Upside Down - How Global Prices Steer U.S. LNG to Different Destinations

Even as winter starts to wind down, global natural gas prices remain elevated as rising tensions between Russia and the Western world have destabilized European energy markets and pushed LNG, and U.S. LNG in particular, to center stage. From a markets perspective, the story of the past year has been high global gas prices — a strong incentive for LNG producers to push production facilities to operate at peak capacity and produce additional cargoes. The tight market has also spurred demand for new long-term sales and purchase agreements (SPAs), creating momentum for a potential new wave of LNG development. But while gas prices in Europe and Asia have been elevated all year, they have not been elevated evenly. The Asia-Europe price spread has swung dramatically from favoring Asia last spring and summer to favoring Europe this winter, and U.S. export destinations have swung with it. Last summer, almost no destination-flexible LNG produced in the U.S. was landing in Europe and now Europe is consuming U.S. LNG at record levels. In today’s RBN blog, we look at how global price spreads impact U.S. LNG export destinations and what the strength in European demand means for the future of LNG development.

U.S. LNG production is at an all-time high, driven both by new terminals coming online and the existing fleet operating at peak capacity for an extended period this winter (see Higher and Higher). High global demand for LNG has underpinned the market for over a year now, pushing gas prices to record highs repeatedly in the second half of 2021 (see Baby, It’s Cold Outside). And while prices are down from their last ultra-peak of nearly $60/MMBtu in late December, they remain incredibly elevated compared to previous years, with increased uncertainty over Russia continuing to put upward pressure on gas prices even as winter enters its final weeks. European fundamentals have driven headlines around the global gas market all year, from record-low storage (see It’s Too Late) to soaring carbon prices (see I Won’t Back Down) to the prospect of a Russia-Ukraine armed conflict indefinitely postponing the startup of Nord Stream 2, the new pipeline from Russia to Germany which would have increased Russian piped exports to Europe. But despite the flashy headlines, summertime U.S. LNG exports to Europe were barely more than in the previous year, which was during the peak of COVID-related cargo cancellations. Even with prices having quadrupled from 2020 amid high global gas demand, Europe was consistently outbid for cargoes by other markets. Now, that’s completely flipped. Last month, more than 75% of U.S. LNG, or 75 of the 98 cargoes exported in January, landed in Europe, nearly double the volume from the previous winter. It’s an astonishing reversal, driven by the flexible nature of U.S. LNG contracts (see Just Can’t Get Enough, Part 2) and the Asia-Europe price spread.

As we’ve said, one of the most important characteristics of U.S. LNG is its destination flexibility. Contracts and government regulations allow offtakers to market to any country not under U.S. sanctions and a diverse group of offtakers hold long-term contracts for U.S. LNG. In our LNG Voyager Quarterly report, RBN tracks all long-term contracts for existing LNG terminals and projects under development. We separate offtakers into five buckets: Asian Consumers, Asian Traders, Pacific Basin LNG Producers, Portfolio Players, and European Consumers. The two consumer categories comprise utilities in their respective continents, such as South Korea’s KOGAS in Asia or Germany’s Uniper in Europe. Utilities hold just under 40% of U.S. long-term offtake agreements, split evenly between Europe and Asia. The remaining three categories, which account for more than 60% of long-term U.S. contracts, are all inherently destination flexible as they are not themselves consumers — a mix of Asian traders such as Mitsui, global portfolio players like BP and TotalEnergies, and a small number of Pacific Basin producers, like Woodside. While many of these companies have sales agreements of their own with LNG end-users, they also have diverse supply sources to serve those obligations which allow them to optimize their logistics and shipping costs. The end result is that U.S. LNG destinations can change dramatically by season, over time, and in line with global gas prices.