Beyond Partisanship: The Even-Handed Look at Biden’s LNG Permit Pause

Friday morning, following widespread rumbling it was coming, President Joe Biden decided to pause the permitting review process for liquefied natural gas (LNG) export terminals, citing climate change in his order. This topic is highly likely to stoke partisan angst and strong feelings on the environment as well as energy prices and supply. So here we pause to point out: As always, we are politically neutral. We prefer no politician nor any party, and we look past sociological issues to focus on the potential economic impact—as stocks do. So whatever your biases are, please set them aside and let us dive into this development. In our view, the decision to pause permitting likely has little to no near-term impact on energy supply, the economy or stocks. But it does raise some longer-term questions.

With reactions on both sides of the political aisle charged, it is important to first clarify what this change does and doesn’t do. So here is a series of bullet points to make it extra, super, crystal clear. This order:

• Does not prevent LNG exports.
• Does not cease construction of export facilities.
• Does not even prevent facilities under development from exporting gas if they have a permit already.

Rather, the order pauses the review process for all requested permits while regulators develop new criteria to account for a project’s estimated climate costs, however those are defined. The Biden Administration plans to follow the normal rulemaking process—writing regulations, submitting them for public comment, tweaking as needed and then finalizing. At that point, the permitting process would resume under the new system, which would presumably require businesses to submit more information to clear some additional hurdles. That is the plan, at any rate. November’s election throws it into doubt, as the rulemaking process probably won’t be done by then. A change in government, should it happen, could shift things or restore the status quo.

So in the near term, we don’t think this alters global natural gas supply. US LNG exports, which just had a banner 2023, will likely keep growing as more approved-but-incomplete facilities come online. According to the US Energy Information Administration, there are 5 LNG export terminals with nearly 10 billion cubic feet per day in export capacity under construction.^[i] Pipelines to get gas to them are also in progress. Hence, we think the chatter in Europe about this allegedly hamstringing global supply misses the mark.

To us, this looks like the Biden administration’s temporary pause on oil drilling leases in federal lands, which it implemented shortly after the inauguration. This incited much fanfare and ire, depending on who was doing the reacting, but it had little practical impact. Energy firms had stockpiled permits before the vote. Those permits take time to run into real production anyway. US oil production rose. Furthermore, the pause didn’t last, and the administration awarded permits galore for existing leases—issuance in Biden’s first two years exceeded totals during the Trump administration’s first half.^[ii] So, now, US oil production is at record highs and projected to keep rising. It isn’t hard to see this going the same way, with business continuing as usual once everyone ticks the boxes. That oil permit move was political theater, a way to seemingly “pay back” supporters who pressed the administration on the environment. This one looks similar, with the order even citing partisan statements in the text.

But for argument’s sake, let us imagine that this drags out indefinitely and no additional terminals get greenlit for a few years. We aren’t saying this is likely, but it is worth exploring. What then? We have seen some folks warn it limits global natural gas supply, a risk. We have also seen some argue it would reduce prices for Americans by keeping more domestic gas here. We don’t think either stance is right. Commodity markets are global, with prices stemming from the totality of global supply and demand. Limiting growth in US export capacity would alter how supply moves around the world, but it probably wouldn’t change total supply (see: the last two years). Perhaps other producers would see an opportunity and ramp up their own export infrastructure.

Exhibit 1 demonstrates this, showing US and European natural gas prices before and after the US commenced LNG exports from the lower 48 states in late April 2016. You will see a couple things. One, they track each other quite closely, illustrating their ties to global trends. Two, US prices didn’t differ much before and after exports started. European prices swung more sharply the past two years due to acute shortage fears, but that disconnect is fading.

Exhibit 1: Natural Gas Prices’ History

Source: FactSet, as of 1/26/2024. Dutch TTF and Henry Hub natural gas prices, 12/31/2013 – 1/25/2024.

To understand why US prices didn’t soar once exports began, it is worth remembering why there was such a clamor to sell LNG overseas in the first place. Simply, we had a ginormous surplus. In the shale boom, natural gas was a byproduct of booming oil production. There was far more gas than the country could consume or store, and producers were flaring it off as a result—a colossal waste. Enabling exports got this surplus where the demand was, making the global marketplace more efficient. In the unlikely scenario that the US couldn’t raise export capacity in the long run, any surplus would probably meet the same wasteful fate. Which reminds us, all this gas is going to get burned one way or the other, likely making the environmental impact symbolic.

So from a pure natural gas supply and price standpoint, we don’t think there is much to see here. However, we do see some risk that moves like this, done more often, raise uncertainty. Put yourself in a business owner’s shoes. You have drawn up plans for a new LNG export terminal. You have bought land and paid people to conduct environmental reviews and complete applications, and you have calculated that the long-term return will be worth the up-front hassle. Does changing the regulatory rules midstream risk changing this math? Does it make businesses in other industries take note, concerned that the sand could soon shift beneath their feet? And to what extent does this uncertainty discourage risk-taking and investment in the long run? Lastly, does this raise the likelihood potential European customers look elsewhere, like Canada or Brazil or wherever else in the future?

The answers are unknowable, and these things tend to be more part of the structural backdrop than cyclical market and economic drivers. So we don’t think this puts the bull market at risk—far from it. But it is a reminder that political risk isn’t confined to Congress and legislation, especially with regulatory agencies taking ever-more power, a phenomenon we call government creep. Looking out for policies that risk creating uncertainty—and winners and losers—at all levels of government is key when weighing portfolio risks.