The LNG industry faces an uncertain future

LNG has become a major growth driver for the energy industry. Burning much cleaner than 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 he saw Qatar orders 12 new LNG carriers – expected demand growth may not live up to expectations. In addition, challenges abound on the supply front, from sanctions on Russian LNG to supply chain and regulatory issues with US projects, according to a new report by Wood Mackenzie.

In early August, a US appeals court ISSUED the Federal Energy Regulatory Commission’s holdup of NextDecade Corporation’s Rio Grande LNG export project on the grounds that FERC should have issued a supplemental environmental impact statement during its holdup process.

In broad terms, this means that the Rio Grande LNG project will be delayed. Construction of phase 1, which will include three liquefaction trains, continues. However, the court’s decision 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 on the outlook for the LNG industry, Wood Mac noted that the Rio Grande LNG case is an example of the risks associated with LNG projects in the United States, which have not yet received a final investment decision, “exacerbating the uncertainty created by the ‘Pause’ of the Biden administration on export approvals in January.

Analysts have noted that this infamous hiatus will likely be lifted after the November elections. After that, the regulatory authorities should develop a new framework for future approvals of such projects, in accordance with all relevant regulations.

There is also a potentially more serious problem of demand. The biggest driver of demand growth in the LNG space is definitely Asia. However, things are currently going well, with imports from Asia up 15% in the first eight months of the year for Wood Mac. However, China’s LNG imports are about to start falling as its gas storage sites near capacity, Bloomberg reported at the beginning of this month. And if the winter is mild, they won’t empty quickly, undermining overall regional demand.

Another problem with Asian demand and any bullish assumptions about it is price sensitivity. Until this year, LNG prices have been quite affordable, hence the strong growth in LNG imports. But as Wood Mac analysts point out in their report, most Asian countries remain very sensitive to price changes, ready to stop buying when the price rises too much.

That, by the way, may just be what’s on the cards for US natural gas. Gas prices could be substantially higher in the United States next year, Reuters energy columnist Gavin Maguire said reported last week, citing data from LSEG. The Henry Hub benchmark suggests that US natural gas prices could average $3.20 per million British thermal units (MMBtu) next year. That would be up from an average price of $2.22 over the benchmark U.S. natural gas price so far this year. A fairly substantial price increase, but not at all unexpected, 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 make US LNG exports more expensive, discouraging price-sensitive buyers in Asia and possibly Europe. LNG imports into Europe, including the EU, Norway, UK and Turkey, fell 20% in the first half of the year, a transition think tank reported this month, EU LNG imports falling by 11%. According to the Institute for Energy Economy and Financial Analysis, LNG imports are expected to decrease further for the full year, by approximately 11.2%.

According to the think tank, this is because LNG demand has peaked and will henceforth decline. However, price is also likely to play a role. Europe is no longer the deep-pocketed operation it was a few years ago and has had to become more frugal with its money. There is also the supply side. The EU specifically filled its storage caverns with gas last year. The winter became mostly mild and much of that gas went unused. European demand, therefore, may not have peaked, but prices would affect it.

Elsewhere, Western sanctions have seen Novatek’s Arctic LNG 2 really take off. The plant produces liquefied gas. However, according to the media rEPORTSthis gas is shipped to the warehouse, not to overseas buyers.

In Florida, an LNG project was delayed for five years due to supply chain issues and high costs. “The COVID-19 pandemic has created an extremely challenging environment for contract negotiation and execution. These impediments continued for some time after the effects of the pandemic began to subside in 2022,” the company behind the Eagle LNG project told FERC.

Finally, there is the issue of emissions, which Wood Mac says will become increasingly important in the future – if other countries follow the EU’s lead in insisting on low-emissions LNG, regardless of price. And that price will inevitably rise as emissions regulations develop.

By Irina Slav for Oilprice.com

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