The Problem With America’s LNG Boom

The Problem With America’s LNG Boom

By Tsvetana Paraskova of OilPrice.com

America’s liquefied natural gas (LNG) exports are booming amid a global energy crisis and a European drive to wean itself off Russian gas. U.S. shipments of natural gas have jumped to all-time highs this year as the United States is intent on helping Europe cut its dependence on Putin’s gas.  As demand for natural gas grows, export facilities along the U.S. Gulf Coast are operating at capacity and cannot ship more LNG than they are currently doing—at least not now.  

Many projects for LNG export plants are under consideration or are already approved by authorities but awaiting final investment decisions (FIDs). While current LNG demand, especially in Europe, remains strong and is likely to draw cargoes that would have typically gone to Asia, Europe’s push to free itself from Russian gas includes reducing gas use in the long term and doubling down on renewables to reach its climate neutrality goal by 2050. 

This is hardly good news for American LNG developers, who need long-term supply commitments and purchase agreements for decades in order to raise investments for the multi-billion projects that take years to build.

Environmental concerns about the greenhouse gas emissions of the LNG supply chain, from fracking to methane leaks, could also put a limit on the amount of LNG America will be able to send to Europe a decade or two from now.  

U.S. LNG Exports Booming

Right now, U.S. LNG exports are booming, and most are going to Europe, where the prices are the highest and demand is the strongest. Amid the energy crisis that began last autumn, LNG demand was high in Europe even before the Russian invasion of Ukraine. After the war started, however, demand went off the charts as the European Union vowed to reduce EU demand for Russian gas by two-thirds before the end of the year. 

U.S. LNG exports hit a record high in January, according to the latest EIA data. In February, exports decreased by 10.5 percent from January 2022 but jumped by 51.9 percent compared to February 2021, the Department of Energy’s latest LNG Monthly showed. The top five countries of destination, representing 57.5 percent of total U.S. LNG exports in February 2022, were Turkey, France, Spain, the Netherlands, and South Korea. The top Asian buyer of U.S. LNG in February came only fifth behind destinations in Europe and the Mediterranean. 

The U.S. is already on course to have the largest LNG export capacity in the world, ahead of Australia and Qatar, with the first cargo produced at Calcasieu Pass LNG in Cameron, Louisiana, having departed from Venture Global LNG’s newly-commissioned facility last month. 

LNG export plants are running at capacity in the U.S., so there is little room for increased shipments. To secure more American LNG, Europe must rely on cargoes being redirected from Asia due to the higher prices in Europe and the EU’s motivation to replace as much Russian supply as it can as soon as possible. This is happening right now since many price-sensitive buyers in Asia are backing out of the spot market. 

Not All Proposed LNG Projects May See The Light Of Day

While the EU’s determination to ditch Russian gas and the EU-U.S. deal for more American LNG shipments have made some U.S. developers more upbeat on the future of their projects, not all of the more than a dozen proposed export facilities will see the light of day, analysts say. 

Facilities need to lock in long-term purchase deals to secure the viability of the expensive projects, and while deal-signing with China has accelerated in recent months, Europe’s long-term energy policy remains rooted in the idea of reducing gas use by 30 percent by 2030 to reach climate goals.  

In the United States, there are a dozen projects approved by the Federal Energy Regulatory Commission (FERC) but not under construction yet as they need a final investment decision, investors, or long-term customers. Another six projects have been proposed to FERC, and two others are in the pre-filing stage.  

“Having European customers, especially if supported by public money, could easily create a huge tranche of LNG supply,” Nikos Tsafos, a James R. Schlesinger Chair in Energy and Geopolitics at the Center for Strategic and International Studies, wrote last month. 

However, it takes up to five years to build a new project, and all new projects are planned with a 20-year investment horizon and firm sale contracts of up to 20 years. 

“For a European company that wants to be aligned with the continent’s target for climate neutrality by 2050, these time scales present a problem. A European customer might want gas in 2025 or 2030, but not in 2040 and likely not by 2045. This mismatch prevents U.S. LNG projects from moving forward with European help,” Tsafos noted. 

“There’s a big customer out there that wants LNG, but you’re not quite sure for how long,” Tsafos told the Financial Times this month.  

Europe wants a lot of non-Russian gas now, but, ideally, it wants to not want an increased gas supply a decade or two from now. The U.S., for its part, cannot currently ship more LNG than it is already doing as its operating export facilities are maxed out. For future projects, Europe’s 2050 net-zero goal and a push to reduce gas use overall is not good news for U.S. developers looking at long-term purchase deals and investments to bring their plans to operating projects. 

“I wish I had better news for Europe but it’s going to take . . . at least five-plus years to get anything of size done,” Jack Fusco, president and CEO of the leading U.S. LNG exporter, Cheniere Energy, told FT. 

Tyler Durden
Wed, 04/20/2022 – 07:10

Share DeepPol