War a Blow to LNG’s “Freedom Molecules” Image

US Gas barons have been celebrating the death and destruction in the Middle East, as short term outlook is favorable for US LNG exporters.
That may not be a permanent situation.

Wall Street Journal:

Stocks of U.S. liquefied-natural-gas companies have been on a tear, as higher gas prices will juice profits. But investors are ignoring the flip side of the Iran crisis: High prices are likely to rewire demand in ways that hurt the industry’s expansion plans. 

LNG has the same chokepoint as oil. Around a fifth of global supply is trapped behind the Strait of Hormuz, and most of this LNG comes from a single Qatari facility that has been struck by Iranian missiles. Qatar says it will take up to five years to repair damage to the Ras Laffan site, which will delay how soon flows go back to normal and keep global prices high. 

This is good for U.S. LNG producers whose supplies are still flowing. Shares in Venture Global, which has higher exposure to surging spot prices, have risen 74% since the start of the war. Cheniere Energy LNG , which has more of its supply locked into long-term contracts, is up 25%.

But higher-for-longer prices muddy the long-term outlook for LNG. Exports of the fuel are marketed around the world as affordable and helpful for energy security. The U.S. Department of Energy has even referred to the fuel as “molecules of U.S. freedom.” 

If pipeline gas is a marriage between two countries, seaborne cargoes of the superchilled gas allow for a less committed relationship.(emphasis mine-Peter) This flexibility is valuable in a tense world.  

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Important point here – for those hoping that America’s supply of natural gas will buffer US consumers against global shortages.
LNG carriers are famously able to change course mid-ocean to arbitrage the most favorable prices globally. US consumers will therefore be competing against consumers in Europe and Asia who are paying much higher premiums.

Continuing Wall Street Journal :

A fresh price jolt, four years after the outbreak of war in Ukraine caused a massive run-up in LNG prices, undermines the affordability pitch. Prices for LNG are more volatile than oil because supply is tight and trading is less liquid. Spot prices in Europe and Asia have gained 67% and 84%, respectively, since the first U.S. strikes on Iran, compared with an increase of 48% for Brent.

U.S. LNG cargoes have helped keep the lights on in Europe since Russia turned off the taps in 2022. But the European Union is a mature, slow-growing market. The industry’s real opportunity is in Asia, where it hopes LNG can be a substitute for coal.   

Prices need to be low to unlock certain cost-conscious markets. According to Shell, Asian LNG prices need to be less than $10 per metric million British thermal units to spark demand in India. 

Prices are currently twice this level. Last year India imported 24.9 million metric tons of LNG, data from Kpler shows—only 4% above the amount it bought in 2021, the last full year before the Ukraine war broke out. Indian buyers have been holding out for an LNG glut that was expected later this year to negotiate a better deal, which now won’t arrive.

If these countries can no longer afford LNG, the risk is that they stick with coal or turn to renewable power. Take what happened in Pakistan. Between 2015 and 2021, the country’s LNG imports rose 50% a year on average until Pakistan was effectively priced out of the market during the 2022 energy crisis.

Consumers and companies switched to renewable energy. Solar installations began to tick up in 2023 and exploded over the next two years, data from BloombergNEF shows. As battery costs have fallen, short-duration energy storage can now offset the intermittence of wind and solar for some users. Pakistan’s LNG imports last year were a fifth below their 2021 peak.

Governments are in crisis mode, scrambling to get their hands on whatever energy is available. A legacy of the war is likely to be a focus on producing more energy at home. Countries may invest in local production if they have oil, gas or coal resources, or double down on renewable energy or nuclear power. Ramping up reliance on imports will be seen as risky, which isn’t a good sign for LNG demand.

New York Times:

But the war with Iran, now entering its second month, is also a reminder that importing gas is a risky proposition that can leave buyers exposed to high prices and shortages during geopolitical strife. That presents a big challenge to the oil and gas industry’s plans to sell more natural gas — and creates an opening for alternatives like renewable energy, coal and nuclear power.

