The war in the Ukraine and other factors keep the need for LNG in Europe high.
Within months of Russia’s invasion of Ukraine, demand for U.S. liquefied natural gas shot through the roof — and it likely won’t come down anytime soon. The nation’s seven export terminals shipped 2.9 trillion cubic feet of LNG through the first nine months of 2022, according to the latest data available from the Department of Energy. That’s up from 2.6 trillion cubic feet the same time frame last year. In addition, a flurry of long-term contracts between U.S. LNG exporters — particularly in Louisiana — and international buyers were announced earlier this year. As expected export capacity continues to ramp up, and as long as demand for U.S. LNG remains high in Europe amid limited Russian gas supplies, a similar level of activity should continue into 2023 and beyond, according to industry insiders.
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The continued export will hinge on many factors and the industry will have to look closely at over building terminals.
The exact level of activity will hinge on a few factors, economists and advocates said. Buyers will still have to be willing to sign long-term deals for LNG, which makes financing for future export terminals possible. Amid environmental and staffing headwinds, regulators will have to keep approving new projects. And Europe will have to continue its buildout of its LNG import infrastructure. Regardless, LNG exporters are aiming high for 2023 and beyond, which should reap financial rewards for a booming Louisiana industry that has showed no signs of slowing down. “What we’ll see going through this winter and into next year will likely remain a pretty strong environment for deals being announced,” said Charlie Riedl, executive director of the Center for LNG, a Washington organization that lobbies on behalf of the industry. “I think that will remain in place through next year, that we’ll continue to see more and more deals executed and reached.”
The pandemic was the breaking point when the prices became favorable.
Right before the COVID-19 pandemic upended the global economy in early 2020, the price of natural gas along the Gulf Coast “kind of converged” with international prices for the commodity, said Greg Upton, associate research professor at LSU’s Center for Energy Studies. The narrow gap nearly led to a slowdown in buildouts of U.S. LNG export infrastructure. However, the situation “fundamentally changed” after demand for energy commodities, such as crude oil and natural gas, shot back up after cratering in the pandemic’s early stages, Upton said. The gulf between U.S. and international prices grew. Then Russia invaded Ukraine in February. As a result, Europe, which traditionally leaned on Russia for natural gas, began looking for alternative sources. That took Russian gas off the European market, driving even more of a wedge between prices in Europe and the U.S. Futures for Dutch TTF, the European benchmark for natural gas, were trading at $43 per million British thermal units as of Wednesday, according to global markets company CME Group. In the Asian market, futures for the Japan/Korea Marker benchmark were trading at about $33 per mmBtu. Meanwhile, Henry Hub futures — the U.S. standard — were trading at $6.37 per mmBtu. The divergence between international and domestic prices has made buyers “really, really willing right now” to sign long-term LNG contracts, Upton said.
2023 will be slower than 2022 but it will still be a strong trade.
Upton said he expects contract activity to be a bit slower in 2023 compared to its hottest point in 2022. However, U.S. exporters will continue to ship LNG overseas because of the price difference. “But the interesting question to me is what are people thinking in terms of the long-term price difference between natural gas here and other places, and is that enough to get someone to sign a contract to purchase that gas for 20 years?” Upton said. “That’s a big question.” Natural gas prices are higher in the U.S. than they were at the beginning of 2022. Driven in part by the overseas war and the increasing LNG exports, natural gas futures rose from as low as $3.71 per mmBtu in January to more than $9 per mmBtu in August, according to the Energy Information Administration. Riedl said the price gap is still making U.S. LNG attractive for overseas buyers, particularly in Europe. “I don’t necessarily see sort of the little bit of fluctuation that natural gas prices domestically have had having a significant impact on the negotiations to buy U.S. LNG,” Riedl said.
A lot of the contracts of today started before the pandemic.
Of the deals signed this year, negotiations had begun on number of them prior to COVID-19, Riedl said. The pandemic paused dealmaking as energy markets were upended. Once the markets stabilized from both the pandemic and the Russia-Ukraine war, negotiations resumed, leading to a flurry of activity. “The number of deals still out there that potentially could be negotiated and agreed upon next year I think looks pretty promising,” Riedl said. The elevated prices certainly convinced some LNG export companies to continue moving forward with their projects in 2022. Commonwealth LNG, a planned terminal in Cameron Parish, received approval from the Federal Energy Regulatory Commission in November and could reach a final investment decision in 2023. Driftwood LNG in Lake Charles began construction in April, despite lacking a finalized financing plan. Venture Global LNG continued making waves. It locked up a $13.2 billion financing plan for its Plaquemines LNG terminal in Plaquemines Parish and is scheduled to come online by 2024. CP2 LNG, another Venture Global LNG facility, could begin construction in 2023, but it still needs FERC’s blessing. The company is also commissioning an expansion at its Calcasieu Pass facility in Cameron Parish, according to the EIA.
There are a number of actions that should be signed in the near future.
Looking ahead, final investment decisions could arrive in 2023 from Magnolia LNG in Lake Charles and an expansion at Cameron LNG in Hackberry. Offshore terminal Delfin LNG has until 2023 to build the first phase of its facilities. These projects will take time to be approved and then build, so export capacity won’t ramp up overnight, Riedl said. And Europe is still trying to build out its infrastructure to receive the LNG. “It takes years for the permitting process and then even more time to actually build the facility,” Riedl said. “There’s a long lead time before we see a facility enter into operation where cargoes are being loaded on a regular basis.” As the industry moves forward in 2023, LNG exporters and natural gas producers stand to benefit from higher prices, Upton said. For electricity users and chemical manufacturers, however, the higher prices will hit harder. Exporting more LNG could bring down international prices for natural gas, but also could bring Gulf Coast prices up, Upton said. Louisiana’s chemical manufacturers and electricity producers are heavily reliant on natural gas, so higher prices would send shockwaves down the line for end users in both sectors. “It’s a mixed bag. It depends on who you are,” Upton said. “And that’s not just true with LNG, that’s true with any market change. Any time there’s a change in prices, some people are impacted differently than others.”
I just hope that overbuilding will not happen otherwise when a drop occurs there will be excess capacity.
