- Russia’s invasion of Ukraine has changed the state of the global natural gas market forever.
- For U.S. natural gas producers, Europe’s desire to wean itself off natural gas has significantly improved the long-term outlook of LNG exports.
- The U.S. is set to account for 57% of new LNG liquefaction capacity expected to come online globally between 2022 and 2026.
As global demand for non-Russian natural gas is soaring after Russia’s invasion of Ukraine, the short to medium-term prospects for U.S. liquefied natural gas (LNG) developers and exporters are becoming brighter. Europe is racing to replace as much Russian gas as soon as possible and to be independent of that gas by 2027. LNG demand is going through the roof, boosting the development of new U.S. export liquefaction capacity as the demand prospects of the European market suddenly became much brighter than a year ago. More and more buyers, including in Europe, are committing to or thinking of committing to long-term LNG deals in order to shield themselves from high and volatile spot LNG prices. Even Europe, motivated to eliminate its energy dependence on Russia, is considering long-term deals with LNG developers. European buyers were swearing off long-term supply agreements just a year ago because of environmental concerns and the EU’s net-zero by 2050 goals.
LNG project development appeared to have stalled in the United States just a year ago. Now the forever-changed energy markets give U.S. LNG exporters more certainty that they will be able to secure financing and long-term contracts in order to proceed with the construction of more LNG export facilities.
U.S. To Lead LNG Supply Additions
America will lead the global LNG liquefaction capacity additions through the middle of this decade, data and analytics company GlobalData said in a recent report. The United States will account for 57 percent of all new LNG liquefaction capacity expected to come online globally between 2022 and 2026, according to GlobalData.
The U.S. is expected to add a new build LNG liquefaction capacity of 220.3 million tons per annum (mtpa) by 2026, while expansion projects account for the rest with 30.3 mtpa.
“LNG developers in the US are incentivized by ever-growing demand for natural gas worldwide, especially in the Asian and European regions. The plans of several European countries and Japan to reduce their dependency on Russian gas post Ukraine invasion would further boost liquefaction developments in the US,” Himani Pant Pandey, Oil & Gas Analyst at GlobalData, said, commenting on the report.
Venture Global’s Plaquemines LNG will be one of the key new facilities with a capacity of 20 mtpa, GlobalData said.
Two weeks ago, Venture Global LNG announced a final investment decision (FID) and successful closing of the $13.2 billion project financing for the initial phase of its Plaquemines LNG export facility in Louisiana and the associated Gator Express pipeline—the largest project financing in the world closed so far this year.
Plaquemines LNG is also the first U.S. LNG export facility to reach FID in nearly three years, since Calcasieu Pass LNG of the same firm was given the green light in August 2019. Calcasieu Pass already exported its first LNG cargo in early March this year.
After the COVID-related slump in global demand, the LNG market is hot again and U.S. developers stand to benefit from Europe’s pivot away from Russian energy.
Europe Ousts Asia As Top U.S. LNG Market
Since the energy crisis of last autumn, Europe has displaced Asia as the growth driver of LNG demand and is no longer “the market of last resort” for LNG cargoes. The Russian invasion of Ukraine has further spurred Europe to start reducing its heavy reliance on Russia’s piped gas, without which the continent currently risks a severe industrial slowdown and a rush to secure heating for next winter.
As of June 8, gas storage capacity in the EU was just over 50% full, according to data from Gas Infrastructure Europe. The EU member states are now required to reach a minimum 80% gas storage level by November 1 to protect against potential interruptions to supply. From 2023, the target will be raised to 90% full gas storage by November 1.
The European rush to LNG made Europe the top market for U.S. LNG exports in the first four months of 2022, the EIA said in a report this week. Between January and April, the United States exported 74% of its LNG to Europe, compared with an annual average of just 34% last year. In 2020 and 2021, Asia was the main destination for U.S. LNG exports, accounting for almost half of all U.S. exports.
At the same time, U.S. LNG exports to Asia slumped by 51% in the first four months of 2022, due to lockdown measures, a mild winter, and high LNG spot prices, which reduced demand for spot LNG imports. “High spot natural gas prices at the European trading hubs incentivized global LNG market participants with destination flexibility in their contracts to deliver more LNG supplies to Europe,” the EIA said.
Long-Term LNG Deals Return
As spot LNG prices soared to record highs and remain highly volatile while Europe seeks to reduce Russian pipeline gas dependence, buyers are returning to long-term contracts in order to secure the long-term supply of non-Russian gas and to insulate themselves from spiking volatile spot prices.
“Many traditional LNG buyers will neither procure spot gas or LNG nor renew or sign additional LNG contracts with Russian sellers. Spot prices have also been high and volatile, pushing many buyers towards long-term contracts,” Wood Mackenzie principal analyst Daniel Toleman said last month.
“Additionally, some buyers are returning to long-term contracting on behalf of governments to protect national energy security.”
The new world energy order in which geopolitics trump market signals will likely accelerate the momentum for additional U.S. LNG export capacity as buyers in Europe are turning to the U.S. and Qatar for gas supply to replace Russian energy.
