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The world of liquefied natural gas is no stranger to booms and busts. A dearth of new projects raises prices, leading to a rush to bring new gas to market.
The next big upswing in capacity is beginning, with a wave of the supercooled fuel visible over the horizon. That is good news for gas-starved utilities and countries fretting over energy security — less so for companies seeking to sell LNG into the European market.
The market needs some slack. Supply has been tight for the past two years as a result of Russia’s invasion of Ukraine. To make up the shortfall, Europe has cut its gas consumption and hoovered up an extra 70bn cubic metres (bcm) or so of LNG originally destined for the Asian market.
But the market is set to get more LNG than it bargained for. Projects capable of producing 140mn tonnes per annum (mtpa, equivalent to 200bcm) are set to come on stream between 2025 and 2027, according to Bernstein. That’s more than 30 per cent of the current market.
New projects are likely to leave the market amply supplied and drive spot gas prices down, at least until demand catches up towards the end of the decade. That’s particularly significant for Europe, where long-term contracts are indexed to the spot price.
Lower prices would be a relief for energy-intensive European industry. Chemicals companies, for instance, have been at a disadvantage compared with their peers in the US.
LNG sellers, however, face choppy seas. Specialist US developers such as Cheniere, Venture Global or NextDecade tend to be protected by long-term capacity contracts, at fixed prices.
But a slump could squeeze profits for “portfolio” LNG companies — often oil and gas majors such as Shell and Total — whose large bets on natural gas form part of transition strategies. These companies buy gas from multiple developers, in addition to any owned production, and try to place it where most profitable globally.
Looking to 2030 and beyond, global gas demand is supposed to peak — at least according to scenarios that target net zero by 2050. Yet LNG developers don’t appear to have got that memo. They are seeking to pull the trigger on a further 190mtpa (circa 260bcm) of projects that will produce gas into the next decade.
LNG demand may grow more than the overall gas market, and not all the projects in the pipeline will be built. But an influx of gas well into the next decade would be an unhelpful headwind for the energy transition — and a chill wind for the oil and gas majors trying to sell it.
Lex is the FT’s concise daily investment column. Expert writers in four global financial centres provide informed, timely opinions on capital trends and big businesses. Click to explore
