The LNG Boom Could End With Billions In Stranded Assets

A few years ago, the notion that the United States could become the world’s largest exporter of LNG would have sounded fantastic. And yet last year, it did just that: The US exported as much liquefied natural gas as Qatar in 2022, at over 81 billion cubic meters. And it will export more this year. But the boom may end sooner than many expect. Most of the liquefied natural gas at Gulf of Mexico terminals last year went to Europe, which was blown toward a future without fossil fuels by the war in Ukraine and its response to the Russian invasion, which took the form of sanctions . prompted an unexpected response from Moscow in the form of lower gas deliveries.

Few expected US LNG producers to be able to fill the gap left by Russian gas, especially after Freeport LNG went offline after an explosion, remaining offline until the end of the year. However, mild weather for most of the time since the start of Europe’s heating season helped, and he ended 2022 with ample gas supplies.

This year is expected to be even tougher for European countries, with much less Russian gas coming in compared to last year. Even with higher imports from the United States, there may be a supply gap, which in all likelihood will push up LNG prices and destroy more demand. And that could ultimately be the undoing of the latest US LNG boom.

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The Institute for Energy Economics and Financial Analysis, an energy NGO, wrote in a recent article on the LNG export boom that there were some important lessons to be learned from it – and those lessons could have important implications on the future of the US LNG industry.

One was that the Biden administration played a role in increasing exports. The second was that even with all the US LNG it got, Europe still has energy shortages. A third lesson was that increased LNG shipments to the US were possible without a large increase in production capacity.

Another lesson was that Europe’s comfortable LNG supply levels came at the expense of Asia. The last lesson the IEEFA said can be drawn from LNG export patterns is perhaps the most important: US producers should not rely on long-term demand from Europe.

Even the European Union has been open to this. Almost every EU and member state government official with anything to say about energy has stuck to the transition scenario that sees the EU reduce its dependence on fossil fuels in the long term.

The past year has shown that there may be setbacks that could temporarily increase the use of fossil fuels – EU coal demand also increased last year – but this does not appear to have shaken the EU’s determination to continue reducing its dependence on oil and gas.

Many would argue that this reduction is physically impossible because, like any other region, the EU needs reliable energy and wind and solar cannot supply it. However, high LNG prices could do the trick and hinder large demand growth, possibly even leading to a decline in demand as projected by the IEEFA.

Reuters’ Gavin Maguire noted in a recent column that US LNG imports to the EU have been “a lifeline and a drain” for the bloc. On the one hand, he noted, these increased imports ensured enough gas in storage for the winter. On the other hand, it emptied European pockets more.

While last year, prices were the last thing on the minds of European gas buyers, too preoccupied with finding enough gas to fill storage caverns, this year, prices may draw more attention. Signals of this came last year when 15 EU member states forced the Commission to come up with a proposal for a price cap on imported gas – something all exporters said is not the best idea in the world.

U.S. LNG exporters generated $35 billion in revenue through the first nine months of 2022, Reuters’ Maguire noted in his column. This compared to 8.3 billion dollars in the nine months of the previous year. Much of this is essentially the LNG import bill into Europe and comes with many other bills for national governments that have tried to cushion the energy price blow to businesses and households.

In the short term, the US will remain Europe’s main supplier of LNG. US companies will continue building new LNG export terminals amid a bright outlook for demand for the commodity, including in Asia.

But LNG-hungry Asian countries in favor of Europe will look for alternatives – any alternative – as Europe itself doubles down on its renewable energy plans as it realizes it has merely swapped one gas dependency for another.

In the long term, increased US LNG export capacity could end up as stranded assets unless Europe’s renewable energy dream fails, which, based on the underlying realities of critical metal supply, is quite likely. possible.

By Irina Slav for Oilprice.com

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