The Essential Podcast, Episode 112: The United States LNG Impact with Madeline Jowdy and Mohsen Bonakdarpour

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Transcript Provided by Kensho


Transcript Provided by Kensho

Nathan Hunt

This is The Essential Podcast from S&P Global. My name is Nathan Hunt. Energy markets always seem to become political, but energy is not inherently political. It's just a global market like any. There is supply and there is demand. Certain customers prefer to buy from certain suppliers, but energy has become, if anything, more political over the past few years. There's a variety of reasons for that, including Russia's invasion of Ukraine and concerns over carbon emissions.

When energy is politicized, it can create a kind of policy whiplash, which is difficult for the market to bear. We've seen an example of that in the contrasting energy policies of the outgoing Biden administration and the incoming Trump administration. The Biden administration has attempted to institute policies that reduced fossil fuel usage. The Trump administration wishes to promote the use of fossil fuels, but again energy is just a global market like any other. There are facts that govern it, and those facts exist outside of political rhetoric.

A group of researchers at S&P Global has been looking at one aspect of energy markets, the market for U.S. liquefied natural gas to understand its economic and practical implication. I'm joined today by Madeline Jowdy of S&P Global Commodity Insights and by Mohsen Bonakdarpour of S&P Global Market Intelligence, to discuss their work on the U.S. LNG market and I hope our audience will forgive us for focusing on the practical versus the political today.

Mohsen and Madeline, I'd like to start by asking you to comment on the things I talked about in that introduction. I am wondering if you agree that energy markets are like any other global markets, and they are in a sense beyond politics.

Madeline Jowdy

Well, Nathan, I can start just having been in the energy market for pretty much my whole life. I grew up in Saudi Arabia and was involved in the oil politics around that, and I'm now in the natural gas space. I would say it's very hard to separate energy from the political because it is a fundamental need of humanity really to function. And it doesn't matter what energy you're talking about, if you're talking about burning wood or dung or burning oil or gas or building a nuclear plant or installing a wind farm, the 2 are just inseparable.

I think that what you may be getting at is looking at just energy as a business and energy just in terms of an impact on the economy. And that's what we have attempted to do in this most recent study.

Nathan Hunt

Mohsen, I'll turn to you. Would you agree or disagree with the suggestions I made?

Mohsen Bonakdarpour

Yes, definitely. But on the economic side, we should bear in mind that energy is a huge, actually, share of the global economy. And of course, it differs very much across country-by-country, depending on the natural resource availability of oil and gas and other mineral availabilities. But for sure, in the U.S., it has been escalating more and more on oil and natural gas, on renewable energy and expected decrease in coal activity for sure.

Energy as the source of one of the inputs to production functions, I should say, it's used in every segment of the economy, every sectoral analytics that you look at, energy becomes an important factor of production. Energy becomes an important input to households. Therefore, it's so spread apart in the global economy and country economic systems that it's inseparable. So on the economic side, it carries quite a bit of the weight.

Nathan Hunt

Today, we're going to be talking about the U.S. LNG Impact Study that both of you worked on and a much larger group of researchers at S&P Global worked on as well. I'd love to understand how did this study come about? What led you to take on this work?

Madeline Jowdy

I think we both have our own stories in how we came into it. For me and my team at commodities markets insight of S&P Global, we came at it from more a U.S. gas price and then a global impact point of view. And for those of you who don't know, you mentioned the differences between the Biden and the Trump administrations. U.S. LNG exports have always been a little bit contentious, both on the domestic side just for the concern about the impact on prices.

And then on the global side, it really started with Europe concern about the emissions of U.S. LNG related to the fact that most of our gas is, in fact, fracked. And so there is a higher -- certainly a higher GHG emissions footprint than if you're just putting a straw in the ground as you can -- or in the water as you can in a place like Qatar. But at the beginning of last year, actually almost a year ago, the U.S. Department of Energy put a moratorium on U.S. LNG exports.

And the reason behind that was to just sort of -- and I think it was understandable. I think it was fair. A study hadn't really been done in many years, and the U.S. has grown as a massive LNG exporter. And so I think the idea behind it was like, let's just pause, let's just look at what this is doing just -- I think probably the main premise was the emissions impact just based on some of the contract negotiations that had happened with some of our European partners. But that moratorium -- a study was done as a result of that moratorium.

