What May We Expect From The President-Elect? [NGW Magazine]

Democrat Joe Biden’s victory in the US presidential election is still in the process of being certified, amid a handful of legal challenges from his opponent, the incumbent Donald Trump and his team.

Trump’s team failed to produce the evidence for the claims although at time of press he was still sacking senior election officials who rejected the narrative that the Republicans were cheated. Election cybersecurity head Christopher Krebs went November 17, after calling it the most secure in US history.

“The general expectation is that Biden will take office save for some completely unpredictable circumstance,” Anna Mikulska, a non-resident fellow in energy studies at Rice University’s Baker Institute for Public Policy, told NGW.

Further uncertainties still remain: the question of which party will control the Senate is due to be decided in a double run-off election in Georgia in January. Georgia has not elected a Democrat senator since 1996, but Biden narrowly won the state – pending a recount – and the races will be tight.

The Democrats would need to win both seats in order to take the Senate – and while the likelihood of this outcome is not high, it remains a possibility and one which would grant Biden significantly more power to pursue his legislative agenda.

Changes

Even assuming the Republicans narrowly hang on to the Senate, Biden’s victory has fairly wide-ranging implications for the US’ natural gas industry. These are not expected to result in major industry upheaval, but certain changes are nonetheless likely to materialise.

In particular, Biden will treat climate change and environmental issues as more of a priority than Trump. This, in turn, could affect permitting for new projects, as well as regulations on greenhouse gas (GHG) emissions and gas flaring. In addition, LNG exporters will be keeping a close eye on how Biden’s foreign policy will shape up, especially with regard to China, which has potential to be one of the largest buyers of US LNG but remains mired in a trade war with the country for now.

Another area of interest to the gas industry is the potential restriction of oil and gas development on federal land. Biden sought to reassure the industry prior to the election that he would not seek to restrict hydraulic fracturing, but federal land appears to be in his sights.

This has more significant implications for oil than for gas. According to investment bank Morgan Stanley, federal land only accounts for around 10% of US gas production, compared with 25% for oil. A significant portion of the gas production is associated with oil drilling so limiting oil production will impact gas production too.

But this would take a few years to become significant as any restrictions would apply only to new drilling, Morgan Stanley said in a research note November 4. And it expects around 30-50% of this activity to shift to state or private land within that timeframe, resulting in associated gas production growth elsewhere.

More broadly, the boom in associated gas is part of a dynamic that stands to affect the gas industry – the fact that a significant portion of output is associated with oil, and thus reacts more to oil price signals.

“In the US, more so than in many other natural gas-producing countries, the prices of oil and gas are related. And generally the production of oil and gas is related,” Mikulska said. Thus a large part of natural gas production remains vulnerable to policy that could have an impact on oil prices.

Iran an unknown

One area in particular that Biden appears likely to prioritise is US relations with Iran. He has indicated that he would be willing to restart talks with the Middle Eastern country, and potentially renegotiate the nuclear agreement that Trump withdrew from.

Morgan Stanley estimates that this could bring up to 2mn barrels/day of Iranian oil back to the market over time, which it warned would be bearish for oil prices. The bank noted that the “feasibility and timeline of such a deal is unclear – and arguably more challenging without Congressional support”.

If Biden succeeds in securing a new Iran deal, though, this will affect US oil – and in turn gas – production.

Another country with which relations under Biden will be of particular interest to the gas industry is China. The Asian country is in the process of overtaking Japan to become the world’s largest LNG importer. Chinese imports of US LNG resumed this year thanks to a preliminary trade deal between the two countries, and to Beijing’s move to grant tariff waivers to certain buyers of the fuel. However, only one – comparatively small – term deal has been signed between a US LNG producer and Chinese buyer since the trade war started in 2018.

In research published prior to the election, RBC Capital Markets said it envisioned “some significant continuity with Trump in the assessment of the China threat”. The investment bank added, though, that it expected White House rhetoric to be less combative owing to the need to collaborate with China on addressing climate change.

“We also contend that continued support for US gas exports to China will be about encouraging coal switching and part of the broader climate agenda,” RBC added.

Mikulska noted that Trump’s approach to China had been a unilateral one, making it easier for Beijing to retaliate with tit-for-tat tariffs, for example. “I think if we have a Biden administration, we'll see a much more multilateral approach to China,” she said. “And we will see probably the US being on much better terms with European allies.” If European countries are willing to collaborate with the US on China, the result may be “much more damaging for China”, she added.

Continuity amid change

In many areas, Biden’s time in office is expected to have significant continuity with that of the former Democrat president Barack Obama, under whom he served as vice president. There are some notable exceptions to this, though, particularly in the area of climate change, where Biden is expected to be stricter; and on the question of China.

Indeed, Morgan Stanley described its expectations of Biden’s foreign policy as potentially looking more similar to the Obama era, with China an exception.

On the domestic front, continuity with Obama is also anticipated, and while this would be a step away from Trump’s support of unfettered expansion, it would not result in the industry being significantly hindered.

“If you look at the past, at what Biden and Obama have done, they actually have been quite good to the oil and gas industry,” Mikulska said, adding, however, that global conditions are different now, and the shift away from fossil fuels is more prominent.

RBC takes a similar view to continuity from Obama to Biden, though thanks to the energy transition it expects the renewable sector to be the bigger winner under a Biden administration.

“Nonetheless, we see the Obama era support for the gas industry continuing in a Biden administration in some capacity, even if it is done more on the down low,” the bank said. “Gas is still viewed as an important transition fuel for encouraging coal switching and helping to confront Russian revanchism.”

On this, RBC expects Biden to promote exports of US LNG in order to lessen European dependence on Russian gas.

Gas thus seems set to play a significant role even as Biden takes a tougher stance on climate change compared with both of his predecessors.

“We view much of what we have seen so far as not shutting down fossil fuels, but rather backing them out of the energy equation over time in the face of the scientific fact of climate change,” RBC said.