“What you’re seeing with this type of volatility that seems to happen every four or five years, it’s just not good,” Jack Fusco, chief executive of a large U.S. gas exporter Cheniere Energy, said last week at a Houston energy conference, CERAWeek by S&P Global.

This is the second time in recent years that a war has caused natural gas prices to soar in many parts of the world. The last spike followed Russia’s invasion of Ukraine in 2022.

Gas is still a lot less expensive than it was four years ago. But the Iran war is not over.

Analysts say that prices could rise significantly if Qatar, one of the world’s largest gas exporters, is unable to restart gas shipments relatively soon. On the third day of the war, the country stopped preparing gas for export. Its facilities later sustained extensive damage that a state-owned energy company said would take several years to repair.

Already, officials in Japan, Bangladesh and Thailand, which typically buy gas from Qatar, have taken steps to burn more coal to produce electricity. South Korea, meantime, is urging residents to conserve energy, including by taking shorter showers.

At the same time, buyers are competing for cargoes of L.N.G. produced outside of the Persian Gulf. That had many American companies riding high last week at the conference in Houston. Many executives expect that they will be able to build more export terminals and charge higher prices. New gas projects in places like Canada or Argentina could also advance as importers look to diversify.

“U.S. producers are positioned to be enormous winners,” said Meg Gentle, who previously led a Houston-based L.N.G. developer.

But there can be too much of a good thing. The longer the war disrupts the global energy trade, the more likely it is that importing countries will try to insulate themselves from future shocks by developing energy domestically or taking steps to conserve. Europe now uses an estimated 16 percent less natural gas than it did in 2021, the year before Russia invaded Ukraine, according to the International Energy Agency.

“The credibility of L.N.G. and gas imports really has taken a hit,” said Ira Joseph, a senior research associate at Columbia University’s Center on Global Energy Policy. “Because of Russia first and now Qatar.”

Higher gas prices also make alternatives more attractive. Take Asia, which the I.E.A. was expecting to help drive a 9 percent expansion in global gas demand by 2030, fed partly by a nearly 50 percent expansion in global L.N.G. supply. Growth could slow if countries switch to other energy sources because they cannot secure enough L.N.G. or can no longer afford it.

Last week, Goldman Sachs raised its forecast L.N.G. prices in Asia by 15 percent for the second half of the year. By 2028, the investment bank said, L.N.G. is likely to be around 57 percent more expensive in Asia than it had expected before the war. Goldman made similar changes to its natural gas price forecasts for Europe.

“Everyone will ask questions,” said Brendan Duval, chief executive of Glenfarne, which is developing natural-gas export terminals in the United States. “Like if you’re in India,” he said, “they’re very price sensitive, so are they going to go, ‘All right, let’s not get too exposed to L.N.G. because this could happen every three years?’”

“But,” Mr. Duval added, “everyone’s got short memories.”

Energy executives who are not in the business of selling L.N.G. said importers would have a strong reason to consider other options.

“If you’re a country that doesn’t have fossil fuels, you’re relying on imports, you’re going to look to protect yourself,” said John Ketchum, chief executive of NextEra Energy, which owns and operates renewable energy projects as well as nuclear and gas-fired power plants in the United States. “One of the ways you can protect yourself is with renewables and storage — or nuclear.”

Some world leaders may look to China as an example. Over the last 20 years, that country has pushed hard to reduce its reliance on imported oil and gas, motivated mainly by worries about energy security rather than concerns about climate change.

So far, American consumers and businesses have been spared higher natural gas prices. That’s because the United States is such a big producer and gas is hard enough to transport that prices tend to be set regionally rather than worldwide.

But if there is a lot more demand for U.S. gas in the coming years — and less supply from Qatar — prices most likely will rise in the United States, too. Goldman Sachs recently raised its forecast for U.S. natural gas prices in 2028 by more than 30 percent.