Europe's efforts to wean itself off Russian natural gas could end up accelerating the next supercycle in U.S. LNG, but U.S. and EU leaders aiming to boost European LNG supplies face a hard reality.
Building new LNG export infrastructure takes years. It requires massive capital investments. Both developers and lenders want a line of sight into the viability of projects that are built to last for decades.
U.S. LNG, in other words, cannot offer a fast solution to Europe's gas crisis, and there remains significant uncertainty about whether the political push to shore up supplies will lead European buyers to commit to long-term contracts needed to support a U.S. LNG build-out, according to industry experts.
The White House and the EU have offered few details about the mechanisms that governments might use to execute their "joint game plan" to ramp up LNG supplies to Europe following Russia's invasion of Ukraine. The gas pledge, announced March 25, had two main parts. The first step called for the U.S. to help the EU secure at least 15 billion cubic meters of LNG in 2022 to displace some of the gas the bloc gets from Russia, which was about 155 Bcm in 2021.
The second step called for EU leaders to work with member states "toward ensuring stable demand" for about 50 Bcm of additional U.S. LNG per year "until at least 2030." It also said EU leaders would "support long-term contracting mechanisms" to underpin new U.S. LNG export projects, and that contracts should include a price formula that considers the U.S. Henry Hub benchmark.
The extra 15 Bcm of LNG works out to about 11 million tonnes of LNG, or about 1.45 Bcf/d. Market forces could be enough to see that goal realized with LNG supplies from the U.S. and others in 2022, with sky-high gas prices in Europe expected to continue, according to analysts. The 2030 goal presents a bigger challenge.
"You are several years from being able to produce a lot more LNG," Jason Feer, head of business intelligence at Poten & Partners, said in an interview. "That's just the hard, cold fact."
The window has widened
The U.S. has six major LNG export terminals in operation, and they have been operating at or close to maximum capacity for months. A seventh U.S. facility — Venture Global LNG's Calcasieu Pass terminal in Louisiana — is continuing to ramp up after shipping its first LNG cargo March 1. After Calcasieu Pass, the next U.S. LNG export facility is not scheduled to come online until 2024.
Investors should anticipate "a rush of projects" looking to reach final investment decisions in the U.S., Sanford C. Bernstein & Co. gas analysts said in a recent note to clients. Bernstein increased its LNG demand forecast to 574 Mt/y by 2030, which implied 120 Mt/y of additional LNG projects that would need to get commercially sanctioned by 2025.
The U.S. is also "the most obvious supplier" of LNG to Europe because new liquefaction trains can generally be built faster in the U.S. than in other countries, shipping distances are shorter and the geopolitical relationship is favorable, according to Bernstein.
"The window for U.S. LNG has widened significantly," Bernstein analysts said.
Measures in the EU-U.S. pledge aimed at supporting new U.S. LNG capacity included a U.S. commitment to "an enabling regulatory environment" and EU leaders working with member states to accelerate the development of LNG import infrastructure. However, the timeline of ensuring annual demand of 50 Bcm until "at least 2030" left room for uncertainty about the EU's stance on the role of gas over the following decades. Market observers said this uncertainty could complicate efforts to facilitate long-term contracting between European buyers and U.S. LNG developers.
Meeting the commitment will require more than 35 Mt/y of new U.S. export capacity, or about 4.8 Bcf/d worth of LNG. Europe's actual LNG demand may be higher as the EU pursues its REPowerEU plan to reduce its dependency on Russian energy without undermining climate goals, according to S&P Global Commodity Insights analysts, who said the nod to contracting support could be the most important part of the pledge.
"The majority of the EU's targets stated in REPowerEU are so aggressive that they should be viewed as aspirational, and this likely means incremental LNG above the 50 Bcm/year target will be needed to balance the shortfall," Senior LNG Analyst Luke Cottell said in a March 30 report. "LNG will also be unable to fully offset Russian gas until a wave of new liquefaction capacity starts up in the middle of the decade."
'Actionable commitment'
The U.S. LNG industry described the EU-U.S. pledge as a "good signal" from the White House following other recent overtures to the industry by federal officials, Katharine Ehly, a senior policy adviser for the Washington, D.C.-based Center for Liquefied Natural Gas trade group. That group and other natural gas sector interests have been pushing for efforts by the U.S. Department of Energy to speed up export authorizations and by the Federal Energy Regulatory Commission to accelerate the permitting process for building LNG new terminals and pipelines.
"We are hoping to see an actionable commitment from the government through approvals so that we can help to make this happen," Ehly said in an interview. "It takes years to build these terminals, so these approvals need to happen soon."
FERC's Democratic majority recently suspended an overhaul of its decades-old permitting policy for natural gas projects that had been criticized by industry representatives as likely to hold up infrastructure development and chill project investment.
Industry officials have also criticized FERC's handling of more mundane authorizations. They have cited a request by the developer of the Golden Pass LNG Terminal under construction in Texas to bring in more workers to keep the project on track to start operations in 2024. FERC has yet to make a decision on the request a year after it was submitted.
FERC could streamline those kinds of administrative approvals in an effort to support new LNG facilities, according to former Republican FERC Commissioner Bernard McNamee. Still, McNamee said U.S. policymakers need to show "a real commitment" to oil and gas development to provide regulatory certainty for investors.
"In order to feed these LNG projects, they have to have access to natural gas, and that means having access to pipelines and that means having access to the drilling of the gas," McNamee said in an interview. "The combination of FERC no longer threatening that it's going to deny an LNG facility or a pipeline due to its upstream or downstream greenhouse gas emissions, and the Biden administration and financial regulators not threatening to cut off financing — just the message of those two things could unleash the taps."
In the end, EU policies may have the biggest influence on whether European companies sign long-term contracts with U.S. LNG developers to underpin financing for new projects. EU member states, including Germany, have announced plans to secure new LNG import infrastructure. But European countries have not gone as far as offering to back companies that contract long-term for LNG, whether by providing subsidies or committing to making up the difference if supplies are later rendered uneconomic.
U.S. LNG developers have widely reported an uptick in commercial talks, but a flurry of recent deal announcements mostly named buyers in Asia as counterparties. LNG sale and purchase agreements can also be complex deals, and newly interested European buyers could be at a disadvantage compared with Asian buyers who have been engaged in negotiations for months, Poten & Partners' Feer said.
"For the potential buyers, it is fine that the government says 'You should do this'," Feer said. "But it is the companies that have to deal with the consequences of those actions. The governments, so far, haven't issued guarantees."
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