The global gas crunch and skyrocketing prices in Europe and Asia are laying the foundations for a revival in final investment decisions in new liquefied natural gas (LNG) export projects in the United States.
Following a nearly three-year-long hiatus in project sanctioning in America, the high natural gas prices globally, the historically low storage levels in Europe, and the continuously growing gas demand in Asia could incentivize the signing of more long-term offtake LNG contracts. Such deals would secure supply commitments for decades for LNG projects and show financiers that export facility developers could make handsome profits by selling gas to energy-starved regions, despite the recent backlash against fossil fuels, including natural gas.
Several U.S. LNG projects hope to move to final investment decisions (FIDs) this year, and at least three have good chances of doing so, according to analysts and industry professionals.
The United States will have the world’s largest LNG export capacity as soon as this year, exceeding the capacity of the top LNG exporters, Australia and Qatar.
And America could add more capacity to ship gas worldwide in the coming years if more projects get the financing needed to proceed. The current gas crisis in Europe is an opportunity for U.S. LNG developers as the crunch showed that gas demand is not going anywhere and will remain growing and resilient—especially in Asia—even as renewable energy capacity soars.
With the volatile and surging spot LNG prices, more buyers are looking to lock in long-term contracts, which is crucial for projects to secure funding and make it to final investment decisions (FIDs), analysts say.
Global gas demand, on the other hand, is expected to remain resilient even as the energy transition questions the role of the fossil fuel in long-term power mix plans. The rationale for gas use in Asia—a key consuming region—will remain strong as the coal-to-gas switch will continue when the dust settles over the current energy crisis.
“2021 saw the return of contracting activity to its highest levels over the last five years. Asia accounted for 85% of global contracts signed, with China leading the pack,” Valery Chow, Vice President, Head of APAC Gas & LNG Research at Wood Mackenzie, said in a report last month.
At the end of 2021, Chinese firms signed long-term supply deals for U.S. LNG, including a Cheniere agreement with Sinochem Group, and one between Venture Global LNG and Sinopec, which, Venture Global says, will be “the largest single LNG supply deal ever signed by a US company and will double imports of US LNG to China.”
A Venture Global project in Louisiana, as well as Tellurian’s Driftwood LNG Project in Louisiana and Cheniere Energy’s export facility in Corpus Christi, Texas, top the list of LNG projects that could receive financial approval soon, Craig Pirrong, a finance professor at the University of Houston and commodity trading expert, has told Reuters recently.
The return of the long-term supply deals and Asia’s insatiable demand for natural gas will likely incentivize several low-cost projects to move towards sanction over the next 12 months, Gavin Thompson, Vice Chairman, Energy Asia Pacific, at Wood Mackenzie, said in December. These include Cheniere’s Corpus Christi Stage 3 and Venture Global’s Plaquemines project, WoodMac says.
China Returns As Big Buyer of U.S. LNG
Chinese LNG importers are back on the market for long-term deals with American exporters after the year-long hiatus of zero Chinese imports of American gas at the height of the trade war in 2019 and early 2020.
The United States has returned to exporting LNG to China after a year without U.S. LNG shipments to China between March 2019 and February 2020. American exports to China started rising toward the end of 2020 to reach a record high in August 2021, the latest available EIA data shows. In November 2021, China was the single largest recipient of U.S. LNG exports, the U.S. Department of Energy’s latest LNG Monthly published in January 2022 showed.
“Momentum Behind New LNG Projects”
“With LNG prices expected to be structurally higher and oil indexation on the rise, there is plenty of momentum behind new LNG projects,” Wood Mackenzie said in its 2022 outlook.
The consultancy expects 79 million tons per annum (mmtpa) of additional LNG to take the final investment decision over the next two years, of which North America will lead with an expected 33 mmtpa in projects getting financial approval, followed by 20 mmtpa in Russia and 16 mmtpa in Qatar.
“The banks are finally realizing that this is an existential issue”
Global gas prices show that we are at the beginning of a structural shortage of natural gas on a global basis that could last a decade, Charif Souki, Executive Chairman at Tellurian, said last month, noting that “America can produce low-cost gas which is sorely needed on a global basis.”
“The banks are finally realizing that this is an existential issue around the world,” Souki added as he said that Tellurian was focused on getting financing for its Driftwood LNG Project finalized this quarter so that construction starts in earnest in the second quarter of this year.
“Financial institutions have changed pretty dramatically their posture from six months ago, driven mostly by fundamentals and the acuteness of the crisis on a global basis,” Souki said.
The role of gas in the energy transition will continue to be called into question, yet the current crisis could be an opportunity for long-planned (and sometimes stalled) U.S. export projects to secure supply contracts and financing.