Submitted by Irina Slav for OilPrice.com,
Cheniere Energy recently announced plans for a $7-billion expansion of its Sabine Pass liquefaction plant in response to the surge in demand for the superchilled fuel in Asia. India's biggest gas importer said that this strong demand would lead to another surge - in long-term contracts. There may be doubts about long-term oil demand, but LNG's future seems to be bright.
Morgan Stanley said earlier this week that it expected demand for liquefied natural gas to grow by between 25 and 50 percent by 2030. Spot prices for LNG over the next ten years, the bank's analysts also said, as quoted by Reuters, could be on average 40 percent higher than the last five-year average. The bank raised its long-term price outlook for the commodity to $10 per million British thermal units.
The long-term price forecasts compare to a spot price of $56 per mmBtu in Asia earlier this month, the Reuters report noted. This would explain a move to long-term contracts, as forecast by the chief executive of India's Petronet.
"Such a volatility was never seen in the history of LNG markets. We have seen the lowest and the highest prices in the last one year," he said, as quoted by Reuters, at an industry event last week.
"Every dark cloud has a silver lining and this (high price) situation is pushing people to have more long-term contracts than normally and that could be the best thing for the gas economy across the world," A. K. Singh said.
But for long-term contracts, there needs to be sufficient supply. The world seems to have swung into a deficit of the fuel and it needs new supply of at least 73 million tons by 2030, according to Morgan Stanley analysts. This would cost some $65 billion, and that's on top of $200 billion of LNG projects approved since 2019, Reuters noted.
"We think that Asia is the growth driver for our industry for LNG demand for decades to come, and China is the single biggest piece in that," said the chief commercial officer of Cheniere Energy last week, as quoted by the Financial Times.
Cheniere's $7-billion production expansion is part of a new wave of LNG projects that popped up amid the energy crunch that started in Europe and quickly spread to Asia. An earlier report by the Financial Times cited Tellurian, with plans for a $15-billion facility. NextDecade plans to sanction a new facility in Texas by the end of the year.
"Market conditions in Europe and around the world confirm that the call on LNG far exceeds available supply," said NextDecade's chief executive Matt Schatzman.
Another executive, the CEO of Venture Global, said U.S. liquefied natural gas will be "critical to meeting this growing need and bringing energy security to Europe and beyond."
Meanwhile, the world's largest LNG exporter earlier this month said its production was maxed out as demand continued to outstrip supply.
"We are maxed out, as far as we have given all our customers their due quantities," said Saad al-Kaabi, Qatar's energy minister, as quoted by Al Jazeera.
"I am unhappy about gas prices being high."
Qatar, by the way, is working on a substantial increase in its LNG production capacity. The project, costing $28.75 billion, will boost the country's LNG production capacity from 77 million tons per year to 110 million tons. It should start producing in 2025.
The going seems to be particularly good for LNG producers and is getting better as buyers become more willing to reduce the risk of future price spikes by locking in lower rates in long-term contracts. This also confirms the long-term growth trajectory of liquefied natural gas despite warnings from the International Energy Agency that LNG demand needs to peak soon if we are to hit the Paris Agreement emission targets.
According to the IEA, gas demand must peak between 2025 and 2030 and start declining from 2030 onwards if the world is to achieve net-zero emission status by 2050. But the latest trends in LNG and gas make this doubtful. The fact that companies are willing to commit billions in upfront investments in new production capacity suggests that they expect quite the opposite of what the IEA advises. The Morgan Stanley forecast chimes in with these expectations.
"Contrary to investor expectations, the world is going to need more LNG in the initial phase of the energy transition," the bank's analysts wrote.
"Competing technologies for natural gas are not being developed fast enough, and there are significant benefits in reducing coal consumption while greener fuels are commercialised."
This was precisely the idea of Europe switching from coal to gas. Yet as the crunch showed, there is no guaranteed hedge against shortages. Now, it is this drive to minimize the chance of future shortages that is spurring demand. Once the long-term contracts are signed, a demand decline would be difficult to effect artificially to advance the Paris Agreement agenda.