The U.S. LNG Pause: Implications for the Global Fertiliser and Food Markets
Peter Fawley
The U.S. LNG Pause
On January 26, the Biden administration announced a temporary pause on approvals of new liquified natural gas (LNG) export projects. The pause applies to proposed or future projects that have not yet received authorisation from the United States (U.S.) Department of Energy (DOE) to export LNG to countries that do not have a free trade agreement (FTA) with the United States. This is significant as many of the largest importers of U.S. LNG–including members of the European Union, the United Kingdom, Japan, and China–do not have FTAs with the United States. Without the DOE authorisation, an LNG project will not be allowed to export to these countries. The policy will not affect existing export projects or those currently under construction. The Department of Energy has not offered any indication for how long the pause will be in effect.
This pause will have political and economic implications across the globe, and is expected to apply further pressure to the LNG market, fertiliser prices, and agricultural production. The following analysis will first delve into the rationale for the pause, the expected impact it will have on global LNG supplies, and the associated risks this poses for the fertiliser and food markets. It will then examine the impact of this policy change on India’s agricultural sector, given that the country is heavily reliant on LNG imports to manufacture fertilisers for agricultural production. The article will conclude with brief remarks about the pause.
Reasons for the Pause
According to the Biden administration, the current review framework is outdated and does not properly account for the contemporary LNG market. The White House’s announcement cited issues related to the consideration of energy costs and environmental impacts. The pause will allow DOE to update the underlying analysis and review process for LNG export authorisations to ensure that they more adequately account for current considerations and are aligned with the public interest.
There are also likely political motivations at play, given the upcoming election in the United States. Both climate considerations and domestic energy prices are expected to garner significant attention during the lead up to the 2024 U.S. presidential election. The Biden administration has been under increasing pressure from environmental activists, the political left, and domestic industry regarding the U.S. LNG industry’s impact on climate goals and domestic energy prices. In fact, over 60 U.S policymakers recently sent a letter to DOE urging its leadership to reexamine how it factors in public interests when authorising new licences for LNG export projects.
These groups have argued that the stark increase in recent U.S. LNG exports is incompatible with U.S. climate commitments and policy objectives, as the LNG value chain has a sizeable emissions footprint. Moreover, there is a concern about the standard it sets for future policy. An implicit and uncontested acceptance of LNG could signal that the U.S is wholly committed to continued use of fossil fuels as an energy source, leading to more industry investments in fossil fuels at the expense of renewable energy technologies. In an unusual political alliance, large U.S. industrial manufacturers are lobbying alongside environmentalists to curb LNG exports. These consumers, who are dependent on natural gas for their manufacturing processes, worry that additional LNG export projects will raise domestic natural gas prices. Therefore, the pause may then be interpreted as an acknowledgement of these concerns and an attempt to reassure supporters that the Biden administration is committed to furthering its climate goals and securing lower domestic energy prices.
Impact on LNG Supplies
Since the pause only pertains to prospective projects, there will be no impact on current U.S. LNG export capacity. However, the pause may constrain supply and reduce forecasted global output as the new policy indefinitely halts progress on proposed LNG projects that are currently awaiting DOE authorisation. In the long-term, this announcement has the potential to tighten the LNG market, potentially resulting in increased natural gas prices and other commercial ramifications. Because the U.S. is currently the world’s largest LNG exporter, a drop in expected future U.S. supplies may force LNG importers to seek to diversify their supply. Some LNG buyers will likely redirect their attention to other, more certain sources of LNG, such as Qatar or Australia. Additionally, industry may be more keen to invest in projects in countries that have less regulatory ambiguity related to LNG projects.
Risk for the Global Fertiliser and Food Markets
Natural gas is key to the production of nitrogen-based fertilisers, which are the most common fertilisers on the market. With regard to the use of natural gas in fertiliser production, most of it (approximately 80 per cent) is employed as a raw material feedstock, while the remaining amount is used to power the synthesis process. Farmers and industry prefer natural gas as a feedstock as it enables the efficient production of effective fertilisers at the least cost.
