US oil and gas production has been booming, changing domestic markets and the role of U.S. production in the world. President Trump talks about “energy dominance” and about oil and gas as a driver for growth and exports. The term “dominance” isn’t accurate, but the United States is now the world’s largest gas producer and a global player in gas markets.
U.S. technology changes global gas market
Before the early 2000s, oil and gas production in the United States had been declining for years. A fleet of LNG terminals was planned in the United States, preparing for the day when domestic gas production couldn’t meet demand. But then an important change happened, thanks to optimistic drillers who combined horizontal drilling and hydraulic fracturing to produce oil and gas from formations that were previously uneconomic. Beginning around 2005, natural gas production in the United States took off, increasing nearly 70% from 2005 to 2018.i The United States is now a net exporter of natural gas, through pipelines to Mexico and as LNG around the world. The boom will continue, fueled by exports—projects due by the mid 2020s will bring US LNG export capacity to five times its current level.
Data source: United States Energy Information Administration
When the world expected the United States to become a significant natural gas importer, companies invested heavily in LNG liquefaction, especially in Qatar, the Middle East, and Africa, to supply the U.S. market. The U.S. natural gas production boom left this gas looking for a home. As a result, the LNG market has become more competitive and transparent. Contracts have become less restrictive, with minimum required volumes and restrictions on resale of gas becoming less common. U.S. LNG is also changing pricing norms. LNG has frequently been priced based on crude oil, based on the lack of a liquid gas market to allow price discovery. However, U.S. LNG is priced based on Henry Hub, the delivery and pricing point for gas contracts on the New York Mercantile Exchange (NYMEX). This pricing is based on fundamentals in the U.S. gas market and allows international buyers to access the U.S. market, albeit with added cost for liquefaction and shipping.
U.S. boom gives Europe leverage with Russia
These change in market dynamics have had important implications in Europe. The countries of the European Union import about 78% of their natural gas,iii with Russia providing nearly 40% of imported gas.iv Importing Russian gas makes geographic and economic sense—there is significant pipeline capacity to serve European markets with inexpensive Russian gas, and the Nord Stream 2 and Turkstream projects are increasing that capacity and giving Russia more delivery options.
However, the Russians have used gas supply as a political weapon and the potential for such interference is increasing with additional pipeline capacity. Russia has twice shut down European gas supply during disputes with Ukraine. In 2014 the EU also imposed sanctions on Russia after it annexed Crimea, further clouding the situation. Some argue that the Russians need revenue from gas sales to Europe as much as Europe needs the gas. Nonetheless, many in Europe see Russia as an unreliable supplier and one not afraid to use its energy resources for political gain.
Growing US LNG exports open more options for Europe. Europe can import US LNG, although volumes are small today and more expensive than Russian pipeline gas. Instead, the most important impact for Europe is the development of a buyers’ market for gas with the surging supply. More supply and more flexible terms put Europe in a better negotiating position with Russia and reduce Russia’s ability to politicize its gas supply.
Oil and gas boom brings opportunities for politicization
Russia is not alone in its use of energy for political ends. Historically, a number of countries have used their oil and gas resources in this way, but the United States has not been among them. The U.S. industry is entirely in the hands of private entities making individual business decisions. However, the surge in U.S. oil and gas production and President Trump’s “energy dominance” rhetoric has raised the question of whether the United States is moving in this direction.
U.S. oil production certainly made recent sanctions on Iran and Venezuela more politically palatable, by softening their impact on global oil markets. Gas supply has been politicized in the United States’ ongoing trade battle with China, the world’s second largest importer of LNG and the world’s largest gas market. The Trump administration has pushed for China to import more oil and gas to reduce the U.S. trade deficit with China. However, China responded to U.S. tariffs on Chinese goods by slapping tariffs on U.S. oil and gas. In January 2020, China promised to increase its imports of oil and gas as part of a preliminary trade deal, but did not remove the tariffs.v Energy is sure to remain a bargaining chip in further negotiations.
Minimizing methane emissions and flaring are key to achieving emission reductions
Natural gas is the lowest-carbon fossil fuel—it can have climate benefits when substituted for higher-carbon fuels like coal or oil. Its lower carbon content also makes carbon capture and storage easier, a useful quality as the world strives for deeper decarbonization. However, minimizing methane emissions and flaring in U.S. gas production are crucial to the climate benefits of gas and for marketing U.S. gas in countries most concerned about climate.
Methane, the primary component of natural gas, is a particularly potent GHG. Methane emissions are particularly concerning at the wellhead. Advancing technology has made it easier and cheaper to identify leaks, but the Trump administration is in the process of rolling back Obama-era rules requiring leak detection and repair and other technologies to reduce methane emissions during production.
Flaring is another avoidable source of GHG emissions in oil and gas production. Natural gas is often produced along with oil, but natural gas prices are very low in the United States today and in some cases there is neither infrastructure nor economic incentive to transport the gas away from the well for sale. In these cases, gas is flared at the wellhead. Natural gas infrastructure has not kept up with the rapid expansion of oil production in some areas, resulting in a 50% increase in flaring in 2018 compared to the previous year.vi Increasing LNG export capacity is likely to improve this situation over time, providing an outlet for plentiful U.S. natural gas to be sold abroad, rather than wastefully burned.