Liquefied natural gas has become a major growth driver for the energy industry. Burning much more cleanly than either coal or oil, gas has earned a place in the energy transition—but that place is far from secure.
Despite continued strong demand for LNG—which saw Qatar order 12 new LNG carriers—the expected growth in that demand may fail to live up to expectations. What's more, challenges abound on the supply side, from sanctions on Russian LNG to supply chain and regulatory problems with U.S. projects, according to a new report by Wood Mackenzie.
In early August, a U.S. appeals court vacated the remand authorization of NextDecade Corporation's Rio Grande LNG export project issued by the Federal Energy Regulatory Commission on the grounds that the FERC should have issued a supplemental Environmental Impact Statement during its remand process.
In general terms, this means that the Rio Grande LNG project will be delayed. Construction on Phase 1, which will include three liquefaction trains, continues. Still, the court's ruling will affect the rest of the project, delaying the final investment decision on Phase 4 and possibly affecting the construction of Phase 2 and Phase 3.
In its report about the outlook for the LNG industry, Wood Mac noted that the Rio Grande LNG case is an example of the risks surrounding LNG projects in the United States that are yet to receive a final investment decision, "compounding the uncertainty created by the Biden administration's "pause" on export approvals in January."
The analysts noted that this infamous pause will probably be lifted after the November elections. After that, regulators would need to devise a new framework for future approvals of such projects in line with all relevant regulations.
There is also a potentially more serious issue of demand. The biggest driver of demand growth in the liquefied natural gas space is certainly Asia. Yet right now, the going is good, with Asian imports up by 15% over the first eight months of the year, per Wood Mac. However, Chinese LNG imports are about to start declining because its gas storage sites are nearing capacity, Bloomberg reported earlier this month. And if the winter is mild, these will not empty fast, undermining overall regional demand.
Another issue with Asian demand and any bullish assumptions about it is price sensitivity. So far this year, prices for LNG have been quite affordable, hence the strong increase in LNG imports. But, as Wood Mac's analysts point out in their report, most Asian countries remain highly sensitive to price changes, ready to stop buying the moment the price goes too high.
This, incidentally, may be just what is on the cards for U.S. natural gas. Next year, there could be substantially higher gas prices in the United States, Reuters energy columnist Gavin Maguire reported last week, citing data from LSEG. The forward strip of the Henry Hub benchmark suggests that U.S. natural gas prices could average $3.20 per million British thermal units (MMBtu) next year. This would be up from an average price of $2.22 from the benchmark U.S. natural gas price so far this year. Quite a substantial price increase indeed, but not unexpected in the least, after gas drillers were forced to start shutting in wells in the face of weak prices that were eating into their profits.
Such a development would see U.S. LNG exports become costlier, discouraging price-sensitive buyers in Asia—and possibly in Europe. LNG imports into Europe, including the EU, Norway, the UK, and Turkey, fell by 20% over the first half of the year, a transition think tank reported this month, with LNG imports into the EU falling by 11%. According to the Institute for Energy Economics and Financial Analysis, LNG imports would fall further over the full year, by some 11.2%.
Per the think tank, this is because demand for LNG has reached its peak and, from now on, will be falling. It is, however, likely that price plays a part, too. Europe is no longer the bottomless pockets operation it was until a couple of years ago, and has had to become more frugal with its money. There is also the supply side. The EU specifically filled up its storage caverns with gas last year. The winter turned mostly mild, and a lot of that gas remained unused. European demand, then, may not have peaked, but prices would affect it.
Elsewhere, Western sanctions have made it hard for Novatek's Arctic LNG 2 to really take off. The facility is producing liquefied gas. However, according to media reports, this gas is being shipped to storage instead of to overseas buyers.
In Florida, an LNG project has been delayed for five years due to supply chain issues and high costs. "The COVID-19 pandemic created an extremely challenging environment for the negotiation and execution of contracts. Those impediments continued for some time after the effects of the pandemic had begun to subside in 2022," the company behind the Eagle LNG project told the FERC.
Finally, there is the emissions question, which Wood Mac says is going to become increasingly prominent in the future—if other countries follow the EU's example of insisting on low-emissions LNG, regardless of the price. And that price will inevitably go higher as emission regulation piles on.
By Irina Slav for Oilprice.com
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