By Brandon Thurner with Vasilios Galanis
U.S. liquefied natural gas (LNG) exports are one of many tools in the U.S. foreign policy soft power tool kit. Along with renewable energy infrastructure, U.S. LNG exports also have the potential to encourage global economic development by increasing energy security. The advent of the Better Utilization of Investments Leading to Development Act of 2018 – or BUILD Act – will increase the resources available to achieve these two sometimes competing goals through the offering of U.S. Government-invested direct equity as a way to complement traditional debt financing from the private sector.
According to the U.S. Department of Energy’s LNG Monthly publication, the United States has exported LNG to 32 countries during the 2018 calendar year, and 36 countries cumulatively. U.S. LNG exports represented 6.6 percent of global LNG imports for the year 2018, starting from a very small base as the U.S. only started exporting LNG as recently as February 2016. This is compared to the two global leaders of Qatar and Australia, at 24.5 percent and 21.2 percent, respectively.
There are many opportunities for U.S. LNG exports to expand in the future. Given energy security discussions in the European Union, trade talks and tensions in East Asia as well as the potential for additional energy infrastructure needs in Africa, LNG activity in these respective regions remains an area of focus. Scarce domestic resources, island nation geographies, and energy security all play a role in ensuring a continued focus on energy supplies in these regions.
The bipartisan BUILD Act passed in October 2018 is poised to enhance the U.S. position in the energy markets because it represents the most significant reorganization of U.S. trade and development organizations in nearly a generation, combining the Overseas Private Investment Corporation (OPIC) and the U.S. Agency for International Development’s Development Credit Authority (USAID DCA). Along with combining the U.S. Government’s two main development finance institutions and arms in OPIC and USAID’s DCA, the BUILD Act also injects a new financing mechanism into potential projects – direct equity.
Direct equity adds another dimension to financing infrastructure projects. In addition to the explicit support of the investment itself, having the U.S. government (USG) as a shareholder also provides an implicit assurance of investment soundness and risk-mitigation. This differs from traditional financing through the issuance of debt, which must first be financed by a willing lender acting as an intermediary, to provide financing given the level of political risk and other factors associated with projects in emerging markets. This debt then must also be repaid by the borrower. Hence, direct equity represents a more agile financing tool that could help pave the way to increase U.S. LNG exports.
As part of its foreign policy goals, U.S.-led development financing has always aimed to increase the role of private sector capital, and encourage the economic growth of less-developed countries. The transformation of OPIC and the USAID DCA into the new United States International Development Finance Corporation (DFC) starting on October 1, 2019 will allow for the realization of increased capital flows, including increasing OPIC’s current $29 billion investment cap to $60 billion, in the new DFC.
According to the text of the BUILD Act, direct equity investments of the DFC are not to exceed 30 percent of the total equity investment in each project as well as not to exceed 35 percent of the DFC’s total exposure when the equity is approved. The premise and text of the BUILD Act looks to have the direct equity investments by the U.S. Government complement existing and potential private sector financing through the enforcement of market-based contracts.
Potentially complementing the BUILD Act by focusing on natural gas as well as renewable energy infrastructure, the U.S. House of Representatives-passed H.R. 1616 (European Energy Security and Diversification Act of 2019) directly spells out the U.S. foreign policy energy supply-side diversification goals to enhance the energy security in European or Eurasian countries. H.R. 1616 specifically lists “natural gas infrastructure, such as interconnectors, storage facilities, [ LNG ] import facilities, or reverse flow capacity,” as some of several intended project recipients for BUILD Act financing. With U.S. LNG exports representing 6.6 percent of total global LNG imports last year, imagine the possibilities for the U.S. economy and U.S. foreign policy aims if there are financial tailwinds at their backs?
One of the objectives of the BUILD Act is to respond to China’s increased economic influence. On the global stage, the new DFC in current form, however, is unable to directly match China’s Belt and Road Initiative’s (BRI) $1 trillion in absolute dollar value. The BRI extends to 65 countries for a total of 30 percent of global nominal GDP, which encompasses 44 percent of the world’s population. However, the DFC offers countries and companies interested in investing in infrastructure and other investment capital-intensive projects “financially-sound alternatives to state-led initiatives from countries like China,” including the avoidance of crippling debt levels from Chinese-financed projects. The U.S. Government’s direct equity investment capabilities through the BUILD Act combined with private sector funds may also serve as a multiplier to catalyze capital in regions of the world where previously the Trans-Pacific Partnership (TPP) could have allowed the U.S. private sector increased market access.
With U.S. LNG exports landing in five of six regions of the world, they are a proxy for other types of possible investments in emerging markets that will become possible when the new DFC is fully operational. The DFC’s potential universe of energy projects would represent a microcosm of host countries and regions that can be assisted in their broader economic development. For example, the BUILD Act in tandem with the potential passage into law of H.R. 1616 may lead to an increase in secure energy sources in European Union countries as well as African countries through U.S.-based financing. Additionally, it would serve as an enhanced U.S. foreign policy tool for continued U.S. trade and security umbrella leadership in East and Southeast Asian countries.
The question remains, what level of complementary direct equity investment through the BUILD Act will allow U.S. LNG exports and other energy sources to enhance both global energy security and overall levels of supply, as well as U.S. global leadership in increasingly-turbulent times?
All views our own.
Brandon Thurner is an on-site consultant with the U.S. Department of Energy, where he provides management and data analysis with a focus on compliance and natural gas. He has over a decade of energy, environmental, and international trade and development experience in both the U.S. Government and private sector through graduate student level work experience at the Overseas Private Investment Corporation (OPIC) and the U.S. Department of Commerce, as well as professional experience with various energy consulting firms. Mr. Thurner holds an MA in international commerce and policy from the Schar School of Policy and Government at George Mason University.
Brandon is a long-time member of Young Professionals in Foreign Policy (YPFP), including membership in both the International Trade and Finance and Europe and Eurasia Discussion Groups.
Vasilios Galanis is an energy consultant with a foundation in energy economics, markets, and trading. His current focus is on the U.S. natural gas industry, and the global liquefied natural gas (LNG) markets as an on-site consultant to the U.S. Department of Energy. Vasilios also served as an energy analyst with the Greek Regulatory Authority for Energy, in the capacity of European utility regulation and natural gas pipeline tariff designs.
Mr. Galanis holds a Masters’ in Energy, Trade and Finance from Cass Business School, City University of London. His academic experience and research interests include: energy commodity trading and risk management using financial derivatives, energy infrastructure transport solutions, generation and distribution of electricity, and emission trading schemes.