The U.S. pause on new LNG projects is an unsettling signal to already fragile natural gas markets given the existence of relatively tight current supplies and a forecasted shortfall in future supply levels. This announcement will exacerbate vulnerabilities and put increased pressure on global supplies, potentially leading to greater volatility and price escalation. Additionally, increased global demand for natural gas will further strain the LNG market. Therefore, global fertiliser prices may increase given that natural gas is an integral input in fertiliser production. Natural gas supply uncertainty stemming from the U.S. announcement may not only impact market prices for fertiliser, but could also increase government subsidies needed to support the agricultural industry to protect farmers from price volatility. Due to the increased subsidy outlay, government expenditure on other publicly-funded programs could plausibly be reduced.
The last time there was a significant shock to the natural gas market, fertiliser shortages and greater food insecurity ensued. Following the 2022 Russian invasion of Ukraine, there was a stark increase in natural gas prices, which led to a rise in the cost of fertiliser production. This prompted many firms to curtail output, causing fertiliser prices to soar to multi-year highs. Higher fertiliser costs will theoretically induce farmers to switch from nitrogen-dependent crops (e.g., corn and wheat) to less fertiliser-intensive crops or decrease their overall usage of fertilisers, both of which may jeopardise overall agricultural yield. Given that fertiliser usage and agricultural output are positively correlated, surging fertiliser costs in 2022 translated into higher food prices across the world. While inflationary pressures have subsided in recent time, global food markets remain vulnerable to fertiliser prices and associated supply shocks. This is especially true for countries that are largely dependent on their agricultural industry for both economic output and domestic consumption. Food insecurity and global food supplies may also be further constrained by unrelated impacts on crop yields, such as extreme weather and droughts.
Case Study: India
The future LNG supply shortfall and its impact on fertiliser and food markets may be felt most acutely by India. The country is considered an agrarian economy, as many of its citizens – particularly the rural populations – depend on domestic agricultural production for income and food supplies. Fertiliser use is rampant in India and the country’s agricultural industry relies heavily on nitrogen-based fertilisers for agricultural production. With a steadily rising population and a finite amount of arable land, expanded fertiliser usage will be necessary to increase crop production per acre. As a majority of India’s fertiliser is synthesised from imported LNG, the expected increased demand for fertiliser will necessitate more LNG imports.
LNG imports to India are projected to significantly rise in 2024, with analysts forecasting a year-on-year growth of approximately 10 per cent. Over the long-term, the U.S. Energy Information Administration predicts that overall natural gas imports to India will grow from 3.6 billion cubic feet per day (Bcf/d) in 2022 to 13.7 Bcf/d in 2050, a 4.9 per cent average annual increase. The agricultural industry is a substantial contributor to this growth. This trend is only expected to continue, as India has announced that it plans to phase out urea (a nitrogenous fertiliser) imports by 2025 in order to further develop its domestic fertiliser industry. To ensure adequate supplies for domestic urea production, India is expected to increase its natural gas demand and associated reliance on LNG imports. A recent agreement between Deepak Fertilisers, a large Indian fertiliser firm, and multinational energy company Equinor exemplifies this. The agreement secures supplies of LNG (0.65 million tons annually) for 15 years, starting in 2026.
Concluding Remarks
The U.S. pause on new LNG export facilities will have ramifications for the global natural gas market and supply chain. While current export capacity will not be jeopardised, the policy change will delay future projects and may put investment plans into question. The pause will also have implications for downstream markets in which natural gas is an important input, such as the fertiliser market. There are a couple of questions that now loom over the LNG industry: (1) what will be the duration of the pause; and (2) to what extent will the pause affect LNG markets?
While the U.S. Department of Energy has given no firm timeline for the pause, analysts estimate – based on previous updates – that the DOE review will likely last through at least the end of 2024. The expectation is that the longer the pause remains in effect, the more uncertainty it will create, especially as it relates to private industry investment decisions and confidence in U.S. LNG in the long-term. In addition to the fertiliser and food markets, transportation, electricity generation, chemical, ceramic, textile, and metallurgical industries may all be affected by the pause. One potentially positive consequence is that because LNG is often thought of as a transitional fuel (between coal and renewable energies), a large enough impact on LNG supplies could accelerate the energy transition directly from coal to renewable sources of energy, providing a boost to the clean energy technologies market. However, the pause may also create tensions with trading partners as it could be interpreted as an export control or a discriminatory trade practice, both of which stand in violation of the principles of the multilateral rules-based trading system. This may expose the U.S. to potential challenges and disputes at the World Trade Organization. Although it may be some time before we are provided concrete answers to these questions, the results of the 2024 U.S. presidential election will provide some insight into what LNG policies in the U.S. will look like going forward.