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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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Natural Gas Prices To Rally As G7 Changes Its Tune On LNG Investment

  • The G7 reversed course this week regarding investment in natural gas, declaring support for investments in new LNG production.
  • Since Russia invaded Ukraine, the European Union has had to reconsider its stance regarding fossil fuels as it struggles to secure energy.
  • This change in stance will lead to long-term demand for LNG, likely causing a sustained rally in natural gas prices.

Two years ago, the French government asked Engie, the power utility major, not to rush into signing an LNG delivery deal with U.S. energy giant NextDecade, with unnamed sources telling Reuters at the time that the government felt the deal was “not aligned with France’s environmental project and environmental vision.” Fast forward two years, and Engie is suddenly eager to sign a deal with NextDecade for deliveries of some 1.75 million tons of liquefied natural gas—that same gas that the French government had misgivings about two years ago. And this is only the beginning.

Since Russia invaded Ukraine in February this year, the European Union has experienced a major priority rearrangement in the energy department that culminated this week with the G7 declaring their support for investments in new LNG production after earlier committing to halting all public spending on such investments, as well as investments in fossil fuels in line with their net-zero plans.

“Investment in this sector is necessary in response to the current crisis,” the leaders of the world’s seven biggest economies said in a statement, as cited by Bloomberg, noting that this is temporary and the projects would need to be aligned with climate objectives to gain their support.

However many hedges the G7 include, this is still a U-turn of the sharper variety. Just months ago, at the COP26 gathering, the G7 leaders and their fellow leaders in Europe were racing to make the most ambitious climate commitment. Now, the race is on to secure enough oil and gas to last the winter.

It is easier said than done, however, because new LNG capacity—not to mention new gas exploration before production—takes time to build. Take Germany, for example. The European Union’s largest economy suddenly developed a taste for liquefied natural gas after the Russian invasion of Ukraine and started talking about building import terminals.

Related: China To Subsidize Refiners If Oil Prices Exceed $130

To date, construction has yet to start despite the sense of urgency the German government has been demonstrating since March. As a result, plans to have at least two operating LNG import terminals by the end of the year might not materialize because the final investment decisions on them have yet to be made, according to the country’s gas industry association.

Meanwhile, however, Germany is discussing more LNG deliveries, this time not from the United States but from Canada. Canada has yet to build its first LNG export facility after a couple of false starts that ended with cancellations, but Germany is already negotiating future deliveries.

By the way, these future LNG projects are highly doubtful to materialize, too, because environmentalist opposition to new fossil fuel projects is strong in Canada, and especially in British Columbia, where the new hypothetical terminals would need to be.

There is a bigger problem, however. Governments have a way of making the projects they favor happen, especially if the energy supply situation is tight and the projects’ approval is urgent. That leaves the much bigger question of where the gas will come from.

Of course, both Canada and the United States are quite big gas producers, especially the United States. Still, more export/import capacity is being built in anticipation of a substantial increase in demand. Investments in new gas production, meanwhile, have lagged behind the demand curve. And this means that this renewed love for LNG will likely cause a sustained rally in natural gas prices.

The G7 may try and make all the hedges it likes. The truth is that support for investment in new gas supply cannot be “temporary” in the sense of “a few years”. LNG export terminals are facilities that cost billions to build. Their operators seek long-term commitments to motivate the investment decision. So does Qatar, which is expanding its own LNG export capacity substantially.

Even though the G7 leaders pretend long-term contracts are not a thing, or that they can pass for “temporary”, they very much are a thing, and that’s some serious compromise on climate goals as is already being detected by the media.

By Irina Slav for Oilprice.com

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