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Norway Votes On Future Of Oil Exploration

Norway Votes On Future Of Oil Exploration

Norway—the world’s North Sea offshore…

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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The Future Of U.S. LNG: Only The Biggest Will Survive

Liquefied natural gas was a big thing a couple of years ago in the United States. With so much cheap gas coming out of the ground thanks to hydraulic fracturing, the U.S. had more than enough not just for its domestic needs but also for gas-thirsty neighbors and far-off buyers such s China and South Korea.

LNG was to be one of the weapons of U.S. energy dominance during the Trump administration, and indeed, Washington did what it could to motivate more export capacity. Planned LNG terminals dotted the map of the Gulf Coast and moved fast to final investment decisions not infrequently with Chinese purchase commitments. And then the trade war happened. Before the industry got back on its feet, the pandemic struck, and all bets were off.

Global forecasts for liquefied natural gas are bright. They are not necessarily as bright for those U.S. LNG projects that have yet to start getting built, for which their developers need billions. These billions normally come from long-term commitments from large buyers. The problem is that U.S. LNG projects are not the only ones being planned for the next few years.

The Wall Street Journal’s Jinjoo Lee wrote in an article this week that the number of U.S. LNG suppliers to overseas clients may be about to shrink in the next few years, with only the largest players such as Cheniere Energy surviving and thriving.

Smaller players are already throwing in the towel. Earlier this year, a company called Annova LNG, backed by Exelon, decided to cancel its Texas LNG export project on the grounds of “changes in the global LNG market.” There are about a dozen planned LNG export projects in the U.S. right now and, according to analysts, more may go Annova’s way.

Related Video: Massive American Pipeline Shut Down in Cyber Attack

Meanwhile, global competition is intensifying. In February, Qatar—the world’s largest producer and exporter of LNG— announced the final investment decision on what it says will be the world’s largest LNG project, boosting the tiny Gulf nation’s annual total from 77 million tons to 110 million tons—a 40-percent capacity increase. The capacity increase will cost $28.75 billion and should become operational by 2025.

Russia is building its LNG capacity, too, with plans to have 140 million tons in annual production capacity by 2030, from some 31 million tons in 2020. It also plans to capture a fifth of the global LNG market by 2030 with that capacity. And it plans to make its LNG profitable at a price of $3-7 per million British thermal units.

According to analysts, new U.S. projects are breaking even at between $7.5 and $9.1 per million Btu, based on gas prices of $2 per million Btu, which is not very good for their international competitiveness with cheaper Qatari and Russian gas. With scale, this disadvantage may disappear, but the big question is whether these new players on the U.S. LNG market will be given the chance to scale. It is a question that remains open while the dynamics of LNG demand change, not in a favorable direction.

According to Accenture Strategy, European demand for gas is on the wane under the onslaught of cheap solar and wind. Per a Bloomberg report from this week, European utilities are trying to come up with alternative uses for liquefied natural gas because there is not enough demand for it for electricity generation.

Germany’s Uniper last month decided to turn a planned LNG import terminal into a hydrogen hub instead, citing a lack of investor interest in new LNG import capacity. That’s a direct blow to U.S. suppliers for whom Europe is a key market along with Asia. The previous administration considered it a priority for the international expansion of U.S. LNG, and President Trump had managed to wring out a commitment from Germany to boost its imports of U.S. LNG. Now, things are changing.

It is not just the hypothetical decline in natural gas demand in Europe that is making LNG projects unappealing for investors. It’s also the issue of green credentials, which have gathered so much prominence in Europe they are now the top priority for a lot of companies across industries. Related: Big Oil Eyes Wave Of Buybacks After Blowout Earnings

“Most European utilities don’t want to touch gas-related projects with a barge pole as companies seek to improve their ESG metrics, improve valuation and avoid stranded asset risks,” says Bloomberg Intelligence analyst Elchin Mammadov.

Ireland earlier this year practically canceled a planned LNG import terminal project with U.S. NextDecade, and the most likely reason is environmental responsibility. The country had a memorandum of understanding with the U.S. company but let it lapse at the end of 2020 and said it had no plans to renew it, forcing NextDecade to suspend plans for the terminal.

The larger players have sensed which way the wind is blowing: Bloomberg’s Sergio Chapa reported this week that Cheniere Energy and Sempra Energy have both announced plans to add carbon capture and sequestration to their operations in a bid to make the gas more palatable for the environmentally delicate European mouth.

This means even slimmer chances for smaller, newer players on the U.S. LNG fields because carbon capture and sequestration systems are anything but cheap and will add to billions in investments necessary for new facilities to be built. As the WSJ’s Lee wrote, the U.S. LNG exporters’ club is about to become a lot more exclusive than it is now.

By Irina Slav for Oilprice.com

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  • Mamdouh Salameh on May 10 2021 said:
    US LNG exports along with exports from Qatar, Australia and Russia will all have a bright future underpinned by two pivotal factors. The first is that no global energy transition could succeed without major contribution from natural gas and LNG.

    The second factor is that global demand for LNG is accelerating particularly in the Asia-Pacific region and is projected to almost double to 700 million cubic metres by 2030 from 376 in 2020.

    The gas and LNG market could be expanded and strengthened further if the 12-country Gas Exporting Countries Forum (GECF) is transformed into an OPEC-like organization for gas. The rationale is that this could enable them to create a global gas and LNG market and influence prices exactly as OPEC does with crude oil. GECF members certainly have the clout to pull it off since they control 70% of the world’s proven gas reserves.

    But before GECF can transform itself into an organization capable of controlling gas prices, the market must first become international. This is already happening with growing production of LNG around the world. LNG now accounts for 11% of world gas production and that figure is growing. Moreover, an estimated 34% of LNG is now traded on spot markets where prices are not linked to those of oil.

    However, the continuing surge in LNG capacity is not only likely to accelerate the process of delinking gas and oil prices but also tough competition in the market between the world’s top LNG producers, namely Qatar, Australia, the United States and Russia.

    Qatar, the world’s largest LNG producer, exporter and also the cheapest is boosting its annual production capacity from 77 million tons to 110 million tons, a 43% increase. Russia, on the other hand, plans to have 140 million tons in annual production capacity by 2030 from 31 million tons in 2020. It also plans to capture a 20% share of the global LNG market by 2030 and also make its LNG profitable at a price of $3-7 per million British thermal units.

    By comparison, new U.S. LNG projects are breaking even at between $7.5 and $9.1 per million Btu, which is not very good for their international competitiveness with cheaper Qatari and Russian gas. That is why only major US LNG producers like Cheniere Energy will be able to survive.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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