Within months of Russia’s invasion of Ukraine, demand for US liquefied natural gas skyrocketed — and it’s unlikely to fall anytime soon.
The country’s seven export terminals shipped 2.9 trillion cubic feet of LNG in the first nine months of 2022, according to the latest available data from the Department of Energy. That’s an increase of 2.6 trillion cubic feet over the same period last year. Additionally, a number of long-term deals between US LNG exporters — particularly in Louisiana — and international buyers were announced earlier this year.
As expected export capacity continues to grow and as long as demand for US LNG in Europe remains high amid limited Russian gas supplies, similar levels of activity are likely to continue into 2023 and beyond, according to industry insiders.
The exact level of activity will depend on a few factors, economists and advocates said. Buyers still need to be willing to enter into long-term contracts for LNG, which will enable future export terminals to be financed. Amid environmental and human resources issues, regulators must continue to approve new projects. And Europe will need to continue expanding its LNG import infrastructure.
Regardless, LNG exporters have lofty goals for 2023 and beyond, which should reap financial rewards for a booming Louisiana industry that has shown no signs of slowing down.
“What we’re going to see this winter and next year is likely to remain a pretty strong environment for announced deals,” said Charlie Riedl, executive director of the Center for LNG, a Washington-based organization that advocates for the industry.
“I think that will continue into next year where we will continue to see more and more deals being executed and closed.”
A growing rift
Just before the COVID-19 pandemic turned the global economy upside down in early 2020, the price of natural gas along the Gulf Coast “converged” with international prices for the commodity, said Greg Upton, associate research professor at LSU’s Center for Energy Studies. The narrow gap nearly slowed the expansion of US LNG export infrastructure.
However, the situation has “changed radically” after demand for energy commodities such as crude oil and natural gas spiked again after craters in the early stages of the pandemic, Upton said. The gap between US and international prices widened.
Then, in February, Russia invaded Ukraine. As a result, Europe, which has traditionally relied on Russia for natural gas, began looking for alternative sources. This took Russian gas off the European market and drove an even bigger wedge between prices in Europe and the US
Futures on the Dutch TTF, the European benchmark for natural gas, were trading at $43 per million British thermal units on Wednesday, according to global markets firm CME Group. In the Asian market, futures for the benchmark Japan/Korea Marker were trading at around $33 per mmBtu. Meanwhile, Henry Hub futures – the US standard – were trading at $6.37 per mmBtu.
The divergence between international and domestic prices has made buyers “really, really ready right now” to sign long-term LNG deals, Upton said.
Upton said he expects contract activity to slow slightly in 2023 compared to its hottest point in 2022. However, US exporters will continue to ship LNG overseas due to the price difference.
“But the interesting question for me is what do people think about the long-term price difference between natural gas here and other places, and is that enough to get someone to sign a contract to buy that gas for 20 years said Upton. “That’s a big question.”
Natural gas prices are higher in the US than they were at the start of 2022. Driven in part by the overseas war and increasing LNG exports, natural gas futures surged from just $3.71 per mmBtu in January to over $9 per mmBtu in August, according to the Energy Information Administration.
Riedl said the price difference still makes US LNG attractive to foreign buyers, particularly in Europe.
“I don’t necessarily see the small swings that natural gas prices have had domestically have a significant impact on negotiations to purchase US LNG,” Riedl said.
Of the contracts signed this year, negotiations on some started before COVID-19, Riedl said. The pandemic halted dealmaking as energy markets were turned upside down. After markets stabilized both after the pandemic and after the war between Russia and Ukraine, negotiations resumed, prompting a flurry of activity.
“The number of deals still available that could potentially be negotiated and agreed upon over the next year looks pretty promising in my opinion,” Riedl said.
The price is right – for LNG exporters
The increased prices have certainly persuaded some LNG exporters to push ahead with their projects in 2022.
Commonwealth LNG, a proposed terminal in Cameron Parish, received approval from the Federal Energy Regulatory Commission in November and could make a final investment decision in 2023. Driftwood LNG in Lake Charles began construction in April, although a definitive financing plan was missing.
Venture Global LNG continued to make waves. It has completed a $13.2 billion financing plan for its Plaquemines LNG terminal in the township of Plaquemines and is expected to be operational by 2024. CP2 LNG, another of Venture Global’s LNG plants, could start construction in 2023 but still needs FERC’s blessing. According to the EIA, the company is also commissioning an expansion of its Calcasieu Pass facility in Cameron Parish.
Looking ahead, final investment decisions could be made in 2023 of Magnolia LNG at Lake Charles and an expansion at Cameron LNG at Hackberry. The offshore terminal Delfin LNG has until 2023 to build the first phase of its facilities.
These projects will take time to be approved and then built, so export capacity won’t ramp up overnight, Riedl said. And Europe is still trying to expand its infrastructure to receive the LNG.
“The approval process takes years and then even more time to actually build the plant,” said Riedl. “There’s a long lead time before we see a facility come on stream where cargo is loaded on a regular basis.”
As the industry moves forward in 2023, LNG exporters and natural gas producers will benefit from higher prices, Upton said. However, electricity consumers and chemical manufacturers will be hit harder by the higher prices.
Exporting more LNG could lower international natural gas prices but also push up prices on the Gulf Coast, Upton said. Louisiana’s chemical and power producers are heavily dependent on natural gas, so higher prices would send shockwaves to end-users in both sectors.
“It’s a mixed bag. It depends on who you are,” Upton said. “And that doesn’t just apply to LNG, it applies to any market change. Every time prices change, some people are affected differently than others.”