With the Biden administration talking up a ban on foreign fossil fuel financing, long-time oil and gas supporter US Exim could be forced to halt its backing of LNG and oil sector transactions. Felix Thompson examines what the new president’s climate policies may mean for the bank’s future, and that of the wider export sector.
As part of the long list of executive orders rolled out in his first few days in office, President Joe Biden reversed key Trump-era energy policies, re-committed the US to the Paris climate agreement and cancelled permits for the controversial Keystone XL pipeline project.
Meanwhile, in a move which looks set to have significant ramifications for the Export-Import Bank of the United States (US Exim), the country’s official export credit agency (ECA), Biden’s team has said it will work to end financing for fossil fuel projects abroad.
The idea was initially put forward by special climate envoy and former secretary of state John Kerry, speaking at a World Economic Forum online panel on January 27.
While his statement was short on specific details, an executive order penned by Biden that same day, titled ‘Tackling the climate crisis at home and abroad’, signalled that funding provided by US Exim and the International Development Finance Corporation (DFC), the government’s development finance institution, would fall within the scope of the proposal.
“The Secretary of State, the Secretary of the Treasury, and the Secretary of Energy shall work together and with the Export-Import Bank of the United States, the chief executive officer of the DFC, and the heads of other agencies and partners, as appropriate, to identify steps through which the United States can promote ending international financing of carbon-intensive fossil fuel-based energy,” the order reads.
The move was welcomed by climate activists, with Friends of the Earth issuing a statement which both praised the announcement and railed at the billions of dollars provided to fossil fuel projects by the DFC and US Exim over the past five years.
“It is high time that Exim, DFC, and the rest of the US government stop destroying local communities and the environment by propping up fossil fuel projects abroad. We look forward to an immediate end to this dirty financing,” said Kate DeAngelis, international finance programme manager at Friends of the Earth.
US Exim championed liquified natural gas (LNG) under former President Donald Trump, with the bank noting in its 2019 competitiveness report – released in June last year – that it had been working with other agencies to advance Trump’s international priorities, namely wireless technology and LNG.
In one sizeable deal in 2020, it was among a number of ECAs to support French oil major Total’s onshore LNG project in Mozambique, signing off on a direct loan of US$4.7bn.
With just days left of the Trump presidency in January this year, US Exim penned a new supply chain finance (SCF) loan guarantee that marked its first support for a domestic LNG exporter.
That agreement saw the ECA agree to provide a 90% guarantee covering a US$50mn SCF facility from the since collapsed financier Greensill Capital to Houston-based Freeport LNG Marketing.
A total fossil fuel ban?
Against this backdrop, the proposed ban on oil and gas transactions would represent a sea change for US Exim – yet analysts suggest there could be possible exemptions.
Nikos Tsafos, deputy director and senior fellow on the energy security and climate change programme at the Center for Strategic and International Studies (CSIS) – a Washington-based think tank – says there could be “conditions” imposed on any outright ban of fossil fuel financing.
“In a narrow sense, the exception could be for projects that have a clear developmental benefit and where alternatives are not commercially viable,” he says.
James O’Brien, partner at law firm Baker McKenzie and a member of US Exim’s Sub-Saharan Africa Advisory Committee under the previous administration, echoes this view, noting that the bank will likely have to consider fossil fuel transactions if it wants to support development in Africa.
“Whether the Biden administration will reduce the emphasis on LNG or petrochemicals generally remains to be seen, particularly in emerging market jurisdictions like Africa,” he tells GTR.
“If one wants to do ECA finance, which could lead to development in those markets, then you need to finance deals that are there, not transactions you simply want to do.”
Another question is whether US Exim will be blocked from lending support to domestic exporters in adjacent industries, such as the oilfield services sector, Tsafos says.
US Exim supported petroleum services and equipment exporters in a few notable transactions last year, penning a US$75mn credit guarantee facility with Argentinian state-backed oil and gas company YPF in August.
The bank said at the time that YPF would use the financing for ongoing capital expenditure in support of its upstream and downstream activities, including the purchase of equipment, materials and services from companies in as many as 12 US states.
That same month, it also voted to notify congress of two other transactions backing US oilfield services exports, signing off on a US$350mn general facility and a US$50mn small business facility for Mexico’s state-owned petroleum company Pemex.
With Republican critics from states such as Texas and Alaska already accusing Biden of putting energy sector jobs at risk through his climate-related executive orders, Tsafos says that Biden could ultimately come under pressure to create “carve-outs” in any total ban.
A 2020 report from US-based think tank, Energy Futures Initiative, says that the fuels sector as a whole – which includes fuel extraction and mining for oil, coal and gas, as well as the production of biofuels such as corn ethanol – employed over 1.1 million Americans in 2019.
“The political question is, do you want to pick the extra fight? Or do you want to create some specific conditions under which you would allow these exports? I don’t know where they’re going to land,” Tsafos says.
US Exim renewables boost?
