America's LNG Boom Has Grown Too Big Too Fast
Authored by Irina Slav via OilPrice.com,
The US became the world's largest exporter of LNG in 2020, setting a record.
There are concerns that new proposed LNG production facilities could cause market saturation and low prices, as well as competition from low-carbon alternatives.
Despite an increase in renewable energy, Europe still depends on Russian gas contracts to meet their energy demands.
Last year, the United States leapfrogged Qatar and Australia to become the world's largest exporter of liquefied natural gas. This was made possible thanks to the surge in LNG demand from Europe as it urgently sought an alternative to Russian pipeline supply.
After such a stellar year for U.S. LNG producers despite the months-long outage sat Freeport, which affected the total volume exported, it was only to be expected that the industry would have some serious capacity growth plans.
Three new LNG production facilities could get their final investment decisions as soon as this year. By 2027, the U.S. could have LNG capacity of 169 million metric tons, overtaking Qatar, which is expanding its own capacity right now, eyeing 110 million tons by the same year.
Alas, nothing is certain in energy. The above plans and forecasts about the U.S. LNG industry are based on the assumption of continued robust LNG growth from both Europe and Asia. They are based on the assumption of growing demand, in fact.
Yet even before most of this new capacity begins to be built, concerns are surfacing from threats of low-carbon alternative energy sources and the very reliability of global LNG supply.
Analysts recently warned that if all proposed LNG production facilities do get built, global capacity could surge by 67 percent to 636 million tons annually by 2030. This, Reuters reported, could lead to market saturation and drive prices down.
In light of the electricity shortages and consequent blackouts that Pakistan, for instance, experienced last year because of prohibitively high LNG prices as a result of insatiable European demand, a future with low LNG prices will not be such a bad thing for everyone.
In light of ambitions by energy companies to get in on the LNG game precisely because of where prices were last year, market saturation is unlikely to be celebrated everywhere.
As for competition from low-carbon sources, this concern is easier to dismiss for the time being, seeing as costs for both wind and solar have increased substantially, casting a shadow over the assumption that they are and will always be the lowest-cost source of energy. Suffice it to say the United States and the European Union are now locked in a subsidy race that focuses heavily precisely on these two energy sources.
The immediate future of LNG seems certain enough. This year, imports into Europe and Turkey will rise by 10 percent from last year's record volumes to reach another record of around 190 billion cu m, according to Refinitiv. So far, so good.
Yet looking a bit further into the future, again with the assumption of strong growth in renewables, this record might be a one-off thing, according to some in Germany. The chief executive of utility major RWE recently warned that some of the LNG importer capacity that was being developed in the country might end up unused.
"It may be that the LNG terminals are not fully utilised. But you need them as an insurance premium," Markus Krebber told German media earlier this month, as quoted by Reuters.
Interestingly, Krebber said Russia was still delivering natural gas to Germany per contractual obligations, only not via the sabotaged Nord Stream but via Ukraine. That's despite assurances from German leaders that the country has now successfully weaned itself off Russian oil and gas.
Be that as it may, there is little doubt that demand for LNG will remain robust over at least the medium term and, if the argument for cheap renewables gets disproved, over the longer term as well. And this is when the reliability of global LNG supply might begin garnering some more attention than demand.
As energy analytics company Kayrros recently noted in an LNG market update, "LNG supply is inherently prone to disruptions. Accidents and unplanned maintenance are a common occurrence at LNG terminals around the world and a major driver of market volatility."
The company went on to report that 32 percent of global LNG production facilities, accounting for 55 percent of global supply, go through unplanned outages more than five times a year, with the average length of the outage at 90 days.
Theoretically, this is not what one would call reliable, especially with a view to future demand, which is seen as considerably higher than current demand. But then there are the delays and cost overruns of future plants, too. Most large-scale LNG projects in the world have seen major delays and massive cost overruns. With a world panting for more LNG, this might become a problem.
The solution to this problem is likely to be the same as the solution to the LNG price problem that plunged Pakistan into severe blackouts: coal. When the cleaner fuel becomes unavailable, for whatever reason, consumers tend to revert to the cheaper, though dirtier alternative rather than the cleaner one, also allegedly cheaper but more of a hassle to build.
Whether there will be a glut of LNG or a prolonged shortage, the future of that fuel certainly looks interesting.