Russia’s invasion of Ukraine triggered extreme tightness in the global liquefied natural gas (LNG) market, as Europe scrambled to secure shipments of the fuel once Russian pipeline gas exports were shut off. European countries ended up importing 121 million tonnes of LNG in 2022, an increase of 60% compared to 2021.
“The huge decline in Russian pipeline gas exports to Europe has effectively shrunk the amount of supply available to the global market, because that gas hasn’t got anywhere else to go now,” explains Jack Sharples, from the Oxford Institute for Energy Studies. “We are unlikely to see a substantial rebound in pipeline gas supplies from Russia in the next five years, meaning that the market will likely remain tight for some time.”
The energy policy response to this new status quo means that there are 32 LNG projects that are either under construction or in the planning stage around Europe (with certain facilities claiming they will be able to transport hydrogen by the end of the decade). These facilities are set to be added to the 31 operational LNG import terminals that currently exist in Europe, according to the Institute for Energy Economics and Financial Analysis (IEEFA), a think tank.
There is a similar boom in new facilities on the liquefaction side of the industry, with two multi-billion dollar final investment decisions announced on major US LNG export projects in March 2023 alone. Data tracked by IEEFA anticipates there being vast liquefaction capacity added in the next five years, led by the US and Qatar.
With the boom in new LNG project announcements, some experts are beginning to voice the possibility that Europe will soon be oversupplied.
“It is dawning on us that there is likely to be too many LNG facilities in development,” says Henning Gloystein, director of energy, climate and resources at the Eurasia Group, a political risk consultancy. “There’s going to be an enormous glut of facilities in Europe, because so many governments want to have their own facilities to ensure they have security of supply.”
A number of outlets have modelled how big this ‘glut’ might be. In a March 2023 policy briefing, IEEFA points out that Europe’s LNG terminal import capacity could grow from 270 billion cubic metres (bcm) at the end of 2022 to 400bcm by 2030, based on current plans. European demand for LNG is, however, expected to be between 150bcm (IEEFA) and 190bcm (S&P Global Commodity Insights); in other words, less than half of what Europe's import capacity would be.
Elsewhere, a March 2023 report from the NGO Global Energy Monitor highlights Europe’s “uncoordinated and costly” LNG build-out, which would “increase the LNG import capacity into the EU by 136% of its current maximum capacity”.
“The EU has a gas addiction, and the treatment for this disease is not to build more gas import infrastructure,” said Baird Langenbrunner, research analyst for Global Energy Monitor, in a press statement. “The EU needs to reduce fossil fuel demand by continuing to scale up efficiency measures and renewables.”
Francesca Gregory, an analyst at Energy Monitor's parent company GlobalData, says the current build-out of new LNG facilities “raises concerns about sunken assets”.
On the liquefaction side, Ben Cahill, a senior fellow at US think tank the Center for Strategic and International Studies (CSIS), says “there is definitely a risk that we are overbuilding, with a lot of capacity in the United States and Qatar that might not be used in five years, if you have a rapid diversion away from gas”. He points out that in 2022, use rates at liquefaction plants globally remained significantly below full capacity.
Europe: sooner-than-expected fall in LNG demand
Warnings of overcapacity are not only due to an overzealous LNG terminal build-out, but also as a result of the roll-out of low-carbon technologies in Europe, which have been catalysed by Russia’s war in Ukraine. The REPowerEU policy package announced in the wake of the invasion aims for 45% European renewable energy by 2030. In practice, this translates into 69% renewable electricity, 32% renewable transport and 60% renewable energy in buildings.
This renewed ambition is already delivering results. Last year, wind and solar generated a record fifth of EU electricity (22%), overtaking natural gas for the first time (20%). Growth in rooftop solar increased by nearly 50% in 2022 year-on-year, while European heat pump sales hit three million units in 2022, representing growth of 41% year-on-year.
“European gas demand was down significantly in 2022, and I think that this trend is only going to continue as currently there are such strong incentives and subsidies for clean technologies and reducing energy consumption,” Gloystein says.
It is true that many analysts maintain a bullish market outlook for LNG in Europe even if gas demand declines. Xi Nan, a senior vice president on Rystad Energy's markets research team, says the war in Ukraine has led Rystad to revise down overall European gas demand in 2040 from 410bcm to 330bcm. However, LNG demand in 2040 has been revised up, from 70bcm to 160bcm.
Nan acknowledges that this picture would change, however, if European countries enhance policy sufficiently to meet their long-term net-zero targets.
The boom in low-carbon technologies in Europe has led other analysts to consider whether LNG demand may actually fall sooner. “It is clear that up to the late 2020s we are going to have a tight LNG market, but after that it really depends how successful Europe is in its energy transition,” says Sharples.
IEEFA, meanwhile, is forecasting LNG demand in Europe to increase in 2023, as it did last year, but then begin decreasing straight after.