And as the months went by, the study was not coming out. And so I think there was just concern on the part of the industry, just concern on the part of project backers and just sort of also a curiosity, like what is the impact? What is the emissions impact? And so we decided to take our own look at both the economic impact, the impact on domestic gases -- on domestic gas prices, excuse me, and then the global impact of U.S. LNG exports.

Nathan Hunt

So let's take a bit of a step back on U.S. LNG exports because the U.S. has not always been an LNG exporter. How did it come about that the U.S. transformed from a country that was looking to import LNG to one that was exporting.

Madeline Jowdy

Nathan, it's an incredible story. It really is. I mean, I -- again, I've been looking at this industry for about 20 years, the LNG industry. And when I started, I was looking at the construction and development of massive scale import terminals. This is in the beginning of the 2000s. There's been a never-ending cycle in the U.S., I mean, pretty much since the '30s of natural gas importing and exporting. But in this sort of most recent iteration, what really changed the balance was the -- what we call -- what we fondly and maybe not so fondly call the shale gas revolution.

So when the drilling -- the horizontal drilling and fracking techniques were merged, it really unleashed an abundance of U.S. LNG supply. And so there was maybe -- there was like a brief -- I think there was a very brief period of time. It may even been like 3 weeks where we were like, great, we don't need to import anymore. And then it was like, well, actually, we have so much gas, we can export it.

And the other sort of component to this that made the U.S. LNG unique was the fact that you did have this infrastructure and all of these facilities were permitted. So you had the maritimes, you had the export berths and you had the storage. And of course, the terminals were designed to import. So what you needed to do was add the liquefaction. Now that's where Mohsen comes in and the economic impact because it's quite substantial. Building a liquefaction plant is a very different animal. It's very expensive.

But the fact that the import structures were in place really facilitated the growth and development of this industry as an export industry because you had all of these sites in place, you had the ships that were going to bring the gas in ostensibly. And so you saw a really dramatic shift almost immediately. Once those liquefaction trains were built, the exports started coming.

And so as you know, we went in 2016 from exporting no LNG -- I just want to point out for the people out there, yes, we did export LNG for many years from Alaska, but it was much smaller scale. So this is from the continental U.S. We grew from nothing to -- today, we're the largest exporter of LNG in the world, and we account for about -- not quite a quarter, but 22% of global LNG -- of global LNG supplies, I should say.

Nathan Hunt

So Mohsen, for the average person, LNG exports are not something they're going to encounter in their day-to-day life. I'm wondering if you can give a sense for how big is this in the U.S. economy? What is U.S. natural gas and U.S. LNG? What is the impact on the economy?

Mohsen Bonakdarpour

Yes, that's a very good question, Nathan. And just to add on to Madeline's statement of how the research started, our Vice Chairman, Dr. Yergin, was writing a research report for Hoover Institute, and he was searching basically to find out if there is any study on the contribution of LNG industry and LNG export to U.S. economy, and he couldn't find it. And this precipitated his mind that a research company like S&P should undertake this because we are in that business of evaluating the economic impact and contribution of variety of different industries to U.S. economy.

The shale gas revolution was something that we did in early 2012, 2013 time period. And more importantly, after the development of the unconventional oil and gas, there was a policy put in place in early '70s that prohibited U.S. to export crude oil. And that was changed in 2014, 2015 time period based on the research that we have undertaken as well too.

The size of the export, as you mentioned, of the LNG industry is extremely interesting to look at during a very short period of time, less than 10 years from 2016 time period till today, the value has gone from being an importer to $34 billion of export of LNG to the global market. To put it in context, this is roughly in line with soybean export. This is roughly half of semiconductor export to the global market, and it is much larger than the export of the Hollywood film and TV industries.

And the enormous items to consider is that all that has been developed in less than a decade to the U.S. economy. So it's really bear in mind to evaluate the very detailed energy market ramification of this build-out of the industry and the implication of the U.S. economy.

Nathan Hunt

So for those people who are energy market fans, and I consider myself one, you may have heard the name Dr. Yergin, that is Dan Yergin. He is the Pulitzer prize-winning author of The Prize and The New Map among many other excellent books. He was involved in this impact study. Can you talk a little bit about how Dr. Yergin was involved in the work?

Mohsen Bonakdarpour

Dr. Yergin basically was, of course, as you know, he's the Vice Chairman. And in projects like this that will have tremendous amount of public interest, he provided advisory committee. He was the Chairman of the project. He provided basically advisory to all of us who are doing the analysis and the research, and he was leading basically this initiative from the S&P Global side.

