Are You Gonna Go My Way - U.S. LNG Projects Face Steep Challenges in Replacing Coal Abroad

The first wave of LNG projects has done more than just catapult the U.S. to the top tier of LNG exporters, it has reshaped markets, helped move LNG closer to being a true global commodity, and spurred changes in everything from ship sizes and routes to contract types and pricing formulas. Talk about having an impact! And, with new projects still coming online in the U.S. and final investment decisions expected on new terminals and expansions this year, the U.S. LNG industry’s effect on the global gas trade is sure to grow. In today’s RBN blog, we look at the practical impacts that have accompanied growing U.S. production with an emphasis on logistics and, perhaps most important, the changes to LNG pricing in Asia.

2022 was a particularly significant year for the global LNG industry, distinguished by a sharp increase in LNG demand in Europe tied to the reduction in flows of Russian pipeline gas after Putin’s invasion of Ukraine. Whereas Europe had historically been the last market option for many LNG sellers, it became the most highly priced market in the world and pulled in LNG from multiple locations, including a cargo from Australia delivered in October. Paying premium prices enabled European buyers to fill the continent’s underground storage at an unprecedented rate — as of mid-January, storage there was over 80% full. A mild winter, at least to date, coupled with conservation efforts and fuel switching have reduced European natural gas demand by 10% to 15% and helped avoid a gas shortage. Now, gas prices (and LNG cargo prices) have fallen to pre-invasion levels and prompted market observers to suggest that, with China emerging from pandemic-related lockdowns, Asia may start pulling large volumes of LNG its way. In today’s RBN blog, we examine LNG cargo movements within the Asia Pacific and Atlantic regions and what rising Asian demand could mean for European gas supplies going forward.

Of the 10 Bcf/d, or more than 75 MMtpa, of nameplate LNG export capacity currently operational in the Lower 48, Japanese companies form the largest single group lifting U.S. cargoes. Their commitments total ~2 Bcf/d of U.S. liquefaction capacity. However, Japan’s LNG consumption has been falling over the past two years, and in 2019 and 2020, U.S. LNG accounted for only 0.6 Bcf/d and 0.8 Bcf/d of Japanese imports, respectively, or about 20% of the country’s total LNG demand in each year. In other words, Japanese companies have made commitments for incremental LNG from their remotest supply option against a backdrop of falling domestic demand. In all cases, the Japanese players have opted not to buy FOB from producer projects, but instead have booked capacity at the Cove Point, Cameron, and Freeport LNG export facilities — all plants that require offtakers to secure and transport the feedgas supply for LNG production. This type of arrangement carries with it the need to set up gas trading desks in the U.S., with front-, middle- and back-office personnel, plus operations staff, representing additional fixed costs. What was the motivation for these commitments, made by no less than seven of Japan’s major LNG buyers, how successful have they been, and what lies in store for these volumes that the country does not appear to need? Today, we look at where these volumetric commitments fit, not only in the portfolios of the capacity holders but within the broader context of LNG commerce and commoditization.