L.N.G. “BOOM” then “BUBBLE” — Multiple Risks And Uncertain Future

As Liquified Natural Gas (LNG) booms, some fear a “bubble” will form

From an Article by James Osborne, Houston Chronicle, November 7, 2019

WASHINGTON – For years, LNG developers have sold investors on multi-billion dollar export projects based on the premise of the world’s insatiable appetite for natural gas.

But three years after Cheniere Energy made history by exporting the first shipment of liquefied natural gas from the continental United States, energy insiders are debating whether an LNG bubble is developing around the vast sweep of projects scheduled to come online over the next 10 years.

From Russia to Qatar, Mozambique to Canada, the oil and gas industry has enough projects in the works to almost double global LNG production by 2030, with much of that growth focused along the Texas and Louisiana Gulf Coast. As analysts crunch the numbers, some do not believe the demand is there to support them all.

“There’s a fairly significant divide about the degree people might be overbuilding,” said Jason Feer, the Houston-based global head of business intelligence at Poten & Partners, a shipping advisory firm. “My take is some people are wildly optimistic about demand. We found this wide range of forecasts, some of them physically impossible.”

Forecasts of LNG’s meteoric rise largely hinge on expectations of rising demand in China, India and developing nations in Southeast Asia, all of which have limited domestic supplies of natural gas. But governments there have been slow to shift from cheap coal — which they have in abundance — to undertake the vast pipeline, storage and terminal buildouts necessary to shift their economies toward gas.

Already, there are signs that Asia’s appetite for LNG might not be as reliable as developers would hope.

Global LNG imports this summer were up 11 percent from last year, but almost two thirds of that additional gas went into storage in Europe and not Asian markets, said Mike Fulwood, a senior research fellow at the Oxford Institute for Energy Studies in the United Kingdom.

That has resulted in storage tanks in Germany and the Netherlands at near capacity – typically they would be at 80 percent at this point in the year – pushing prices there to around $3.30 per million British thermal units, or MMBTUs, well below the point at which it its profitable to import U.S. LNG. At the same time Russia is building new pipelines into Europe and is looking to expand its LNG facility near the Arctic Circle.

“All this surge into LNG into Europe is not because Europe wants or needs LNG. It’s because it has nowhere else to go,” Fulwood said. “The problem is if we get this perfect storm of events, like a mild winter, Russia keeps pumping out pipeline gas and China’s growth is a bit weak. In that scenario, you have LNG pushing a supply gap that no longer exists and then prices crash.”

Half full now and going for broke —

For certain, the LNG pessimists are dwarfed in numbers by the optimists, for whom the boom of fracked gas in the United States makes a perfect match for a warming planet trying to reduce the burning of carbon-intensive coal.

Massive, risk-adverse companies like Exxon Mobil and Royal Dutch Shell, not to mention state-owned operations in Qatar and Russia, are all pumping billions of dollars into developing LNG export projects to have them ready six years from now when forecasters predict existing facilities will be maxed out.

“Everyone wants a piece of this market. They’re saying we’re in danger of losing market share if we don’t start building out capacity,” said Alex Munton, an energy analyst with the consulting firm Wood Mackenzie. “You’ll continue to move through these cycles, like we saw this year, and spot prices have come down in a big way. But gas demand still has a bright future relative to other [fossil fuel] commodities.”

In the early years of the U.S. LNG wave, companies would get 20-year contracts for almost their entire output before beginning construction. If their customers later decided they didn’t want the gas, they could cancel the shipment, but would still be on the hook for a roughly $3 per MMBtu infrastructure fee.

That left those developers virtually no risk – the money they would make on the gas delivery itself was minimal, Munton said.

But with so many LNG developers now competing to sign on customers, companies are having to offer more generous terms and take on more risk themselves. Exxon Mobil and Qatar Petroleum agreed to build the Golden Pass LNG facility in Sabine Pass without announcing any long-term contracts, which analysts have interpreted as a plan to sell most of the LNG on the spot market, betting gas prices will rise or at least hold steady.

The Houston firm Tellurian, which is trying to build an export facility in Louisiana, is offering customers an equity stake in its LNG facility and associated pipeline in exchange for signing on to a long-term contract. And Venture Global, which announced earlier this year it was moving ahead on its Calcasieu Pass facilityin Louisiana, has reduced the infrastructure fee it’s charging customers through a new and cheaper construction model that uses modular equipment built off-site to chill and liquefy natural gas.

At a time gas prices are falling, companies are betting — hoping — the market will turn around by the time their facilities are built.

“LNG takes five to seven years to build, and they’re saying, if I don’t pull the trigger now I won’t have the volumes to sell,” Feer said. “You’ve got all this LNG that’s looking to hit the market in 2023 and 2024 and a lot of that volume is uncommitted.”

But LNG developers say they’re not worried. Tellurian is forecasting the world needs an additional 250 million metric tons of new LNG supply by 2023 — far in excess of Poten & Partners’ forecast of 120 million tons of new demand by 2030.

“LNG is now a commodity and in the commodity business, low cost wins,” Joi Lecznar, a spokeswoman for Tellurian, said in an email.

Too much Liquified Natural Gas (LNG)

But how much risk are investors willing to take on a business that really only came into its own in the last decade?

Some may be starting to get cold feet. After taking years to work their way through the government approval process, some developers such as Tellurian and Texas LNG, a Houston company planning an LNG export complex in Brownsville, have pushed back final construction decisions, a sign they are still trying to sign on more customers, analysts say.

But with larger state-owned and multinational companies, such as Shell and Qatar Petroleum, pressing ahead on LNG projects, there is little sign of the building boom slowing down.

“There’s too much LNG out there already, but industry keeps building more capacity,” said Nikos Tsafos, a senior fellow at the Washington think tank Center for Strategic and International Studies. “The question is whether this market will be there when all this additional supply hits.”

Tagged as: climate change, fracking, gas boom, gas bubble, LNG, marcellus shale, natural gas, Ocean Tankers, pipelines