Imports of liquefied natural gas into Asia last month slumped to the lowest in seven years. The reason, of course, was the war in the Middle East that has choked off about a quarter of global LNG supply, pushing prices higher and spurring a race for limited volumes. Most of those volumes are coming from the United States. Yet a future LNG boom is far from certain.
Earlier this week, Emirati ADNOC said it would invest billions in the U.S. natural gas industry, including production, midstream, and liquefaction, as well as regasification in receiving countries. Any business that the Emirati company builds in the U.S. will also seek to cater to the energy needs of data center operators, the chief executive of ADNOC’s international investment arm, XRG, told the FT this week. A combination of diversification and getting as much exposure to the whole industry appears to be the winning bet.
The idea of owning your own natural gas production and getting it on the water at the lowest possible cost is the right equation for turning a profit selling American gas to the international market, according to U.S. LNG pioneer Charif Souki. The co-founder of Cheniere Energy believes that the business model employed by most of the current generation of LNG developers doesn’t add up because of the low liquefaction fees the developers have agreed to.
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According to him, exporters that own their own gas and have access to good pipeline interconnectivity have an advantage over others. For those who build their own facilities, being realistic as to costs and securing the best contractor is critical.
Currently, LNG exporters with a focus on turning other companies’ gas into a commodity that can be exported by sea fund their projects through long-term supply commitment deals with large buyers. This worked well for Venture Capital, for instance, but up to a point, when its so-called foundational investors started suing the company for breaching its long-term contracts to make some quick billions on the spot LNG market during the 2022 crunch. It does not seem to be working so well for others, however.
The operator of Commonwealth LNG, a project in the making, recently said it had terminated a long-term supply deal with Japan’s JERA—the biggest gas buyer in the country. Neither of the companies gave a reason for the termination, but it came at a time when Japanese energy buyers should be rushing to lock in future supply from a secure location outside the Middle East.
The deal was inked last June, for a period of 20 years, for volumes of 1 million tons annually. Commonwealth LNG planned first production in 2029 at the time, but later in the year pushed the start of production forward to 2031. The company blamed the temporary ban on new liquefied natural gas capacity that the Biden administration imposed on the industry in its final year, following a report by an environmentalist that claimed LNG is more harmful than coal for the atmosphere.
There are several new LNG projects in the United States nearing completion. The Energy Information Administration said in its latest Short-Term Energy Outlook that four new export facilities are set to start operation next year, providing a substantial boost to export rates. All of these facilities have cost billions to build—and demand for LNG is currently undergoing what might turn into a structural change. Such a change, if it materializes, would create a risk for the profitability of some LNG plants.
The warning about structural gas demand destruction came from the head of the Gas Exporting Countries’ Forum. Speaking at an industry event in France earlier this month, Philip Mshelbila said that “If the conflict ended today, the world would recover in six months to a year. But if it lasts six months, those knee-jerk changes we are seeing could become structural.”
This is bad news for the pure-play LNG companies. But with diversification in different parts of the industry, such as the one planned by ADNOC and the one suggested by Souki, businesses—and their investors—get some protection from the wiles of international markets heavily influenced by geopolitics while enjoying exposure to the fastest-growing source of electricity demand: data centers.
Gas-powered plants have become a Goldilocks thing for the tech industry. They take less time to build than nuclear and generate baseload power, unlike wind and solar. In the U.S., they also have access to an abundant local natural gas supply. But because new gas-powered plant construction has not exactly been booming in the past decades, turbine manufacturers do not exactly keep massive inventory. Gas pipeline infrastructure has also not kept up with demand trends that only emerged over the past couple of years.
In other words, there are abundant opportunities across the natural gas supply chain that could provide investors in the field with better, more secure returns than narrow exposure to just one part of that supply chain. The global LNG market is changing. It has gone from glut predictions to the most severe supply disruption in weeks. That change might become permanent—or at least quite extended in time—due to the price sensitivity of most LNG buyers. Electricity demand, on the other hand, will remain on the rise thanks to the seemingly unstoppable AI race, while getting additional momentum from the war-related push to reduce dependence on hydrocarbons. Baseload electricity will be the big winner, and with it, the natural gas industry from well to liquefaction train.
By Irina Slav for Oilprice.com
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