Liquefied natural gas prices are going through the roof these days, and a new year is not expected to bring much price relief.
European wholesale gas prices hit record levels this last summer, driven partially by an increase in demand as the pandemic eased up. But price decreases are still not in sight, even though summer’s at its end.
European natural gas futures have spiked to more than 75 Euros per megawatt-hour, as of Sept. 21, up from less than four Euros last May. It’s the result of a growing demand, while big natural gas fields like those in Groningen in the Netherlands are being shut down over environmental concerns.
And it’s not just a Euro-thing: Peak winter prices in Japan and Korea could eclipse records set in early 2021, according to Valery Chow, the vice president of Wood Mackenzie.
And unpredictable winter weather could raise even more havoc.
“An unusually cold winter in the Northern hemisphere will create the perfect storm for global gas prices,” Chow said. “There’s little margin for error given extreme tightness in regional spot markets around the world.”
Several countries – the U.S., Australia, Qatar, Argentina, among others – have bountiful natural gas reserves. Yet producing and getting additional LNG to market as LNG takes a long time, because of the extraordinary cost of building new liquefaction and gasification facilities.
For this reason, the upward price pressure from stalled supply growth will continue until 2024-2025, according to S&P Global Platts.
Natural gas shortages actually began last winter, driven by the disruptions from COVID-19 and unpredictable weather.
“We had a cold winter in the northern hemisphere last year and demand really spiked,” said Jamison Cocklin, senior editor of LNG Insight at Natural Gas Intelligence. “When the supplies started to dwindle, buyers in Asia scrambled for cargoes that sent prices soaring this last winter.”
A hot summer, hurricanes and some significant outages made the problem of low storage inventories even worse.
And there are signs that reliable producers that once chased market growth are not going to be immediately able to do so, even though the LNG prices are at a decade high.
In the U.S., shale production of oil in the last decade is what drove access to huge reserves of natural gas. Most of this natural gas has been essentially a by-product of the oil. This associated gas is not considered sufficiently lucrative to produce on its own. In these same places – the Permian Basin, for example – investment for shale oil was scaled back during the pandemic and has not yet recovered.
“There have been 24 months of no investments,” said Ramanan Krishnamoorti, the chief energy officer at the University of Houston. “The existing fields are far past their most prolific production. Unless someone starts drilling some new wells that can produce more (oil and) gas, there is going to be a big decline in the absolute production of natural gas.”
Lower natural gas production will impact the supply of LNG available for export. The U.S. LNG exports account for 12.6% of the global market – not enough to shut down gas flows but certainly enough to force prices up in response.
Australia, which currently provides more than 20% of all LNG exports, doubled its LNG exports between 2015 and 2020. But this growth stalled last year, hamstrung by technical problems at several of its LNG plants and the impact of COVID-19. Recovery is not expected before 2022.
Qatar, one of the world’s largest LNG suppliers (currently making up 22% of global LNG exports), has plans to dramatically expand its production with a huge multi-billion dollar expansion of its North Field. This project alone will increase Qatar’s production capacity by 64% – but the first phase will not be done before 2025. So again, little relief in the meantime.
On the demand side, China has become the world’s biggest LNG customer in the last year, with demand up 20% in 2021 over this time last year. This growth is expected to continue in the coming years, says Wood Mackenzie. China’s increased appetite for LNG means that further demand growth will likely fall in line with its own economic growth, putting even more pressure on a currently constrained LNG supply.
Another major exporter, Russia, has reduced the amount of piped natural gas it plans to send Europe this winter via its state-owned Gazprom. Many believe it is doing so to increase pressure for the European Union to approve its Nordstream 2 offshore pipeline, which would run under the Baltic Sea between Russia and Germany.
Yet the move is also driving up European demand for LNG, as countries like Germany and the Netherlands search for alternatives. (Currently, the U.S. and Qatar are the biggest LNG suppliers, delivering about half the volume of natural gas flowing from Russia via its pipelines.)
And there is the growing demand in many emerging markets that are lifting themselves out of energy poverty. LNG exporters, such as the U.S. and Australia, have worked hard to increase demand in these markets, reaching out to potential customers to help ensure the needed infrastructure is in place to receive the gas.
Multi-billion dollar LNG regasification projects are being proposed in Vietnam, for example, which is considering imported LNG as its future fossil fuel of choice. Vietnam does not currently import any LNG but has a plan in place to import 10 million tons by 2030.
“The gas producers have been subsidizing the regasification plants around the world as a way of being able to sell LNG,” said Ed Hirs, an energy economics professor at the University of Houston. “The gas producers give it away for free until they get you hooked. It makes a big difference.”
Source: University of Houston Energy Fellows