LNG industry’s future remains uncertain despite dizzying profits

As Putin’s forces closed on the Ukrainian border, Cheniere Energy’s stock soared. The liquefied natural gas (LNG) giant – America’s top exporter of LNG – recently released its 2022 earnings, reporting revenues of over $33 billion – more than double those amassed in 2021.

The American LNG industry boomed in 2022, and despite not exporting prior to 2016, the US is now one of the world’s top exporters, alongside Australia and Qatar.

Beyond dizzying profits, the onset of war provided the industry with an unprecedented opportunity to advance its cause. Naturally, lobbyists got cracking immediately. Less than 24 hours after the invasion, the lobby group LNG Allies sent President Biden a list of demands that included resuming the lease of federal lands, approving LNG export applications and facilitating the construction of new pipelines. Within months all 5 demands had been either partially or completely met, despite climate justice being a major focus of his 2020 campaign.

According to a recent report from Friends of the Earth, Public Citizen and BailoutWatch, 45 long-term contracts to export US-produced LNG were finalised in 2022 – up from 14 in 2021 and 3 in 2020.

It may not last forever

The global LNG industry, whose profits exploded as Europe frantically replaced piped Russian gas, may face significant challenges in the medium-to-long term, according to a February report from the Institute for Energy Economics and Financial Analysis (IEEFA) which predicted a marked reduction in demand growth over the coming years.

A slump in demand beginning in 2019 and massively exacerbated by the pandemic, resulted in few new projects being initiated meaning demand will continue to outpace supply in the short term: only 5 new export-scale projects are scheduled to come online in the next 2 years and supplementing global supply capacity by a meagre 3 per cent.

The IEEFA forecasts that 2025 will begin a three-year wave of new LNG export projects and flooding the market with supply. The addition of a mammoth 64 million metric tons per annum (mtpa) of new liquefication capacity in 2026 will eclipse all additions of the preceding 5 years combined and swell global capacity by 13 per cent.

This sudden influx in supply, however, may be met with a decidedly lukewarm response, as the IEEFA predicts that “sustained high global LNG prices; weak LNG demand growth and elevated price sensitivity in Asia; declines in gas consumption in Europe; and a multi-year string of global capital investments in cost-competitive energy alternatives will undermine global LNG demand growth over the next several years.”

Rhetoric or action?

The hysterical panic surrounding fuel shortages has shown that net zero is still a long way off. But in 2022, Europe, facing painfully high prices and forced to confront its fossil fuel dependency, quickly implemented policies aimed at reducing consumption and significantly decreasing its gas demand.

Between August and November 2022, the EU and the UK used 20 per cent less gas than the average for the same period between 2017 and 2021. Cynics, however, ascribe this solely to unseasonably mild weather.

Responding to the Russian invasion, the RePowerEU initiative was launched in May 2022, with the immediate aims of finding alternatives to Russian fossil fuels and drastically “accelerate our clean energy transition”, including a rise in the EU’s 2030 target for renewables from 40 to 45 per cent. Assuming these targets are met, the IEEFA forecasts that EU gas demand could fall by 40 per cent or more by 2030.

Renewables targets often seem made to be broken, but in 2022, the EU seems to have progressed from equivocating on the importance of targets to actually working to achieve them. 41.4 gigawatts (GW) of new solar PV capacity was connected to electricity grids in 2022, 47 per cent more than in 2021 and this is expected to reach 85 GW in 2026.

Nevertheless, reducing greenhouse gas emissions by 55 per cent by 2030 seems a gargantuan task – only this week Germany blocked a ban on new combustion engines sparking fears that the move would empower other member states to block further legislation.

It’s all about Asia

If the EU can quit infighting and commit to its targets, the long-term future of the industry will widely hinge on what happens in Asia.

China’s appetite for imported LNG dropped by around 20 per cent in 2022. However, a unique set of circumstances – exorbitant spot prices, ‘zero-COVID’ and a decline in economic growth – caused the steep fall in demand. So 2023 could bring renewed enthusiasm from 2021’s top importers.

Fitch Ratings does not consider the 2022 shift away from imported LNG as symptomatic of a longer-term trend, stating: “Fitch expects the decline in liquefied natural gas’s (LNG) share of total imports to reverse over the medium term, as significant LNG terminal capacity and long-term import contracts start operation or came into effect. China’s ongoing investments in gas import infrastructure would help facilitate rising gas imports.”

Significantly, 9 new LNG contracts with a total volume of 13 billion cubic metres of natural gas (bcm) are scheduled for 2023, providing a sizeable insurance policy against spot market volatility. At just below $15/MBtu, China’s contracted LNG supplies were almost 30% cheaper than spot LNG imports during 2022 according to the International Energy Agency (IEA) using data from S&P Global Commodity Insights.

Despite this, uncertainty regarding China’s actions is very much warranted. Over the past year, China massively intensified its pipeline imports, primarily from Russia. And, tellingly, in December 2022 Gazprom started production at Russia’s Kovykta gas field which feeds into the Power of Siberia pipeline and suggests increasing exports to China. 2022 also saw an uptick in China’s domestic raw coal output, rising by 9 per cent.

A 2023 return to the spot market would prompt an even tighter market over the coming year.

We just don’t know

BP forecasts robust growth in the global LNG industry until 2030, when “the range of uncertainty widens”. Outlining 3 possible scenarios: ‘Accelerated’ involving a 75 per cent reduction in carbon emissions by 2050, ‘Net Zero’ involving a 95 per cent reduction and ‘New Momentum’ involving a continuation of the current trajectory of the world’s energy system.

In both ‘Accelerated’ and ‘Net Zero’ LNG imports would decrease by around 40 per cent between 2030 and 2050, and increase by 30 per cent in ‘New Momentum’ over the same period.

