Trump’s tariffs threaten domestic natural gas industry and US energy goals

President Donald Trump’s 25 percent tariff on imported steel will create an existential shock in material costs for the domestic natural gas industry, potentially causing multibillion-dollar projects to become uncompetitive and threatening the president’s own goal of U.S. energy dominance.

Citing national security concerns, the president surprised policymakers and the business community by announcing on March 1 that he would impose a 25 percent tariff on imports of steel and a 10 percent tariff on imports of aluminum. One week later he signed proclamations implementing the policy, though temporarily exempting Canada and Mexico.

{mosads}For the natural gas industry, steel is a critical material in all phases of the business. Whether it be for gas gathering, transmission or distribution, U.S. energy companies require significant quantities of steel pipe. According to the U.S. Energy Information Administration, the U.S. pipeline network has nearly 3 million miles of mainline and other pipelines that connect production areas and storage facilities to approximately 74 million consumers. And, this number only represents active pipelines; there are many more miles of natural gas pipeline projects that are in various stages of planning, approval and construction.

Dramatically increasing the cost of steel by applying a tariff, or import tax, to this material could cause planned and ongoing projects to simply become financially unfeasible. The impact of such a tariff is even more troubling when you consider that many of the steel products that are essential to natural gas projects are not even produced in the United States.  

For Plains All American Pipeline, this is an unfortunate reality: 26-inch steel pipes are a key component in its approximately $1.5 billion worth of ongoing projects. However, as Greg Armstrong, chairman and CEO of Plains All American Pipeline, revealed to attendees of this year’s CERAWeek energy conference, there are only three places in the world that manufacture 26-inch steel pipe and none of them are in the United States. Placing a tariff on critical products that are not produced domestically fails to protect our national security or our domestic industry.

A 25 percent tariff on steel imports is, in reality, a massive tax on the natural gas industry, and it could cause President Trump’s goal of “energy dominance” to completely derail.

Another segment of the natural gas economy under real threat from these tariffs is the nascent U.S. LNG export industry. LNG projects are highly capital intensive and relatively low margin economic endeavors. Increasing the cost of key inputs because of tariffs on steel will have an outsized impact on their underlying economics.

For example, take Freeport LNG on the Gulf Coast of Texas. If there had been a 25 percent tariff on imported steel when the company began construction on its first three LNG trains, costs for the nearly $13 billion project would have increased by several hundred million dollars. Adding hundreds of millions of dollars in additional costs would have threatened the economics of the project as Michael Smith, chairman and CEO of Freeport LNG Development, explained at the 2018 CERAWeek energy conference in Houston:

“This thing [Freeport LNG’s 3 export trains] would cost a few hundred million dollars more if we had to pay 25 percent more than what we did. But when you’re in development, all of a sudden, it’s one more externality you can’t control. And banks want to know if you have plenty of coverage with plenty of contingency money.”

In the United States, there are currently six LNG terminals slated to be online by 2020. However, there are also more than a dozen U.S. LNG terminals either waiting for final investment decisions or approval from the Federal Energy Regulatory Commission (FERC). For the projects in the queue, developers believe that President Trump’s tariffs could be a fatal blow.

Ernie Megginson, the former vice president of development for the Magnolia LNG project, recently said: “The existing off-take agreements will likely be OK for the projects already under construction. However, the projects that have not yet started construction will be in some trouble.”

LNG export facilities and foreign markets are critical for relieving the natural gas glut in the United States. If LNG facilities cannot be built because of rising costs, or if countries that import U.S. LNG decide to look elsewhere for diplomatic reasons, the United States will not achieve its energy export potential.

In the final analysis, tariffs on steel and aluminum harm far more industries than they help, as we saw with President Bush’s tariffs in 2002. The U.S. natural gas industry is at the beginning of a critical growth phase. Both pipelines and LNG facilities are needed to support this growth, and steel tariffs will put many of these critical infrastructure projects in jeopardy.

Jamie McInerney is executive director of the Trade Leadership Coalition, a nonprofit organization providing public information and educational resources to explain the benefits of the United States engaging in international trade.