Since Russia's invasion of Ukraine upended global energy markets, the LNG industry has been grappling with many uncertainties. In fact, the only real certainty is that spot LNG prices will remain elevated for years to come, even if they don't hit the most recent record highs again. Key demand centers in Europe and Asia are facing their own set of uncertainties at the end of the heating season and ahead of next winter, the peak demand period in the northern hemisphere.
Uncertainties range from how much Europe will have managed to fill its storage capacity by next November, to how much Asia will buy on the spot market to stock for the winter after lackluster demand so far this year.
LNG supply and demand will also depend on whether Russia will cut off supply to more EU customers after halting deliveries to Poland, Bulgaria, and Finland, and on how cold next winter will be in Europe and Asia.
"We have massive uncertainty over what will happen next," Steve Hill, Executive Vice President at Shell Energy, said at this week's World Gas Conference in South Korea.
"If we convert the Russian pipeline gas volume into Europe in 2021 into an LNG equivalent, and add on the LNG volumes delivered into Europe in 2021, that's 200 million tonnes of LNG equivalent. That's half the size of the current (global) LNG industry," Hill said, as carried by Reuters.
It's clear that Europe will not be able to replace all the Russian pipeline gas with LNG soon. The world just doesn't have that much supply capacity and will not have it until some point in the middle of this decade. Larger volumes of LNG are expected to hit the market in 2026 and afterward, when the U.S. projects under development and Qatar's expanded capacity come on stream.
Since the energy crisis of last autumn, Europe has displaced Asia as the growth driver of LNG demand and is no longer "the market of last resort" for LNG cargoes. The Russian invasion of Ukraine has further spurred Europe to start reducing its heavy reliance on Russia's piped gas, without which the continent currently risks a severe industrial slowdown and a rush to secure heating for next winter.
As of May 26, gas storage capacity in the EU was 44.45% full, while in the UK, this capacity is over 91% full, according to data from Gas Infrastructure Europe.
Storage levels in Europe are back to normal levels for this time of the year, but there is nothing normal in the global energy market this year, so LNG demand in Europe is expected to remain high through the start of the next winter season. Moreover, the EU member states are now required to reach a minimum 80% gas storage level by November 1 to protect against potential interruptions to supply. From 2023, the target will be raised to 90% full gas storage by November 1.
"Filling the EU's gas storage before the next winter is crucial for ensuring our security of supply," European Commissioner for Energy Kadri Simson said last week.
Related: Oil Prices Are Set To Surge Even Higher This Summer
While Europe will continue to race to buy much higher volumes of LNG compared to last year, the demand outlook in Asia is less certain. Asian LNG imports fell 10% year-on-year in Q1 2022, with Chinese, Japanese, and Indian imports down 11%, 14%, and 25%, respectively, Wood Mackenzie has estimated. Overall Asian LNG demand is now expected to be flat this year compared to 2021, WoodMac says.
High spot LNG prices have priced out Asian buyers, while market volatility and uncertainties, and concerns about energy security have prompted a growing number of buyers to seek long-term contracts.
The race for LNG supply could give rise to the second wave of U.S. LNG projects, but new supply will take time to develop, Kateryna Filippenko, Principal Analyst, Global Gas Supply, at Wood Mackenzie, said last week.
But much of this new LNG supply, including from projects that have taken FIDs in previous years, is likely to come only after 2026.
Until around 2026, "Europe will have to compete with Asia for the marginal LNG molecule to satisfy demand – just as it is right now," Filippenko noted.
"Competition between Europe and Asia for limited LNG will be intense until a new supply wave arrives after 2026. Prices will inevitably remain elevated until then."
By Tsvetana Paraskova for Oilprice.com
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However, the real reasons for the sky-high LNG prices are rising LNG demand particularly in the Asia-Pacific region and supply shortages. To this could be added the EU’s hasty policies of accelerating energy transition at the expense of fossil fuels, misjudgement of the global energy market and negligence in filling its gas storage and the non-stop rhetoric by the EU about replacing Russian gas supplies.
Total global LNG exports in 2021 amounted to 381.8 million tonnes (mt) the overwhelming bulk of which was locked into long-term contracts with customers in the Asia-Pacific region.
The current global LNG production capacity can’t be increased significantly until Qatar raises its capacity to 110 mt/y by 2024/25 and the United States increases also its capacity by 2025. But by then, global LNG demand would have again overtaken the capacity expansion.
That is why high LNG process will be with us well into the future.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
One needs only look at the Permian basin in the US, which has highly flexible supply, to see the stickiness of the growth in supply, which is still below 2019 levels, even though the US economy has completely recovered from the Pandemic and wholesale prices are 2x what they were in 2019.
The end result is the competion, which is not impacted by fuel prices changing due to political, or investor decisions, where price stability is highly desireable, that is where all the investment is going. By 2026, even the most staunch oil industry supporter will realize the end is near for fossil fuels.
At our home, we have cut our fossil fuel use by 80% over the past 4 years. Just a used EV and solar panels. The end result is we save over $4k per year, no longer have to even think about energy cost rising and basically paid for the system and car and now will have free use for the next 20 years. It will be a few more years before we trade in our other ICE vehicle for an EV, buy an induction stove for cooking and replace our hot water heater with an electric heat pump and are completely off of fossil fuels and no longer have to watch our hard earned dollars to the constantly rising prices charged by the oil companies and monopoly utilities businesses.