Friday Facts: Five Trends in Global Gas

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Today’s Key Takeaway:  It is still uncertain whether companies will be rewarded or penalized by the market for these moves—although trends in the global gas industry suggest the former rather than the latter. Balancing reliability, cost, and environmental responsibility remains the industry’s great unresolved challenge.

Downside of High Prices: Five Trends in Global Gas
Ben Cahill, Center for Strategic and International Studies, June 2, 2022

It has been a turbulent year for the global gas industry. Well before Russia’s war on Ukraine, gas and electricity prices in Europe skyrocketed, although they have recently fallen back a bit. With Europe looking to cut its dependence on Russia and import up to 50 billion cubic meters per year in liquefied natural gas (LNG) from alternative sources, the market looks ever tighter. U.S. LNG exporters stand to benefit. But high prices, extreme price volatility, and concerns about the emissions footprint of natural gas pose big challenges for the industry. Below are a few key themes that emerged from the World Gas Conference in Daegu, South Korea last week.

Boom Times for U.S. LNG

Exuberance reigns in the U.S. LNG industry. As Europe seeks alternatives to Russian gas, there are strong geopolitical and market tailwinds for exports from the United States. Companies signed numerous supply contracts in recent months, and last week Venture Global sanctioned the first phase of its Plaquemines LNG project (with capacity of 13.3 million tons per year), backed by $13 billion in project finance. Proposed ventures that were struggling to generate commercial interest are newly optimistic, and a new wave of final investment decisions seems possible. A number of proposed ventures are fully permitted and investors seem eager to support an industry generating record profits. The rise in exports to Europe in recent months shows the unique flexibility, liquidity, and growth trajectory of U.S. LNG. The sense of optimism among U.S. LNG companies was palpable at last week’s World Gas Conference.

Still, there are some downside risks. Rising natural gas prices in the United States, paired with relatively flat production, suggest that higher exports could create a domestic backlash, reviving an issue that has been dormant since the early days of the LNG export industry. The rise in Henry Hub prices also raises feed gas costs for exporters and reduces their profitability, and labor and material costs are rising. 

Renewed Focus on Energy Security

Energy security is top of mind for Asian buyers. Several companies expressed concerns that the focus on boosting gas supplies to Europe could jeopardize energy security in other regions. Gas buyers in Japan, South Korea, and China worry that they will have to compete with Europe for scarce LNG supplies in the coming years. A cold winter in Northeast Asia next year would pose challenges.

In the near term, this will strengthen the case for new long-term supply contracts—and indeed Asian rather than European buyers have inked most of the recent supply deals for U.S. LNG. Korea Gas Corporation (Kogas), one of the world’s largest LNG importers, suggested it would consider signing new short-term contracts and extensions including larger volumes to supplement existing long-term contracts. But high prices and competition for scarce supplies create a challenge for buyers in Northeast Asia and a pass-through risk to Southeast Asia and South Asia.

The Downside of High Prices

Elevated prices are creating a heavy burden for price-sensitive buyers in countries such as Pakistan, Bangladesh, India, and Thailand. Platts Japan Korea Marker (JKM) prices—the main spot benchmark for Northeast Asia—exceeded $30 per million British thermal units (MMBtu) in the first two months of the year, and high prices curtailed spot trading. These concerns are perhaps less acute in Northeast Asia compared with South Asia and Southeast Asia. But high prices threaten the ability of gas to compete against coal and renewable energy, jeopardizing the role of gas as a transition fuel. Developing countries with existing gas infrastructure like Bangladesh and Pakistan are not likely to make drastic changes, and declining production in several countries still suggests growth potential for gas. But expensive gas will have difficulty securing a larger foothold in emerging markets, and sellers as well as buyers are concerned. Unfortunately, high gas prices incentivize countries around the world to burn coal and delay coal-to-gas switching.  

Big Challenge in Managing Volatility

Aside from high costs, price volatility is creating challenges for the natural gas industry. Spot prices in Europe and Asia fell to as low as $2 per MMBtu in the post-Covid-19 doldrums, but spiked last year and have fluctuated wildly since last fall. The volatility in spot prices in Europe and Northeast Asia, and the recent run-up in Henry Hub prices in the United States, is forcing companies to reevaluate some elements of their commercial strategy. The recent price fluctuations show the value of long-term contracts, which now seem to offer more stability for buyers and more predictable revenue for sellers. Panelists suggested the need for companies to reexamine their hedging and portfolio management strategies. They also noted that volatility creates opportunities for LNG portfolio players and risk-tolerant trading houses.

Long Road Ahead to Decarbonize the Industry  

Finally, an omnipresent theme at the conference was the need to decarbonize natural gas production and exports. The industry frequently touts its plans to reduce methane emissions, invest in carbon capture and storage (CCS), and implement technology solutions to reduce its carbon footprint. Several panels tackled the methane issue, including the ever-growing range of monitoring technologies on offer and the emergence of voluntary initiatives to certify the emissions intensity of gas. Numerous panelists suggested that decarbonizing production is necessary to satisfy investors and to safeguard the role of gas in the energy transition.

But so far, promises outstrip action. Industry pledges on methane emissions are not translating into material cuts quickly enough, either in the United States or in countries with looser regulatory standards. The announced slate of CCS projects is growing rapidly, but the track record of CCS in the LNG industry is problematic, and there are many regulatory, economic, and technical questions left to tackle. Despite the strong incentives to reduce their carbon footprint, high prices and material costs make it challenging for companies to invest in CCS and energy-efficient equipment. It is still uncertain whether companies will be rewarded or penalized by the market for these moves—although trends in the global gas industry suggest the former rather than the latter. Balancing reliability, cost, and environmental responsibility remains the industry’s great unresolved challenge.