As Putin’s forces closed on the Ukrainian border, Cheniere Energy’s stock soared. The liquefied natural gas (LNG) giant – America’s top exporter of LNG – recently released its 2022 earnings, reporting revenues of over $33 billion – more than double those amassed in 2021.

The American LNG industry boomed in 2022, and despite not exporting prior to 2016, the US is now one of the world’s top exporters, alongside Australia and Qatar.

Beyond dizzying profits, the onset of war provided the industry with an unprecedented opportunity to advance its cause. Naturally, lobbyists got cracking immediately. Less than 24 hours after the invasion, the lobby group LNG Allies sent President Biden a list of demands that included resuming the lease of federal lands, approving LNG export applications and facilitating the construction of new pipelines. Within months all 5 demands had been either partially or completely met, despite climate justice being a major focus of his 2020 campaign.

According to a recent report from Friends of the Earth, Public Citizen and BailoutWatch, 45 long-term contracts to export US-produced LNG were finalised in 2022 – up from 14 in 2021 and 3 in 2020.

It may not last forever

The global LNG industry, whose profits exploded as Europe frantically replaced piped Russian gas, may face significant challenges in the medium-to-long term, according to a February report from the Institute for Energy Economics and Financial Analysis (IEEFA) which predicted a marked reduction in demand growth over the coming years.

A slump in demand beginning in 2019 and massively exacerbated by the pandemic, resulted in few new projects being initiated meaning demand will continue to outpace supply in the short term: only 5 new export-scale projects are scheduled to come online in the next 2 years and supplementing global supply capacity by a meagre 3 per cent.

The IEEFA forecasts that 2025 will begin a three-year wave of new LNG export projects and flooding the market with supply. The addition of a mammoth 64 million metric tons per annum (mtpa) of new liquefication capacity in 2026 will eclipse all additions of the preceding 5 years combined and swell global capacity by 13 per cent.

This sudden influx in supply, however, may be met with a decidedly lukewarm response, as the IEEFA predicts that “sustained high global LNG prices; weak LNG demand growth and elevated price sensitivity in Asia; declines in gas consumption in Europe; and a multi-year string of global capital investments in cost-competitive energy alternatives will undermine global LNG demand growth over the next several years.”

Rhetoric or action?

The hysterical panic surrounding fuel shortages has shown that net zero is still a long way off. But in 2022, Europe, facing painfully high prices and forced to confront its fossil fuel dependency, quickly implemented policies aimed at reducing consumption and significantly decreasing its gas demand.

Between August and November 2022, the EU and the UK used 20 per cent less gas than the average for the same period between 2017 and 2021. Cynics, however, ascribe this solely to unseasonably mild weather.

Responding to the Russian invasion, the RePowerEU initiative was launched in May 2022, with the immediate aims of finding alternatives to Russian fossil fuels and drastically “accelerate our clean energy transition”, including a rise in the EU’s 2030 target for renewables from 40 to 45 per cent. Assuming these targets are met, the IEEFA forecasts that EU gas demand could fall by 40 per cent or more by 2030.

Renewables targets often seem made to be broken, but in 2022, the EU seems to have progressed from equivocating on the importance of targets to actually working to achieve them. 41.4 gigawatts (GW) of new solar PV capacity was connected to electricity grids in 2022, 47 per cent more than in 2021 and this is expected to reach 85 GW in 2026.

Nevertheless, reducing greenhouse gas emissions by 55 per cent by 2030 seems a gargantuan task – only this week Germany blocked a ban on new combustion engines sparking fears that the move would empower other member states to block further legislation.

It’s all about Asia

If the EU can quit infighting and commit to its targets, the long-term future of the industry will widely hinge on what happens in Asia.

China’s appetite for imported LNG dropped by around 20 per cent in 2022. However, a unique set of circumstances – exorbitant spot prices, ‘zero-COVID’ and a decline in economic growth – caused the steep fall in demand. So 2023 could bring renewed enthusiasm from 2021’s top importers.

Fitch Ratings does not consider the 2022 shift away from imported LNG as symptomatic of a longer-term trend, stating: “Fitch expects the decline in liquefied natural gas’s (LNG) share of total imports to reverse over the medium term, as significant LNG terminal capacity and long-term import contracts start operation or came into effect. China’s ongoing investments in gas import infrastructure would help facilitate rising gas imports.”

Significantly, 9 new LNG contracts with a total volume of 13 billion cubic metres of natural gas (bcm) are scheduled for 2023, providing a sizeable insurance policy against spot market volatility. At just below $15/MBtu, China’s contracted LNG supplies were almost 30% cheaper than spot LNG imports during 2022 according to the International Energy Agency (IEA) using data from S&P Global Commodity Insights.

Despite this, uncertainty regarding China’s actions is very much warranted. Over the past year, China massively intensified its pipeline imports, primarily from Russia. And, tellingly, in December 2022 Gazprom started production at Russia’s Kovykta gas field which feeds into the Power of Siberia pipeline and suggests increasing exports to China. 2022 also saw an uptick in China’s domestic raw coal output, rising by 9 per cent.

A 2023 return to the spot market would prompt an even tighter market over the coming year.

We just don’t know

BP forecasts robust growth in the global LNG industry until 2030, when “the range of uncertainty widens”. Outlining 3 possible scenarios: ‘Accelerated’ involving a 75 per cent reduction in carbon emissions by 2050, ‘Net Zero’ involving a 95 per cent reduction and ‘New Momentum’ involving a continuation of the current trajectory of the world’s energy system.

In both ‘Accelerated’ and ‘Net Zero’ LNG imports would decrease by around 40 per cent between 2030 and 2050, and increase by 30 per cent in ‘New Momentum’ over the same period.