Soaring prices in Europe and Asia show that the market needs more gas. The US has the resources to meet that demand, but has hurdles to overcome

The price system, in the famous words of the economist and philosopher Friedrich Hayek, is “a mechanism for communicating information… which enables individual producers to watch merely the movement of a few pointers, as an engineer might watch the hands of a few dials, in order to adjust their activities.” In international gas markets right now, those pointers are heading into the red.

European gas prices have been hitting record highs. This week the October 2021 contract for European benchmark TTF gas went above per megawatt hour, equivalent to more than $24 per million British Thermal Units. That is about five times its level of a year ago. The soaring cost of gas has contributed to power prices also hitting record highs, sparking protests, factory shutdowns and emergency relief measures, and raising concerns about the impact on consumers over the coming winter. 

In Asia, LNG prices are at similar levels, trading at around $20 per mmBTU. Yet the response from US exporters has so far been muted. The last US LNG export project to be given final investment decision was Venture Global’s Calcasieu Pass, more than two years ago in August 2019. 

“The price signals are screaming that the market needs more gas. But there is a series of barriers that needs to be overcome before US companies can respond with new commitments to invest in additional supply,” says Alex Munton, Wood Mackenzie’s principal analyst for Americas LNG. 

Some of the factors that are driving gas prices to their current heights in Europe and Asia will be transitory. The Russian government said this week that a rapid regulatory approval for the now complete Nord Stream 2 pipeline would “significantly balance price parameters for natural gas in Europe, including on the spot market”. But as Europe phases out its coal-fired power, along with nuclear power in Germany, and its own production declines, its need for imported gas will grow. 

US companies are not the only players seeking to take advantage. Qatar Petroleum took FID on a huge capacity expansion in February, and Russia also plans a big increase in LNG production. But US exporters can still be highly competitive. 

There is a central challenge for US companies, however, in managing the risks associated with developing multi-billion dollar plants. In the first wave of US LNG development, buyers were generally prepared to take price risk in 20-year contracts, which made it possible for relatively small companies to finance large plants. For the next wave of projects, those contracts have been much more difficult to secure.

Climate policies are playing a part in that. Although demand for gas is being supported by the shift away from coal for power generation, in the longer term net-zero policies imply lower gas demand, too. Climate campaigners can also deter utilities from signing long-term gas purchase deals. Engie of France last year pulled out of talks over a possible US$7 billion deal with NextDecade, after a campaign by Friends of the Earth Europe. 

The gap could be tailor-made for the oil and gas Majors, which have the scale and experience to manage the market risks. But as Wood Mackenzie’s chief analyst Simon Flowers explained last week, they have this year been cautious about committing to large investment projects or even long-term sales contracts. BP’s second agreement with Woodfibre LNG in British Columbia, a 15-year contract announced in May, was one of only very few such deals done in 2021. 

The attitude of the Biden administration is another uncertainty swirling around the US LNG industry.

Whereas President Barack Obama was a supporter of US gas exports, seeing no contradiction between his climate policies and allowing the industry to grow, President Joe Biden’s position has been harder to read. He signed an executive order soon after taking office, to “require that federal permitting decisions consider the effects of greenhouse gas emissions and climate change”; a requirement that could be used to obstruct future LNG projects. 

The state department last month appointed Amos Hochstein, who worked with President Biden in the Obama administration and later at LNG developer Tellurian, as senior advisor for energy security. That looks like a sign that the administration may be shifting towards stronger support for LNG exports, and Hochstein has this week been raising concerns about Europe’s reliance on Russian gas. But the practical significance of his position for the US industry has yet to be seen. 

One of the US projects that seems closest to making the breakthrough to FID is Tellurian’s Driftwood LNG, which is working towards a decision by early next year. Tellurian has addressed the price risk

issue by signing deals with Vitol, Gunvor and Shell based on a combination of the Asian benchmark JKM and the European TTF, netted back for transportation charges. Driftwood looks like “potentially a fast-track US LNG project”, Munton commented. But it still needs to secure financing and probably more gas assets to supply the plant in its vertically integrated business model. 

Wood Mackenzie still expects strong growth in US LNG exports over the coming decade. The outlook for market growth, especially in Asia, combined with the resource base and production capabilities of the US, means there is enormous potential. But developers, customers, lenders and policymakers have work to do for that potential to be realised.

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