The global liquefied natural gas market has recovered from the 2020 pandemic shock to energy demand. As LNG consumption and spot prices surge this year, U.S. exports of LNG are booming. In the short term, American LNG exports are set for records this year, benefiting from the highest summer spot prices in Asia in at least six years and Europe’s very low natural gas inventories. Those have prompted Europe to restock with natural gas following a harsh winter that drained inventories when a cold snap in April caused unusual additional withdrawals from storage.
Currently, market fundamentals point to strong U.S. LNG exports in the short term as American supply is attractive for buyers. But how attractive is American LNG in the medium and long term?
According to the Baker Institute Center for Energy Studies (CES), U.S. LNG supply will continue to be a key player on the global market in the future, thanks to three main aspects: non-oil linked pricing, geopolitical motives of energy security for buyers, especially in parts of Europe, and the desire of other buyers, especially in Asia, to switch from coal-fired power generation to cleaner-burning natural gas.
“The need for diverse supplies to counter energy security risk and the desire to use cleaner-burning natural gas may well sustain U.S. LNG exports to otherwise price-sensitive customers,” Michelle Michot Foss and Anna Mikulska at the Rice University’s Baker Institute argue in a Forbes article.
“Molecules of U.S. Freedom”
U.S. LNG is attractive in central and eastern European countries willing to reduce their reliance on Russian pipeline gas and Russia’s gas monopoly Gazprom. These include Poland and the Baltic states, which have been eager to shake off Russian energy influence and continue to be strongly opposed to the Gazprom-led Nord Stream 2 pipeline project from Russia to Germany bypassing Ukraine.
Related: Oil Demand Under Threat From Delta COVID Variant The previous U.S. Administration even pitched LNG exports as “molecules of U.S. freedom to be exported to the world,” when it approved two years ago new projects to add additional American liquefaction and export capacity.
Non-Oil Linked Pricing
U.S. LNG suppliers have also revolutionized the pricing and term contracts by linking the price to the U.S. natural gas benchmark Henry Hub instead of to oil and allowing more flexibility in destinations and periods of term contracts. American LNG also benefited from the increasingly competitive spot market for LNG.
The oil price rally of recent months has raised global LNG prices linked to crude prices and made U.S. gas benchmark-linked supply more attractive.
While flexible terms and pricing alternatives to oil-linked contracts are points for U.S. LNG supply, the fact remains that in terms of costs, American exports struggle to compete with Qatar, and not all planned projects in the United States are sure to proceed to final investment decisions (FIDs) in the coming years.
Qatar’s decision to develop the world’s largest project in terms of capacity is a major challenge to the other key LNG exporters, including America, to reduce their costs.
“At a long-term breakeven price of just over $4 per million British thermal units, it’s right at the bottom of the global LNG cost curve, alongside Arctic Russian projects,” Wood Mackenzie research director Giles Farrer said when Qatar announced its massive LNG expansion project earlier this year.
“Qatar is pursuing market share. This FID is likely to put pressure on other pre-FID LNG suppliers, who may find Qatar has secured a foothold in new markets,” Farrer added.
Despite the higher costs and prices of U.S. LNG, for some buyers, especially in central Europe, paying more for American supply is a smaller price to pay than continuing to depend on Russia for most of their gas.
“The Achilles Heel” Of U.S. LNG Supply
Prices and geopolitics aside, a third – increasingly important – factor will be shaping the attractiveness of American LNG supply going forward. Major developed economies are in a race to pledge net-zero emission targets, while investors and backers of fossil fuel projects demand solid emission-reduction goals and profiles of new supply. This is where “the Achilles heel” of U.S. LNG exports lies, according to Wood Mackenzie.
American supply may be attractive in terms of non-oil-linked pricing or flexibility in contracts, but its carbon footprint could be a deterrent to customers, especially in Western Europe, which is increasingly looking at the emission profile of the energy it imports.
Related: How Much Oil Can Saudi Arabia Really Produce?
In the United States, developers have started to bet on showing a lower environmental impact as they compete with Qatar and Australia for global LNG export leadership.
“To win customers, LNG developers are having to do more to prove their projects’ green credentials,” says Alex Munton, Wood Mackenzie’s principal analyst for LNG in the Americas.
Lower 48 upstream gas production needs to lower emissions to win over buyers in the energy transition, WoodMac notes.
“It’ll take years of tighter control – regulation or industry-led – before US upstream gas competes on carbon intensity with global basins,” Giles Farrer, Director of LNG, said.
The benefits of LNG over coal in Asia is a point for U.S. exports, but Western Europe’s snub of American supply because of emissions concerns is likely to change the way U.S. LNG developers plan and design their export capacity to remain competitive not only in terms of costs but also in ‘green’ credentials.
By Tsvetana Paraskova for Oilprice.com
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