Even before Biden’s latest move, US Exim had been directed by congress as part of its reauthorisation in late 2019 to boost its share in renewables, and had been set a goal of reserving 5% of its financing authority – equivalent to roughly US$6.5bn – for renewable energy projects.
Nevertheless, the new executive order on the climate crisis looks set to bring US Exim’s energy activities under closer oversight.
As well as directing US Exim to work with the secretaries of state, treasury and energy to bring about an end to international fossil fuel financing, the order also states that they must simultaneously advance “sustainable development and a green recovery”.
While it’s not clear whether this order relates specifically to growing renewable energy financing abroad, analysts anticipate that US Exim will realign its portfolio towards greener transactions under Biden.
Tsafos expects there to be a “huge shift” towards such projects across various agencies, saying that US Exim has “not been very good at supporting” the renewables sector in recent history.
“By my count, they [US Exim] only allocated about US$1.7bn over the last 10 years cumulatively for renewable energy. They did almost three times as much in one LNG project [in Mozambique],” he notes.
Nevertheless, the ECA’s ability to support green energy projects hinges, at least in part, on wider changes within the American manufacturing sector.
Tsafos explains that any major overhaul in energy policy at US Exim will have to confront certain obstacles, such as China’s dominance in areas including solar and batteries.
During his term in office, Trump had attempted to make the US solar manufacturing sector more competitive, imposing gradually decreasing 30% tariffs on solar cell and module imports in 2018, in a bid to encourage foreign companies to shift operations to the US.
There were suggestions that the levies may have had a positive impact on US domestic production in one section of the solar market, with a review released by the US International Trade Commission (USITC) in February 2020 stating that US domestic production of solar modules – or panels – had increased in the wake of Trump’s tariffs.
The report pointed to the decision by several large module producers such as Hanwha, Jinko and LG to open US factories in 2019, leading to an increase “in domestic module production capacity, production, and market share”.
But a separate report from the International Energy Agency, released in May last year, shows that China still dominated the solar technology space, with Chinese manufacturing accounting for two-thirds of solar photovoltaic module shipments in 2019. Malaysia, the nation with the next highest total of shipments that year, accounted for 12%.
Meanwhile, production of US solar cells – which are used to make modules – fell in the year following Trump’s tariffs.
The USITC review says that several major cell producers ceased manufacturing operations, leading to a rise in imports and a decline in production capacity in 2019.
Against this backdrop, Tsafos says that until the US addresses its current weaker hand in the manufacture and export of renewable energy technologies, US Exim’s ability to help drive Biden’s climate plan could be constrained.
“You have to ask, what is the bottleneck there? Because in reality, the US is not incredibly competitive in some of the technologies that we’re deploying now for renewable energy… Remember, Exim is about exporting. And if you don’t have a manufacturing base at home, there won’t be any renewables exports to support.”
Commercial bank opportunities?
Commercial banks operating in the export finance space largely expect Biden’s energy policies to be a boon for the industry and present new funding opportunities in the coming years.
During his election campaign, Biden made a pledge to invest US$2tn towards overhauling America’s “crumbling infrastructure” and boosting the switch towards a “clean energy economy” in a host of sectors, including the automotive and building industries.
A key strand in this proposal was the installation of “millions of solar panels” and “tens of thousands of wind turbines”, as part of a broader aim of making the US power sector carbon neutral by 2035.
By shifting the domestic power sector towards clean, “American-made” electricity, the proposal says the US will “lead the world in inventing, manufacturing and exporting clean energy technologies”.
Such ambitious plans have not gone unnoticed by commercial banks.
“We see an opportunity for growth across all sectors including solar, wind, hydrogen and bio-fuels,” says Ahmet Bekce, head of export and agency finance at Citi. “Another area which would need significant amount of enabling financing is energy transition.”
At the same time, there are signals that Biden’s renewable energy plans at home will lead to an uptick in domestic renewables projects, which will in turn present opportunities for non-American firms and ECAs.
Ravina Advani, head of energy, natural resources and renewables at BNP Paribas Americas, says that “as the US looks to go carbon neutral, and phase out some baseload technologies, such as natural gas and coal, export finance banks will play a very important role”.
She notes that offshore wind projects in the US will likely be one key area for export finance banks – and other financiers, such as debt funds, private equity, sponsors and tax equity firms – to support in the coming years.
Under Trump, the US had been ramping up its wind output in recent years, with a March report from the Global Wind Energy Council revealing that the US installed nearly 17GW of new wind capacity in 2020. Notably, more capacity was installed in Q4 2020 than throughout the whole of 2019.
But with Biden vowing to double offshore wind production during his term in office, there are hopes that there will be a sizeable increase in offshore wind projects on the US east coast.
The new administration has moved swiftly to complete an environmental study on the 62-turbine Vineyard wind farm off the Massachusetts shoreline – a major project that had taken the Trump administration years to review.
“I think the administration will play an important role and export finance banks will be financing those [US offshore wind] projects, given equipment will be coming from all over the world to meet those needs,” adds BNP Paribas’ Advani.