CDN NEWS | 
US NEWS 
(Reuters Breakingviews) – A few years ago, it was much better to sell liquefied natural gas than to buy it. Vladimir Putin’s invasion of Ukraine in early 2022 caused the price of European gas to spike to over 300 euros per megawatt hour (MWh), 15 times its long-term level before 2021. As gas producers crank up supply, the second half of the decade is likely to see a better time for consumers – and an edgier period for companies extracting the fossil fuel.
The world currently consumes 2.9 billion metric tons (4 trillion cubic metres) of natural gas a year. Of that about 400 million metric tons, or 14%, gets turned into liquefied natural gas (LNG). The process involves cooling natural gas in special liquefaction facilities to minus 162 degrees Celsius, thereby condensing its volume by 600 times. The resulting liquid is portable enough to ship around the world to an importing country, where it is returned to its gaseous state and used to fuel factories and heat homes.
In the gas industry, LNG is where the growth is. Shell, the world’s largest trader of the stuff, expects global supply to grow at a 3.6% compound annual rate until 2040, while gas delivered by pipeline will shrink by 0.2% a year. After the invasion of Ukraine in 2022, LNG’s share of European gas supply jumped from 19% to 33% as countries shifted away from Russian pipelines.
Producers are responding to rising demand and higher prices. Qatar and the United States, which along with Australia produced nearly two-thirds of the world’s LNG last year, are leading the charge. Shell thinks that overall supply could spike from 400 million metric tons to 600 million metric tons by 2030. Goldman Sachs analysts reckon capacity could increase by 45 million metric tons a year between 2025 and 2028, more than three times the average annual increase over the last four years. The United States and Qatar will account for nearly 70% of this, Jefferies estimates, with the emirate’s output likely to jump by 85% to over 140 million metric tons by the end of decade. That’s even after factoring in U.S. President Joe Biden’s January decision to pause pending and future export applications to study the fuel’s environmental impact, which could delay new U.S. projects.
To be sustainable, a massive surge in supply requires a similar increase in demand. Conveniently, Shell’s outlook sees global consumption of LNG rising to around 600 million metric tons a year by 2030, in line with its expectations for increased supply. U.S. oil giant Exxon Mobil sees natural gas demand rising 25% by 2050. Much of that could come from Asia: Jefferies analysts reckon growing Asian economies will account for 70% of the increase in demand for LNG between 2022 and 2030.
Yet this lust for LNG is far from assured. According to Goldman, Asian consumption of the fossil fuel has grown by an annual average of just 18 million metric tons in recent years, even after excluding unusually low demand during the pandemic years of 2020 and 2022. That’s less than half the expected annual growth in supply after 2025. Jefferies analysts think global LNG demand by 2030 may be nearer 550 million metric tons — implying scope for a significant oversupply.
The fight against climate change may also intervene. If the world is to limit warming to 1.5 degrees Celsius above pre-industrial levels, the International Energy Agency reckons LNG consumption can only be around 300 million metric tons by 2050.
If demand fails to keep up with supply, prices could tumble. Gas for immediate delivery in Europe currently costs 27 euros per MWh, but in the aftermath of the 2009 global financial crisis the price dipped to just 7 euros per MWh. During the pandemic in 2020 it fell to 3 euros per MWh. A slump would hurt Europe’s large oil and gas producers. Every decline in the gas price of 3 euros per MWh knocks around 1% to 1.5% off their 2025 cash flow from operations, Morgan Stanley calculates. For Norway’s Equinor the hit is 2%. French giant TotalEnergies CEO Patrick Pouyanné, meanwhile, prices around 25 euros per MWh to earn an acceptable 15% internal rate of return on his LNG projects.
Gas suppliers have some protection from the market’s gyrations. According to Shell, around two-thirds of LNG contracts are set over longer periods, rather than based on the spot price. That insulates suppliers. Qatar’s contracts tend to be harder for consumers to wriggle out of. They are also often pegged to the price of oil, which is currently high.
That protection only goes so far, though. The single biggest chunk of new LNG capacity coming onto the market is from the United States. U.S. suppliers are generally more exposed to spot prices, and Morgan Stanley analysts note that many of their contracts allow customers to cancel cargoes. Meanwhile, over 50% of the gas Qatar intends to supply from 2030 onwards is uncontracted, according to the Center on Global Energy Policy at Columbia University.
Saad al-Kaabi, CEO of Qatar’s national gas group QatarEnergy, may be willing to take that risk. His production costs are lower than those of his rivals. He can therefore afford to add an extra 16 million metric tons to global supply, as he did at the end of February, in the knowledge that Qatar should still make money even if gas prices hit the deck.
A price slump could also prompt big price-sensitive Asian buyers like India and China to produce electricity with LNG, rather than coal. To fully displace coal in those two giant economies, global supplies of LNG would need to jump to 1.1 billion metric tons per year by 2050, Thunder Said Energy has calculated.
Yet even if demand disappoints, customers should benefit. Lower gas prices could lower energy costs for European companies and households by 2 trillion euros by 2028 compared to 2022, Goldman analysts reckon. By then, consumers’ LNG angst of the early 2020s will seem a distant memory.
QatarEnergy CEO Saad al-Kaabi said on Feb. 25 a new expansion of the fossil fuel producer’s production of liquefied natural gas (LNG) will add 16 million metric tons per year to its expansion plans, bringing total capacity to 142 million metric tons per year by 2030.
Kaabi told a news conference in Doha “we still think there’s a big future for gas for at least 50 years forward and whenever we can technically do more, we’ll do more.”
Editing by Peter Thal Larsen and Nivedita Bhattacharjee
Breakingviews
Reuters Breakingviews is the world’s leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.
Share This:
COMMENTARY: Canadians Should Decide What to do With Their Money – Not Politicians and Bureaucrats