U.S. LNG Exports: A Catalyst for Geopolitical Shifts and Terminal Agreement Disputes

February 20, 2024

The U.S. LNG Export Boom: A New Energy Landscape

The U.S. has become the largest exporter of liquefied natural gas (LNG), driven by significant infrastructure development and advances in natural gas extraction. This growth has led to debates about environmental sustainability, economic effects on communities, and how this aligns with U.S. climate goals. The CP2 LNG project, in particular, has faced criticism from environmental groups concerned about its fit with climate objectives.

The unexpected rise in domestic shale gas production, due to technological and market developments, has shifted the U.S. from an expected LNG importer to a major exporter. This shift was initially met with concerns about potential increases in domestic gas prices affecting consumers and industries. However, studies by the U.S. Department of Energy from 2012 to 2018 suggested that LNG exports would have minimal impact on domestic prices under certain conditions. Indeed, despite the growth in LNG exports, domestic gas prices have remained stable, supported by increased production in areas like the Marcellus Shale and the Permian Basin.

Yet, the projected doubling of LNG export capacity by 2028 prompts questions about future domestic gas prices and the impact on other industries. The significant use of U.S. natural gas for LNG exports could potentially affect prices and supply.

Legal Challenges in the Shifting Energy Market

The transition in the energy market raises important questions about contractual risks and the predictability of such major changes. The situation with the Pascagoula Facility in the Eni v. Gulf LNG arbitration (ICDR Case No. 01-16-0000-7065) originally designed for LNG import but underused due to the domestic gas surplus, highlights the legal and economic issues arising from the shale gas boom. The Eni v. Gulf LNG arbitration case underscores the need to consider foreseeability within the broader context of contractual risk allocation, reflecting the parties’ initial intentions and expectations.

The shale gas boom has complicated contractual arrangements, particularly Terminal Use Agreements (TUAs), by altering traditional views on supply, demand, and pricing. This has implications not only in the U.S. but also in international energy markets, where U.S. LNG exports have contributed to global energy security and changed trade dynamics.

Companies should be cognizant of supervening events (such as the shale gas revolution) that lead to frustration of the principal purpose of a TUA.

Supervening Events and TUA Contract Frustration

Defining the Supervening Event

The “supervening event” that could potentially disrupt the main purpose of a TUA needs precise definition. Various interpretations include the disappearance of the U.S. import market or technological advancements that led to increased domestic shale gas production. The event is best understood as a combination of factors resulting in the market shifts known as the “shale gas revolution” and its impact on the contractual relationship.

Nature of Changes and Legal Implications

The distinction between “evolutionary” and “revolutionary” changes does not critically influence the identification of the supervening event. The legal doctrine of frustration is not confined to isolated, instantaneous events but also applies to developments that unfold over time with significant impacts. Both sudden events and gradual developments can usually be recognized as supervening events under the applicable law.

Impact of the Shale Gas Revolution

The shale gas revolution, brought about by several converging factors, has transformed the supply and demand dynamics of the U.S. natural gas market, rendering LNG importation economically unviable. This shift from a net importer to a net exporter of natural gas has fundamentally questioned the economic viability of importing LNG into the U.S. market, leading to the underutilization of infrastructures like the Pascagoula Facility.

Substantial Frustration of the TUA

The shale gas revolution’s impact on the contract was unprecedented, structural, and permanent, rendering the economic rationale of the TUA completely senseless. This situation could not have been reasonably anticipated by the parties at the contract’s inception, indicating a substantial frustration of the TUA’s principal purpose.

Future Directions for Terminal Use Agreements

The shale gas revolution necessitates a reevaluation of TUAs, challenging old assumptions about risk, supply, and demand. As environmental issues become increasingly important in energy discussions, TUAs need to incorporate sustainability and emissions reduction more prominently. This involves creating agreements that are economically viable and flexible, yet also environmentally responsible.

The impact of the U.S. shale gas boom on TUAs highlights the global implications of domestic energy developments. It emphasizes the need for TUAs to be adaptable and innovative, capable of handling market volatility and the interconnected nature of global energy networks. This shift underscores the importance of evolving contractual frameworks to meet the challenges of today’s dynamic energy landscape.

The profound impact of the shale gas revolution on the contractual landscape of the energy sector, particularly affecting TUAs, highlights the need for companies to be aware of supervening events that could lead to the frustration of a contract’s principal purpose. This necessitates a reevaluation of existing agreements and careful consideration of future contractual frameworks in the dynamic energy market.