The Golden Age For Liquefied Natural Gas (LNG)

Originally published on Forbes.com March 1, 2023

Within two years, LNG has replaced all of the lost gas from Russia. US export revenues of LNG grew exponentially in the last six years. Export volumes and wealth from LNG could potentially lead to $100 billion in new LNG developments in the US.

Cheniere Energy is a big LNG exporter in Louisiana. In the week of February 20, 2023, the company announced it will expand its facilities in Sabine Pass. They plan to boost capacity by 20 million tonnes per annum to 50 million tonnes by adding three trains in an adjacent area, which would come online by late 2028.  

Freeport LNG is one of five LNG terminals along the Gulf Coast that turned the US from a big gas importer to the world’s top exporter. Freeport has fixed problems that led to an explosion eight months ago and they will soon rejoin the market boom. 

It was only a few years ago that investors in LNG were hesitant. One reason was fear that renewable energies would come on strong and new oil and gas assets might get started but then stranded.

Instead, Russia came on strong and attacked Ukraine and this continued to destabilize the oil and gas markets that the pandemic had begun.

Much of Europe’s gas imports in 2022 coming from Russia were cut off by Russia. Liquefied natural gas (LNG) was a natural replacement, and countries like the US and Qatar, and Australia could step up to fill the gap. The market for LNG started to explode, particularly in the US.  

What defines a golden age?

Pictures convey this best. Let’s start with the shale revolution. Figure 1 defines the golden age of shale gas in the US, starting about 2010.

The Marcellus Shale is the winner and is called the queen of shale gas. Shale gas is producing about 80 billion cubic feet per day (Bcfd).

The Permian is number 2 and its gas is associated with shale oil production which is booming at 7.2 million barrels per day in 2021. The rapid uptick in oil production began in 2011. Occupying West Texas and Southeast New Mexico, the Permian is called the king of shale oil.

LNG boom in Europe.

Out of this boom in shale gas came the boom in LNG. It could be said that shale saved the US by making it self-sufficient in oil and gas, while LNG saved Europe from energy shortages caused by Russia’s gas cutoff.

In the first 6 months of 2022, the US has shipped 39 billion cubic meters (bcm) of LNG to Europe. This compares with 34 bcm for all of 2021. This US gas is to replace a portion of the gas that Russia cut off from Europe.

The numbers confirm this. In January 2021, Europe received 45% of its total gas supplies from Russia and only 14% from LNG. By February 2022, Russia had fallen to 20% while LNG had increased to 40%. By December 2022, Russia was at 5% and LNG was at 53%.

Within two years, LNG has replaced all of the lost gas from Russia. Most of this replacement occurred in one year, the first year of the war in Ukraine. 

LNG cargoes to Europe shot up from about 380 in 2021 to almost 850 in 2022.

Southeast Asia’s place in the LNG market.

But does all the LNG that is exported from the US go to Europe?

Before the start of the Ukraine war in February 2022, Asia took the major portion of US exports (Figure 2). But in a dramatic switch, Europe then became the dominant destination and was taking about 75% of the US supply — France, Spain, and the UK were the top three countries.

Meanwhile, South Korea, Japan, India, and China were the top importers in Asia. China was just ahead of South Korea for several months before 2022, but since then have fallen back because of the Covid pandemic and the aftermath of its business shutdowns in China.

With the war in Ukraine continuing, Europeans will keep on gobbling up spot-price LNG. In the long-term, however, they are committed to renewable energies such as wind and solar and big batteries to achieve their goal of net-zero carbon emissions by 2050. They will be cautious about signing 20-year contracts with the US. But this could come back to bite them if all the long-term contracts are picked up by the Asians and may lead to a harsh gas-short European winter at the end of 2023.

The spot price of LNG has drifted downward in the past months and is now at $19.50/MMBtu (the August price of $70/MMBtu was a record). This is still higher than in early 2021 when the price was less than $10/MMBtu.