Nathan Hunt

So let's talk about the pause because this is what motivated the impact study. In January of 2024, the Biden administration announced a pause on reviewing applications to export LNG to non-free trade agreement countries. Can one of you tell me what does that mean in layman's terms? Have they paused LNG exports or something else?

Madeline Jowdy

So most of you might even know when the law was either changed or adopted. But basically, because of free trade agreements that the United States has with, I think it's some 22 countries, that basically means that if you are -- that you can freely trade with those countries, you don't need any sort of authorization or permitting or anything like that. And so when it comes to LNG and LNG exports specifically, unfortunately, there's only about 4 countries on that list that actually import LNG or that really need to import LNG.

And so what as a producer or exporter, you need to do is to secure what's called a non-free trade agreement export authorization. And so in that process, you need to you need to make the case for your project, you need to make the case for the buyer. And this is open-ended. So you wouldn't say specifically a non-FTA-specific country. It's just sort of a blanket non-FTA permit authorization.

And basically, by pausing the permitting on non-FTA authorizations, it sort of put the -- not the existing exporting projects, they already have their permits, but the ones that are in the planning phases, they may have made a final investment decision or they may not have. But without that non-FTA authorization, a project will basically not go through. It will not be economically feasible to sell that amount of LNG to an FTA country, and it also is extremely limiting.

Nathan Hunt

At the time, the Biden administration suggested that part of the reason for delaying or putting a pause on these new permits was out of concern for the emissions impact. And I'm curious what countries were affected by the pause, like what countries are importing U.S. LNG? And what other energy sources would they be using if they weren't importing U.S. LNG?

Madeline Jowdy

Well, Nathan, it's hard to say exactly what countries. What I will say is that U.S. LNG export go to basically every single -- maybe not every single one, but most LNG importing countries in the world. And so there's about 50 of those countries and maybe with the exception of Norway or some sort of smaller scale importer, U.S. LNG has appeared everywhere. Now I would -- one of the most interesting things about this study, one of the most interesting findings, I would say, on the sort of on the global front was the fact that if you do curtail these exports or you sort of -- let's just say you permanently halt.

We did a scenario where you halt further additional U.S. LNG exports. And what we found is that 85% of that volume. So if you take that entire volume that would have been exported and that now is not, compensating for that volume would have come from other fossil fuels, so non-U.S. fossil fuels, so coal and oil and then, of course, LNG from other countries.

It was really quite striking. Now how that plays out in Europe versus Asia is a little bit different. Europe is pretty far along in sort of its renewables and emissions reductions mandates. And so in Europe, the impact is a little bit more -- it's different from what it is in Asia. But overall, we saw this initial sort of non-U.S. fossil fuel response.

Nathan Hunt

So it seems unlikely that the pause will remain in effect under the incoming Trump administration. But assuming it did and you guys sort of looked at that as a scenario, what would the impact of that be on the U.S. economy?

Mohsen Bonakdarpour

Yes, sure. Maybe we should step back one, and to reiterate that the most important aspect of the analysis was to first show given our base case forecast with no halt what kind of an impact LNG has to the U.S. economy. And the scenario was run from 2025 to 2040 to quantify basically the impact in terms of number of jobs that the whole LNG value chain supports and contribution to GDP impact on U.S. business revenues and finally, the fiscal impact.

We should bear in mind that when a complex system like LNG or any other energy or nonenergy-related sectors are being analyzed to figure out the impact on the U.S. economy. It's not only the impact that per se that target industry will have directly on the U.S. economy because of the intricacies and the linkages of these sectors to their supply chain, those industries are going to be impacted as well. Hence, when employees of the target industry and supply chains are impacted, that means, in general, income for those employees are impacted.

If it is upward, then more spending are there for U.S. households, and therefore, that will escalate the impact. If it is downward, then it will contract the U.S. economy. So the whole economic contribution is a phased process of what we call direct supply chain and income effect. In our base case, when we run the scenario over the '25, 2040 time period, we discovered, roughly, contribution of the whole value chain of the LNG contributed $1.3 trillion to the U.S. economy.

It supported on average, close to 500,000 jobs between 2025 and 2040 and cumulative impact of the sales activity was $2.5 trillion. Employee wages was impacted by $0.5 trillion. And finally, the federal and state tax contribution were $166 billion. So these numbers are large. It's quite a bit extensive. Now the halt, of course, put a stop on selected basic assets in the U.S.

