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How Biden’s LNG Export Pause Could Backfire

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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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Is the World Overbuilding LNG Capacity?

  • Energy Monitor reports that demand for LNG is going to flatline soon and start declining.
  • The news outlet is the first one to suggest an LNG glut.
  • The report also cited the International Energy Agency’s prediction that peak gas demand—like peak oil and coal demand—will be with us in just a few short years.

Last year, the United States became the world’s largest exporter of liquefied natural gas. This year, the federal government, acting on urges from climate activists, started a review in the approval process for new LNG facilities. At around the same time, a warning came about a coming glut in LNG capacity—amid reports that China’s resurgent LNG imports are threatening Europe’s energy security.

Just a decade ago, natural gas in all its forms was as uncontroversial as a hydrocarbon could ever get in the modern world. Now, it is being called “way worse than coal,” and governments in Europe and North America are taking aim at it for its methane emissions—the new CO2. And Energy Monitor reports that demand for LNG is going to flatline soon and start declining, which is why a lot of LNG capacity currently under construction will end up as a stranded asset.

The news outlet is the first one to suggest an LNG glut. The Institute for Energy Economics and Financial Analysis, a pro-transition think tank, has argued in several reports that global energy capacity will exceed demand for the fuel.

Yet demand appears to remain quite strong, at least for now. So strong, in fact, that the European Union last year imported a record amount of Russian liquefied gas despite assurances it has severed all gas ties with its former top supplier. And it apparently continues to buy record amounts of Russian LNG.

Related: Mercuria CEO Says OPEC May Have to Deepen Oil Production Cuts

The argument that LNG capacity is being overbuilt is based on expectations that all natural gas demand is going down, and soon. The reason it is going down is consumption declines—at least in the case of Europe. The Energy Monitor article reports a 20% drop in demand for gas in 2022, which was in excess of a target for a gas consumption reduction of 15% amid soaring prices.

Unsurprisingly, it was these prices that took care of consumption much more than any government-mandated reductions. The mild winter of 2022-2023 also helped a lot, but even during that winter, a cold spell in November had Germans turning up their thermostats and sparking worry among gas storage level watchers with higher withdrawals.

The report also cited the International Energy Agency’s prediction that peak gas demand—like peak oil and coal demand—will be with us in just a few short years. Given the IEA’s track record in such forecasts, it might be best to take that one with a pinch of salt. After all, two years ago, the IEA said the world does not need any more investments in new oil and gas production, only to call several months later for more investments in new oil and gas production.

In the United States, companies are building new LNG supply capacity because there is demand for LNG. It’s difficult to think of a simpler and more apt illustration of how a free market works. There is demand for an energy commodity. If there is demand, to paraphrase Shell’s former CEO Ben van Beurden, there will be supply.

China last year became the world’s largest LNG importer, even as pipeline gas imports from Russia surged to a record and domestic production also grew. In fact, China imported so much LNG that some began to worry it would raise prices for Europe on the spot market—despite the happy reports about lower gas demand.

The reality about gas demand is that it is easy to reduce when you don’t need it. Germany, in the winter of 2022, was an excellent example. People were told to conserve energy, take shorter showers, and turn their thermostats down. People did what they were told; first, because their gas bills became exorbitant and, second, because it wasn’t too cold anyway. Then it got cold. And those same people turned their thermostats up because heating in the winter is not a luxury. It is a necessity.

It is because of this simple fact of life that peak gas demand is most probably nowhere in sight—unless governments intervene to force its reduction by mandating lower consumption. The tricky part of such a course of action would be to find a comparable alternative to gas in order to avoid mass disgruntlement. Enduring gas demand in the face of massive wind and solar buildouts is proof enough that such an alternative has yet to be invented or discovered.

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In the meantime, if the free market is left to itself, a lot more LNG capacity will come online over the next decade, most of it in the United States but also in Qatar, which is working to double its export capacity by 2027, and Russia, too. This new LNG capacity costs tens of billions of dollars to develop. Surely so many companies, including the largest commodity traders in the world, can’t all be wrong about the long-term prospects of gas demand.

By Irina Slav for Oilprice.com

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