But below $20/MMBtu, LNG becomes competitive with the price of coal, and undeveloped countries like India and Bangladesh will be attracted to LNG. Buyers would be sure to come to the LNG market if the spot price fell to $15/MMBtu.

But other buyers will need to keep a wary eye on China who might undercut any new deal with suppliers.   China’s economy will be picking up speed soon. Companies owned by China have signed deals with Oman and Qatar in recent months. Sinopec sealed a 27-year deal with Qatar Energy in November 2022 in the largest single LNG sales and purchase agreement on record. The golden age of LNG will continue.

The US is looking ahead also, and in this climate has pushed aside uncertainties about stranded gas facilities and are again investing in LNG supplies. In 2022, LNG exporters completed 45 long-term contracts to sell US gas overseas, up from 14 in 2021 and 3 in 2020.

But no additional US LNG export capacity will become available until 2024. A new supply of LNG is expected to hit the market by 2026-2027, from the US and from Qatar.

LNG is like a gold rush for the US. 

Figure 3 shows the amount of LNG exported from the US over time. Before 2016 it was illegal to export LNG. Then the US opened its gates to an export flood, and the shale revolution became a golden age for LNG.

Export volumes of LNG from the US showed a steady increase after 2016 in a period when export prices were low at $4-6/Mcf.

In July 2021, LNG export prices took off like a rocket, rising to $17/Mcf by July 2022. This led to US export revenues of LNG that grew exponentially (right side of Figure 3). The revenues surged from $8.3 billion in Jan-Sep 2021 to $35 billion in Jan-Sep 2022.

New-build LNG projects.

Export LNG terminals are not cheap to build – about $10 billion each. In North America, Cheniere Energy approved a terminal expansion in Texas. In Qatar, Exxon Mobil and Shell are involved with projects to grow LNG exports that add up to $29 billion. 

Since the war in Ukraine, about 20 import LNG terminals have been initiated. Germany has invested $3 billion to implement four floating terminals. In China, which bought the most LNG last year, 10 new LNG terminals will come online in 2023. China’s capacity will double between 2020 and 2025.

But export volumes and wealth from LNG could potentially lead to $100 billion in new LNG developments, according to Wood Mackenzie.

They predict that by 2027, the US will have doubled LNG production from each of Qatar and Australia, which have stayed relatively constant.  By 2030, just 7 years away, the US will have doubled Qatar’s increased capacity and tripled Australia’s capacity which has stayed the same.

Note that this projection has included possible LNG new projects but some of these are likely to be delayed or canceled – so it’s an overestimate.

The head of gas and LNG asset research for Wood Mackenzie, Giles Farrar, said, “Record-high prices and the need for energy security drove buyers, which included portfolio players and US producers and infrastructure companies, to seek long-term US LNG deals in 2022 and created huge contracting momentum for projects. Last year alone, 65 million tpy of long-term US deals were signed, dwarfing the 18.5 million tpy we saw in 2021.”

Takeaways.

US export revenues of LNG grew exponentially in the last six years. The revenues surged from $8.3 billion in Jan-Sep 2021 to $35 billion in Jan-Sep 2022.

Export volumes and wealth from LNG could potentially lead to $100 billion in new LNG developments in the US.

Within two years, LNG has replaced all of the lost gas from Russia. Most of this replacement occurred in one year, the first year of the war in Ukraine. 

Europe may be cautious about signing 20-year contracts with the US. But this could come back to bite them if all the long-term contracts are picked up by Asia, and could lead to a harsh gas-short European winter at the end of 2023. China’s economy will be picking up speed soon.

LNG is great for energy security, and absolutely necessary for Europe since Russia cut the gas pipeline flow.

But LNG is also good for climate security because emissions of CO2 when gas is burned are only about half of the emissions of burning coal or oil. France in fact wants natural gas to be labeled as a “green” renewable, to be realistic about the golden age of LNG.