The U.S. Natural Gas Crash: Geopolitical Implications

While the dramatic drop in global oil prices since the COVID-19 outbreak has grabbed headlines, more geopolitically important developments may be occurring in natural gas markets. These developments could pose a threat to U.S. liquified natural gas (LNG) exports, which have benefited the United States and its allies by creating a supply cushion and lowering dependence on Russia and other single suppliers.

In 2017, the United States became a net natural gas exporter and has since exported significant quantities of LNG. These volumes have dramatically changed natural gas markets, enabling consumer states to diversity their gas supplies and improve their energy security – and thus their national security. For example, U.S. LNG exports, as well as exports from Azerbaijan, have enabled Turkey to dramatically reduce its dependence on Iran and Russia. (Turkey has not repaired the gas pipeline from Iran since it was damaged by an explosion in March, indicating Ankara is not eager to renew supplies from Iran.)

When overall demand for energy dropped in spring 2020 due to the COVID-19 lockdowns, natural gas emerged a winner. In absolute terms, demand for natural gas dropped for the first time in a decade. But natural gas’s relative share of overall energy consumption increased, with coal emerging as the big loser. In the U.S. market, for instance, the relative share of natural gas in U.S. electricity production is projected to rise this year to 41 percent, up from 37 percent in 2019. Its compatibility as a base fuel for renewable energy technologies, combined with its low pollution and climate impact, has made natural gas the fuel of choice in many markets. Prices are also at historical lows in many markets, adding to its attractiveness.

However, emerging natural gas market developments pose challenges to the LNG industry, especially in the United States. The drop in global oil prices has led to many shut-ins that close down U.S. oil production, which will likely cause U.S. natural gas prices to rise in the future. Indeed, much U.S.-produced gas is “associated gas” obtained as a by-product of oil production. These supplies are decreasing, while demand for gas is rising in the United States as lockdowns are eased and Americans return to work. Thus, an increase in the price of the natural gas used to produce U.S. LNG is emerging, which will cut the profit margins of a U.S. LNG industry already struggling to make a profit. In parallel, demand is down for LNG in other markets, causing prices for U.S. LNG exports to become unprofitable. This could lead to the collapse of some American LNG projects and production, or at least the cancellation of expansion of capacity, thereby eroding America’s important contribution to global energy security.

An additional development that could affect LNG markets and further depress prices is a new Qatari LNG production policy. Qatar, the world’s second-largest exporter of LNG, is considering emulating what Saudi Arabia recently did in the oil market: increasing LNG production despite depressed market conditions and prices. This could prompt an extreme crash in LNG prices and further damage the U.S. LNG industry. This requires immediate U.S. policy attention.

Another global trend affecting the long-term geopolitics of energy is the resurgence of demand for gas supplied by pipeline. Fear of disruptions, from both pandemics and trade wars that disrupt seaborne supplies, will likely drive some consumers to pipeline-supplied gas, which is currently seen as more reliable. The offshore Trans-Adriatic Pipeline section of the Southern Gas Corridor has been completed and is connecting to Italy. It is thus on schedule to deliver new natural gas supplies to Europe by year’s end. This is good news for energy security in Southern Europe.

American LNG may be down, but it is not necessarily out. The downturn in capital investments in energy projects is adversely affecting several gas production basins overseas. For example, in the eastern Mediterranean Sea, export options to expand Israel’s gas exports have dissipated, partly due to the closing of a major Egyptian LNG production plant that was a potential importer of Israeli gas. In parallel, multinational companies involved in drilling offshore of Cyprus have postponed their activity. Turkey, by contrast, plans to conduct offshore drilling soon. In short, the dynamics of Eastern Mediterranean gas have changed significantly.

While the media and U.S. government have focused mainly on oil during the COVID-19 crisis, they would be wise to pay attention to developments in natural gas markets, especially the geopolitical implications of the potential drop-off in U.S. LNG exports, which could have significant undesirable implications for the United States and its allies. In contrast, some of the developments in pipeline gas markets, such as cessation of Turkey’s imports from Iran and the completion of the offshore portion of the Southern Gas Corridor, significantly support U.S. geopolitical interests. Relevant U.S. government agencies should continue to monitor and support the continuation of these pipeline supply trends.

Brenda Shaffer is a senior advisor for energy at the Foundation for Defense of Democracies (FDD) and an adjunct professor at Georgetown University. She also contributes to FDD’s Center on Economic and Financial Power (CEFP). For more analysis from Brenda and CEFP, please subscribe HERE. Follow Brenda on Twitter @ProfBShaffer. Follow FDD on Twitter @FDD and @FDD_CEFP. FDD is a Washington, DC-based, nonpartisan research institute focusing on national security and foreign policy.