And when we evaluated that over the same time period, roughly 100,000 jobs on average per year was going to be at risk. And close to 250,000 -- $250 billion of cumulative impact of GDP was going to be at risk. So it's important to figure out that even though we are looking at the partial stoppage of some of the assets, but the impact is going to be huge over the next 15 years.

Nathan Hunt

That's a huge impact. The Biden administration was focused on emissions and the reduction of the use of fossil fuels in their decision to make the pause. Did you in your initial impact study look at the emissions implications of U.S. LNG?

Mohsen Bonakdarpour

That actually is the Phase 2 part of the study, Nathan. The Phase 1 was looking at the energy market impact on the U.S. and on a global basis and figure out the implication of the U.S. national economy. The Phase 2 is drilling down quite a bit on the impact on the emission that Madeline can comment better than I can and also start segmenting the economic impact by specific geography, including all the 51 states and drilling it down into congressional districts.

Madeline Jowdy

Yes. I would say the emissions impact of this study, so in the Phase 2 is, it's a considerable undertaking. The Biden administration pause cited a study that had been done before on the sort of comparing the emissions impact or footprint of U.S. LNG versus coal. And this is very, very complicated to kind of sort out. So it's one thing to say, okay, here's the GHG or methane impact or here's the value chain, here's the emissions and so on of the U.S. LNG or other sources.

It's another thing to look at, and as you probably know, most of the emissions impact comes from the Scope 3 or from the product that is being burned. So a big part of what we're looking at is where it's being burned, how and what sectors? Is it in power? Is it in residential, commercial and industrial. And so this is a very -- it's a complex part of the energy system. We're already well underway in sort of examining the results of this. So stay tuned, I would say.

Nathan Hunt

So the Phase II part of the study, which looks at economic impact in different regions in the U.S. and the emissions impact. When is that coming out?

Madeline Jowdy

That will be out in the beginning of March, which will coincide, we have a release planned just ahead of CERAWeek, which is the industry -- the energy industry event of the year, if I'm allowed to say that.

Nathan Hunt

You are. And since I've got you guys on a live mic right now, I am going to ask you, right now, will you come back on and talk to me again after the Phase 2 part comes on?

Madeline Jowdy

It would be a pleasure.

Mohsen Bonakdarpour

Absolutely. Absolutely.

Nathan Hunt

Okay. So let's again talk about this paused because the U.S. has paused these new permits under one President and then looks to unpause under another. What effect, if any, do you think these contradictory policies have on the market for U.S. LNG?

Madeline Jowdy

Well, on a broad level, and this will happen in the stock market or in any business. On a broad level, that kind of uncertainty is not looked upon favorably. I mean, nobody likes uncertainty. No one likes the fact that you can't plan around that. But going back to how you started this podcast and sort of the intersection of energy and politics, I think that one thing that we have been really concerned with is it goes really beyond the pause because it's not just this threat to the industry or to the LNG industry, U.S. LNG industry, it's not just about the pause.

It's also about a regulatory and policy climate that has become increasingly uncertain and volatile. And these are -- when you sort of change the bureaucratic cycle or the regulatory cycle, when you make -- when you upend the regulatory process, let's just say, it becomes very, very difficult to plan or to permit. And so from what we were looking at, we just reviewed a number of legal cases and challenges to U.S. LNG exports. And I also want to say this is more broad.

This goes into the heart of sort of how we feel about how we as a country in the U.S. feel about infrastructure in general. So its pipelines, its transmission lines. There have been a lot of challenges to getting some of these projects permitted. And these are the kinds of things that don't go away with an administration. Once you sort of change a regulatory process, it's really hard to kind of unchange that.

Nathan Hunt

So natural gas isn't infinite. Let's say we have sort of a set quality of natural gas reserves in the United States. Even with hydraulic fracking, even with horizontal drilling, there is a set quantity. Is exporting LNG to other countries driving up the price of natural gas for U.S. consumers?

Madeline Jowdy

Well, to date, the answer is no. We have -- Nathan, it's just -- it's an incredible resource base. And so if you kind of -- if you look back to -- I think you have to go back to before we started exporting LNG in 2016 to just sort of look at an incredible impact that sort of the production increases that we saw from horizontal drilling and fracking had. And so once the shale gas started coming out, we saw just U.S. natural gas prices plummet to sort of lowest levels they've been in quite some time.

