The new administration has signaled that it would repeal or renegotiate NAFTA, and approve the Keystone Pipeline project with different commercial considerations. Republican control of FERC (who recently blocked an LNG application), could result in more US LNG projects getting to market.

This past week, the new administration clarified that US LNG exporters could negotiate directly with Chinese LNG buyers, an important vote of confidence in the development of the LNG market.

Overall, domestic energy development and trade in energy projects are good for jobs and the economy, and reduce US dependence on foreign suppliers. They help sustain the Republican narrative that the US can step back from its financially draining role in funding wars that ostensibly are about energy market security it no longer needs.

Trump’s timing: an evolving terrain

There are some four thousand Republican appointees in a dozen key agencies that will be instrumental in effecting the Trump agenda. These include leaders at the Department of State (for cross border energy trade), Bureau of Land Management (for land access, particularly federal lands currently off limits for exploration and production), Department of the Interior (for resource development), the EPA (for regulations of emissions, water use, ozone), FERC (for infrastructure approvals), the Department of Energy (for investment planning) and the Supreme Court (for adjudicating in a conservative fashion).

The new administration is well behind in the normal pace of appointments, with only 58 filled roles (compared to 190 by the Obama administration in the same time period). It is through these many appointed positions, and the dozens of small unreported and routine decisions they execute, that the Republican agenda will be carried out. Meanwhile, the outgoing administration may be unwilling to make routine decisions. This will slow down approvals, permitting and hearings, at least for the next few months.

Outlook for LNG: three fundamental impacts you need to know

What does all this mean for Australia’s LNG producers?

  1. A pressure cooker:
    The pace of approvals of new and existing US LNG export plants will be delayed. FERC commissioners are administration appointees and there are too few at the moment to adjudicate on applications, leading to an administrative backlog. This may pressure LNG buyers into off-take contracts with existing producers, particularly for those with contacts close to expiry. Australia’s LNG producers may therefore have a short term negotiating window to lock up new contracts.
  1. A battle to be front and centre on the LNG stage:
    The playing field is tilting in favour of more US-based LNG export. The new administration is pro trade and pro resource development, mainly because of the jobs impacts. Gas producers, pipeline operators and LNG export plants will want to see open LNG market access and will press the administration on this point. The administration, so far, is responding warmly. The new administration could put in place federal fiscal policies that promote development (tax rules).

    US LNG projects already have a significant capital efficiency advantage as well as feedstock cost advantage. Australia may struggle to secure its place in the next round of LNG project development.

  1. Ready, set, negotiate:
    Markets should expect the flow of LNG from the US to increase, pressuring European markets primarily. More US gas means more contracts are likely to reflect a hybrid pricing structure of US continental gas coupled with traditional oil indexed pricing. Australian traders should be ready to negotiate on this basis.

What’s next? Well, as they say, the only constant is change.

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