Soaring natural gas prices in Europe and Asia and a tight global natural gas market could get planned North American liquefied natural gas (LNG) projects across the finish line.
A trio of experts spoke Tuesday on dynamics in the LNG market at the LDC Natural Gas Forum in New Orleans.
NGI’s LNG Insight Senior Editor Jamison Cocklin said that record benchmark prices for natural gas in Europe and Asia are propelling North American project sanctioning “after two years of inactivity.”
Global benchmarks such as the Dutch Title Transfer Facility (TTF) and the Japan-Korea Marker (JKM) have shattered records over the past few weeks, regularly exceeding $30/MMBtu. They have also started to impact U.S. prices as the global market grows more interconnected.
The North American LNG market has been “pretty loose” in recent years, but demand is “finally starting to outstrip LNG production capacity.” Cocklin said that this trend is poised to continue through 2025. “U.S. LNG is very much in the money right now,” he said.
Globally, LNG sale and purchase agreements for 53 million metric tons (mmt) were signed in the first eight months of 2021, compared to just 16 mmt in all of 2020, according to figures from Rystad Energy.
Cocklin added that buyers are increasingly signing long term agreements to protect themselves from spot market volatility. This creates “a very favorable market for second wave projects and expansions.” But, he said, “a few are surer bets than others.”
Freeport LNG’s Train 4 expansion in Texas might reach a final investment decision by the end of the year, Cocklin said. Meanwhile Tellurian Inc.’s 27.6 mmty Driftwood LNG project and the first phase of Venture Global LNG Ltd.’s 20 mmty Plaquemines LNG terminal, both in Louisiana, could get the green light next year.
Where Will Prices be This Winter?
Fauzeya Rahman, an LNG reporter at market intelligence firm ICIS, said that the current price rally is entirely dependent on the severity of the winter in Europe, Asia and North America.
“It’s hard to know exactly what will happen” in the winter, she said. But the supply-demand balance could be tight “for the next few years.”
Demand for natural gas is not only booming in Asia and Europe, but Latin American LNG consumption is also breaking records, further squeezing the market, she said.
Politics will also be important to pricing this upcoming winter, Rahman said. A comment by Russian President Vladimir Putin last week that domestic supplies to Europe would increase in the winter saw TTF prices plunge 10% in one day. Europe’s LNG demand will also be impacted by the Nordstream 2 pipeline coming online.
European natural gas stockpiles could be completely drained over the next few months, according to a new analysis from Wood Mackenzie.This would leave the continent wholly dependent on Russian pipeline imports if this winter turns out to be unseasonably cold.
There “is so much right now that is unprecedented,” Rahman said.
Will Markets Work?
Carina Energy Consulting’s Sam Andrus said during the panel that the pricing signals hitting the market are part of the ongoing creation of competitive global gas markets.
“The U.S. is not just exporting LNG, but also competitive markets. We have connected North America to global markets, and North America-based participants now have to take note of global markets.”
He said LNG ships are “akin to pipelines. And a constraint in a pipeline is a disconnect in prices.”
But, “shipping is a pipeline without line pack,” and a tight market is going to be a reality “for some time until sufficient storage can be built in Asian markets.”
Some countries in Europe also lack natural gas storage. The U.K. for example has almost no storage. Wood Mackenzie analysts have suggested that there is a risk European storage levels could drop to zero this winter.
Andrus stressed that “competition works,” and high JKM prices last winter stimulated supply and curtailed demand. ICIS forecasts that European demand in 2022 will likewise drop by 19 mmt because of high prices.
Additionally, Andrus said that U.S. natural gas production would likely respond to price signals next year.
“Producers will come back next year. This year, they are forced to sit on the sidelines. There just is no cash to ramp up significantly. As they get their balance sheet fixed, they will start to come back.”
He said that potential constraints to new LNG projects in the United States include insufficient pipeline infrastructure. He said, “We won’t see an interstate pipeline being built for regulatory and other reasons. It won’t happen.” This could potentially put a strain on Permian production to exclusively feed Gulf Coast projects, he said.
