U.S. liquefied natural gas exports set a new record last year thanks to strong demand from Asia and Europe. With the difference in U.S. and Asian/European prices in the double digits, U.S. gas producers were in for a windfall. And despite criticism from Congress that they are exporting too much gas, they will continue doing the very same thing this year as well. They should enjoy the going while it’s good. The Energy Information Administration forecast in December that U.S. natural gas production was about to set a fresh record this year, reaching 97.5 billion cu ft daily by December. That would be up from 95.1 billion cu ft in October 2021. And producers will export as much of this as they can liquefy.
Currently, the peak LNG capacity of U.S. producers is 11.6 billion cu ft daily, according to EIA data. But demand is much greater than that as Europe and Asia continue struggling through winter ahead of storage replenishment season. It is good news, then, that U.S. peak liquefaction capacity is set to grow to 13.9 billion cu ft daily by the end of this year, with nominal capacity at 11.4 billion cu ft, from 9.5 billion cu ft daily. And this will make the U.S. the biggest exporter of LNG in terms of capacity.
This is certainly good news for gas producers such as Cheniere Energy, the biggest LNG producer in the United States. The latest data is bullish, and so is the outlook: in December alone, foreign buyers took in 13 percent of U.S. natural gas output, Bloomberg reported, adding that this was a sevenfold increase from five years earlier when much of the LNG export capacity did not exist. And this is where the risk lies for the flourishing LNG industry.
“We continue to expect more price volatility to be present in these markets relative to recent history, albeit at a more diminished level once exiting the peak demand season of winter weather,” Natasha Kaneva, JP Morgan’s head of commodity research and strategy, told Bloomberg. “This is particularly true in the U.S., where price volatility has long been absent.”
Sustained strong demand for LNG is good news. Price volatility—not so much. What’s also not good news for U.S. LNG exporters is the fact that they are not the only ones building export capacity. Competition in the LNG space is not going to ease anytime soon. And in the context of greater demand and greater competition, U.S. producers just might overshoot.
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We saw it in the Permian most recently. The country’s most prolific shale play suffered a shortage of pipeline capacity for years, which hurt prices, until a bunch of new pipelines came online, boosting prices. And then demand slumped, and now these pipelines stay half-empty.
The same happened with oil production during the so-called second shale revolution when everyone’s top priority was to pump as much as possible until the United States became the world’s largest oil producer, only to see prices drop under the weight of all the supply and the demand crash during the pandemic. The crash also saw a lot of unhappy investors who started demanding their returns after years of drillers burning cash to see just how much oil they can pump.
According to recent forecasts by the Energy Information Administration, by 2024, the United States will have a peak natural gas liquefaction capacity of 16.3 billion cu ft daily. Yet just a year later, Qatar’s expanded North Field project will come on stream, adding 40 percent to the country’s annual liquefaction capacity of 77 million tons, helping it reclaim its number-one LNG exporter place. More LNG is coming from Russia’s Novatek, too, with its Arctic LNG 2 set to be completed by 2025.
With all this supply coming soon—the Mozambique LNG project might become operational by 2027 as well—the market could at some point become a buyers’ market once again. The EU is planning to ditch long-term contracts for gas, effectively boosting its exposure to the spot market, and that’s good news on the face of it. But it is doing so in a bid to reduce gas consumption altogether—a strategy similar to that of a smoker refusing to buy cigarettes lest he’d smoke them all.
Demand in Asia is also not a constant, and it will at some point weaken, increasing the risk for all these new LNG projects planned to become operational over the next few years. Just three years ago, the LNG market was oversupplied, and U.S. developers were shelving projects. Now, LNG is in great demand, and projects are back on the table. Not all of these will be profitable—this is simply the nature of the industry—but for now, the going is good, and producers are making the most of it.
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By Irina Slav for Oilprice.com
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