And what's interesting is that even though, of course, demand increased, we actually substituted a lot of coal for natural gas because natural gas all of a sudden became competitive with coal, and that had a huge emissions reduction. Going into exporting LNG, we saw that, that gas price overall. Now there's a lot of volatility in gas prices based on seasonality and so on. But overall, that export growth had no impact on gas prices.

And that's because the production -- the resource base is huge, and it's supported sort of 3 times -- it would support 3 times the amount of exports that we have. Going forward, what we found in the hot scenario was that actually there is an impact on prices, but it's very, very small. It's something like -- Mohsen, maybe you can back me up on this because you did a lot of the economics on this, but it's something like $0.15.

It's a very, very small impact. So it really doesn't make a difference. And that's because, again, we do have this huge resource base projected out into the future as well.

Mohsen Bonakdarpour

Yes. So the analysis that Madeline just mentioned is that we evaluated to figure out per household basis for those households that are using natural gas and let's say, an impact of $0.15 basically, okay, that will bring basically some kind of a reduction in their income and their spending one way or another. But at the same time, the halt is reducing activity.

And if it wasn't there, that means then there is some benefit to the household as well, too, and that's the income effect. When we figured out the residual between the 2, it absolutely was a benefit to the household rather than a detriment to the household.

Nathan Hunt

One of the things that has made energy such a political football over the last few years, in particular, is the idea of energy security, right? We have countries that have access to domestic sources of energy. There's sort of the haves and then we have the have-nots that don't. And a lot of Europe fits into that category. They don't tend to have, except in the North Sea, large reserves of natural gas.

And I'm wondering, is it from an economic and energy security perspective, beneficial for the U.S. should the U.S. be holding on to its energy at this point rather than exporting it? Is there some sort of geopolitical argument for basically building fortress U.S. in energy policy?

Madeline Jowdy

Yes. Well, I think this -- the entire findings of this study basically refutes that because it shows the benefits. I mean, I think one thing that -- I think this probably came out in the U.S. in the oil export ban study is that if you can't get a good price for your product, you're just -- it's just not going to be produced. So there's one -- that's one aspect of this. But again, I think that the impacts of the exports, the benefits to the exports far outweigh the costs in income and production and so on.

Nathan Hunt

Mohsen, I'd like to end with a question for you. The impact study you've undertaken, both in terms of understanding the immediate economic impacts, but also the regional impacts that will come in Phase 2. This strikes me as methodologically fiendishly difficult. You're basically looking at a series of counterfactuals, if not this then this, if not this then this. How do you and how did your fellow researchers tackle that issue of the what-ifs?

Mohsen Bonakdarpour

Okay. That's a great question. And this is something that we have developed over 2 decades, working basically very closely with our Commodity Insight colleagues. This is something that we initiated, of course, years ago to be able to integrate our thought process, our modeling process among the 2 teams, understanding each other's basically capability offerings, figuring out the best way to integrate these processes and also link the whole systems together.

We know that our Commodity Insight colleagues are experts and very knowledgeable in energy markets, in data, in scenario analysis, in energy markets. And we have figured out basically there is absolutely a huge linkage between that and economic models. As I said, energy becomes an extremely important part of the global economy. And over the past 2 decades, we have built out a series of frameworks and modeling environments that speaks between the 2 very seamlessly and assesses basically the economic ramification.

The Market Intelligence part of the S&P has a very focused group on global analytics and intelligence that focuses on global economic analysis. Our models are constructed for macro economies of roughly 70 different countries, which explains 98% of global GDP. And we drill down very much into different regions and industries on a global basis. So we have been becoming very much an expert in doing impact analysis and contribution research.

Nathan Hunt

So Mohsen and Madeline, I am going to hold you to returning to the podcast in March to talk about Phase 2. I'm very interested to learn more. Thank you very much for joining me.

Madeline Jowdy

Thank you.

Mohsen Bonakdarpour

Thank you.

Nathan Hunt

For those of you who are curious, you can find Phase 1 of the U.S. LNG Impact Study on our website which is spglobal.com. The Essential Podcast is produced by Patrick Moroney. At S&P Global, we accelerate progress in the world by providing intelligence that is essential for companies, governments, and individuals to make decisions with conviction. From the majestic heights of 55 Water Street in Manhattan, I'm Nathan Hunt. Thank you for listening.

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