Lisa Fischer, from the think tank E3G, adds that Europe’s energy crisis response plan envisages a 50% drop in gas demand by 2030. She says that on the current trajectory, Europe would cut 30% of demand, but trends “in the heat pump and solar market are expected to be exponential not linear”. This means it is reasonable to expect a significant overshoot of that 30%, to the point that the entire shortfall of former Russian gas supply is accounted for, and there is no room for more LNG growth in Europe.
LNG markets outside Europe
Even if the long-term future of LNG in Europe remains uncertain, the events of the past year have proved highly disruptive to other LNG markets, bringing into doubt the long-term prospects of the fuel in countries like Pakistan and Bangladesh.
“Forecasts for global LNG before the war in Ukraine are characterised by this expectation that we are in the golden age of gas,” says Sharples. “Everything was indicating that markets like Pakistan, India and Bangladesh would all grow strongly. There was an understanding that if you are a developing economy, and you are trying to meet climate targets in the medium term, then LNG would be a good option.”
In January 2021, for example, Morgan Stanley projected LNG demand in India would grow at 5% per year through 2025, while Southeast Asian demand would grow at an astonishing 13% per year over the same period. Similarly, in 2019 consultancy McKinsey & Company called Asia the “engine for growth in gas demand” globally, forecasting that China, Southeast Asia and South Asia would account for 95% of global LNG demand growth through 2035.
“These and similar projections came on the heels of several years of low and relatively stable LNG prices,” explains Clark Williams-Derry from IEEFA. “During that time – roughly 2018–2020 – the global LNG market was wrestling with oversupply. With global LNG supplies seemingly abundant and prices seemingly slated to stay low, many forecasters assumed that strong Asian demand growth was all but guaranteed.”
The last two years, however, have seen sky-high LNG prices, earning LNG a reputation as “the globe’s most expensive and unreliable energy commodity”, says Williams-Derry. Europe has been outbidding key “growth markets” for LNG cargoes, which has caused problems for nations such as Pakistan and Bangladesh that were relying on spot markets for much of their gas.
Most emerging markets in Asia recorded steep declines in LNG imports in 2022 as they switched to cheaper fuels, with a notable exception in the highly gas-dependent economy of Thailand, which was forced to buy expensive LNG from the spot market as it grappled with declining domestic gas production.
Williams-Derry adds that Asian governments have taken long-term steps to reduce LNG demand and de-emphasise LNG in their national energy plans. Pakistan, for example, recently executed a “U-turn” on its prior energy import policy, with officials asserting: “The nation won’t build new power plants that rely on imported coal, LNG or fuel oil over the next decade.” Similarly, the Philippines has accelerated policies to improve the investment environment for domestic renewable energy, specifically due to high and volatile fossil fuel commodity prices.
Even Japan and South Korea – who have long been two of the biggest global consumers of LNG – are responding to high LNG prices by turning to other energy sources, says Williams-Derry, with a notable new push for nuclear power.
China – a country which for most of the past decade has been the engine of global LNG demand growth – showed its willingness to switch fuels in 2022, with LNG imports slumping by 20%.
“China is quite highly spot [price]-reliant and looked at the price and said no thanks,” says Gloystein. He adds that the country’s energy security strategy now seems to be firmly back in the realms of coal, rather than gas. Indeed, recent analysis from E3G shows that China’s coal project pipeline resurged by nearly 50% in the last six months of 2022, taking the total to 250GW.
More generally, China is “shifting to a slower rate of economic growth which is less commodity-dependent”, says CSIS’s Cahill, making it unlikely that China will return to being a big LNG growth market any time soon.
Long-term contracts insignificant
The surge in LNG prices since 2021 has sparked a trend whereby buyers secure more long-term contracts. “Long-term contracts provide some certainty for both buyers and sellers, by reducing exposure to spot price volatility,” explains Cahill. In November 2022, China signed a $60bn, 27-year deal for LNG to be supplied by Qatar, while recent months have also seen a flurry of long-term contracts signed by EU buyers including Engie, Ineos and RWE.
But long-term contracts do not necessarily mean that buyers are locked into their LNG supplies for decades to come. “Long-term contracts mean that you are guaranteed your supply, but they do not guarantee price, which can be tied to gas hub pricing, or the crude oil market,” says Sharples. “Over the last year, when the price was too high in India, Pakistan, Bangladesh and China, these countries began reselling their cargos back into the market on a spot basis, which European buyers then acquired.”
In effect, then, countries are not obligated to use their contracted supplies because they can copy LNG ‘portfolio players’ like BP, Shell and Gunvor and sell LNG at whatever price the market is asking for. In that sense, just because more LNG supplies are signed for, does not mean countries are locking themselves into gas for decades to come.
Of course, if LNG demand does fall more rapidly in Europe than many analysts are expecting, there might be a renewed business case for emerging markets to reinvest. “If the market falls back into some kind of balance by the late 2020s, then it could stimulate developing economies to come back into the market in a more serious way,” says Sharples.
But the rapid pace at which clean energy technologies are being installed, and the plummeting prices of energy transition technologies like battery storage, means that even in that instance, there is a chance that investing in new LNG infrastructure may no longer have a strong business case.