Have times ever been so good for the global liquefied natural gas (LNG) business?
With gas prices in besieged Europe seven times those in the US, a vessel carrying LNG between them can make $200 million or more on a single voyage, enough to pay off the ship's cost.
Not surprisingly, new export projects are racing to launch — but can they make it before the market turns again?
Cooling natural gas to minus 160 degrees Celsius turns it to a liquid, so it shrinks by 600 times and can be carried easily by ship. It is the only way of moving gas across oceans or intercontinental distances too long or politically fraught for pipelines.
LNG has always been a cyclical business, even more so than oil. Export plants are multibillion dollar investments and take decades to conceive and build; only a few new ones come along each year.
Present-day supply represents decisions taken under very different market conditions. Most cargoes are still sold under long-term contracts, meaning that only about 15 per cent of LNG is actually available on a “spot” basis, to traders or to end users who have not secured enough for their needs.
Gas is harder to store for long periods than oil — LNG warms up and gradually boils off as it is shipped around. It needs specialised cryogenic tankers, nearly all of them built in a few South Korean and Chinese yards.
Not surprisingly, this means LNG prices around the world are volatile, diverge regionally and alternate extreme slumps — 2009 to 2010 and 2015 to 2020. Booms in the industry are equally violent, as witnessed in 2011 to 2014 following Japan’s Fukushima accident, and the last two years with the post-coronavirus pandemic recovery and Russia’s squeeze on its pipeline exports.
As Europe tries within a couple of years to undo decades of rising dependence on Russia, the LNG market has to fill the gap.
LNG demand this year is expected to reach 436 million tonnes, according to Norwegian consultancy Rystad Energy, and with supply at only 410 million tonnes, someone has to go short.
The result is prices soaring to levels equivalent to almost $300 for a barrel of oil.
Estimates suggest another 150 million tonnes of LNG is needed by 2030 and 200 million tonnes per year by 2040. About 186 million tonnes per year of new capacity is currently making progress, nearly all of it required by 2030.
The giant expansion in Qatar, which recently awarded stakes to Shell, TotalEnergies, ExxonMobil, ENI and ConocoPhillips, will start operations between 2026-2027.
The UAE’s new export facility at Fujairah is also planned to begin service in 2027. Any new plants not already under way, such as in Tanzania, will have to move very quickly to be ready by the end of the decade.
If past experience is any guide, some of these projects will be delayed or derailed by technical problems or politics, environmental or community opposition. New Russian supply is now largely ruled out by sanctions and lack of access to technology and finance. Construction in the north of Mozambique, a key emerging exporter, has been halted by insurgency.
The US accounts for more than half the future portfolio — even more when adding Mexico, whose plans rely on access to American production.
This is concerning given that rising domestic gas prices or an anti-fossil fuel attitude might lead either government to stop issuing permits for new exports.
On the other hand, demand is already constrained by high prices. Emerging LNG-importing countries in South and East Asia, including Pakistan and Bangladesh, are turning back to coal or even burning oil, which is cheaper, in a rare reversal of the usual pattern.
LNG imports by China, now the world’s biggest buyer of the fuel, are set to fall 14 per cent this year. Over the next decade, Russia will try to launch new pipelines to China to divert gas it can no longer sell in Europe.
Renewable energy will enjoy further impetus, particularly in Europe. Nuclear power, which can also generate heat, might expand in some areas.
Gas-saving measures, such as better building insulation, and electrically-driven heat pumps, will gain ground. “Green” hydrogen manufactured with solar, wind and hydroelectricity will replace gas in the fertiliser, steel, chemicals and other industries.
An inflection point will come, determined by the pace of liquefaction plant construction, further disruptions to gas output, economic growth or decline, efficiency measures, climate policy and the rise of alternatives. At that moment, the LNG market will tip back into oversupply, and prices will drop and remain low for an extended period.
Whether this slump starts with an imminent global recession, when the next wave of new LNG plants arrives around 2026-2027, or only into the 2030s, is critical for investment decisions made today.
So LNG developers today need to move fast to get to market ahead of competitors. At the same time, they need to avoid the massive cost blowouts and supply-chain congestion that plagued a previous wave of plants in Australia.
Conversely, buyers are desperate today but have to avoid committing to high-priced, long-term contracts at the peak of the market.
Operations must be as low-carbon as possible to be acceptable. Both sellers and purchasers need a strategy to deal with Europe’s net-zero ambitions once the replacement of Russia is done — whether to shift marketing progressively to Asia after 2030, or to team up with carbon capture and storage developers.
Every boom sows the seeds of its destruction. Current prices are so abnormally high that the subsequent plummet will be dizzying. LNG suppliers should enjoy today’s bonanza, but be cautioned by history.
Robin M Mills is chief executive of Qamar Energy and author of The Myth of the Oil Crisis