A few years ago, it was much better to sell liquefied natural gas than to buy it. The invasion of Ukraine in early 2022 caused the price of European gas to soar to more than 300 euros per megawatt hour (MWh), 15 times its long-term level before 2021. As gas producers increase supply , the second half of the decade is likely to be better for consumers and more difficult for the companies that extract this fossil fuel.
The world consumes 2.9 billion metric tons (4 trillion cubic meters) of natural gas annually. Of that amount, about 400 million tons, 14%, are converted into liquefied natural gas (LNG). The process consists of cooling natural gas in special liquefaction facilities to -162 degrees Celsius, thus condensing its volume 600 times. The resulting liquid is portable enough to travel around the world and reach an importing country, where it is returned to its gaseous state and used as fuel in factories and to heat homes.
It is in LNG where the growth of the gas industry is. Shell, the world’s largest marketer, expects global supply to grow at a compound annual rate of 3.6% until 2040, while gas supplied by pipeline will decline by 0.2% a year. After the invasion of Ukraine, the share of LNG in European gas supplies went from 19% to 33%, as countries moved away from Russian gas pipelines.
Producers are responding to increased demand and prices. Qatar and the US, which together with Australia produced almost two-thirds of the world’s LNG last year, are leading the way. Shell believes global supply could increase by 400 million to 600 million tons in 2030. Analysts at Goldman Sachs estimate that capacity could increase by 45 million metric tons a year between 2025 and 2028, more than triple the average annual increase in the last four years. The US and Qatar will represent almost 70% of this figure, according to Jefferies, which estimates that the emirate’s production will increase by 85% to exceed 140 million tons by the end of the decade. All of this without taking into account the decision taken in January by Joe Biden, president of the United States, to suspend pending and future export applications to study the environmental impact of the fuel, which could delay new projects in the country.
To be sustainable, a massive increase in supply requires a similar increase in demand. Conveniently, Shell’s outlook sees global LNG consumption rising to around 600 million tonnes a year by 2030, in line with its expectations for increased supply. Exxon expects natural gas demand to increase 25% by 2050. Much of that increase could come from Asia: Jefferies analysts estimate that the continent’s growing economies will account for 70% of the increase in LNG demand among 2022 and 2030.
But this lust for LNG is far from guaranteed. According to Goldman, Asian consumption of the fossil fuel has grown by an annual average of just 18 million tons in recent years, even after excluding unusually low demand during the pandemic years. That’s less than half the annual supply growth expected after 2025. Jefferies analysts believe global LNG demand by 2030 could approach 550 million tonnes, implying room for a significant glut. offer.
The fight against climate change can also intervene. If the world wants to limit warming to 1.5 degrees above pre-industrial levels, the International Energy Agency estimates that LNG consumption alone will be around 300 million metric tons in 2050.
If demand does not meet supply, prices could plummet. Gas for immediate delivery in Europe currently costs 31 euros per MWh, but after the 2009 crisis the price dropped to only 7 euros. During the pandemic it fell to 3 euros. A fall would harm large European oil and gas producers. According to Morgan Stanley, each drop in the gas price of 3 euros per MWh would reduce the cash flow from its operations by between 1% and 1.5% in 2025. For the Norwegian Equinor, the hit is 2%. For his part, Patrick Pouyanné, head of TotalEnergies, demands prices around 25 euros per MWh to obtain an acceptable internal rate of profitability of 15% in his LNG projects.
Gas suppliers have some protection against market fluctuations. According to Shell, about two-thirds of LNG contracts are set for longer periods, rather than based on the spot price. This isolates suppliers. Qatar contracts are typically more difficult for consumers to circumvent. In addition, they are usually linked to the price of oil, which is now high.
But this protection has a limit. Most of the new LNG capacity coming to market comes from the US. US suppliers tend to be more exposed to spot prices, and Morgan Stanley analysts note that many of their contracts allow customers to cancel cargoes. . Meanwhile, more than 50% of the gas that Qatar intends to supply from 2030 does not have a contract, according to the Center on Global Energy Policy at Columbia University.
Saad al-Kaabi, CEO of state gas group QatarEnergy, may be willing to take that risk. Its production costs are lower than those of its rivals, and it can afford to add 16 million tonnes more to global supply, as it did in late February, knowing that Qatar will continue to make money even if prices plummet.
A collapse in prices could also prompt large price-sensitive Asian buyers, such as India and China, to produce electricity with LNG, rather than coal. According to Thunder Said Energy calculations, to fully replace coal in these two gigantic economies, global LNG supply would have to increase by up to 1.1 billion tons per year by 2050.
But even if demand disappoints, consumers should benefit. According to Goldman analysts, lower gas prices could reduce the energy costs of European companies and households by €2 trillion by 2028, compared to 2022. By then, consumer anxiety over the LNG at the beginning of this decade will seem like a distant memory.
The authors are columnists for Reuters Breakingviews. The opinions are yours. The translation, of Carlos Gómez Belowit is the responsibility of Five days
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