A cross-section of energy analysts have lately provided a mixed outlook on the natural gas sector. In its latest Short Term Energy Outlook, the U.S. Energy Information (EIA) was bearish and forecasted that natural gas spot price at Henry Hub would average ~$6 per million British thermal units (MMBtu) across 4Q22 and 1Q23 – more than $1/MMBtu lower than their October forecast mainly due to higher-than-expected storage levels heading into winter. The EIA also said that it expects natural gas prices to decline after January as the deficit to the five-year average in inventories decreases.
However, just three weeks ago, the Paris-based International Energy Agency (IEA) warned that Europe could face a gap of as much as 30 billion cubic meters (bcm) of natural gas during the key summer period for refilling its gas storage sites in 2023. According to the IEA, “…the process of filling EU gas storage sites this year benefitted from key factors that may well not be repeated in 2023”.
The IEA also noted that “these include Russian pipeline gas deliveries that, although they were cut sharply during 2022, were close to ‘normal’ levels for much of the first half of the year. Total pipeline supply from Russia to the EU in 2022 is likely to amount to around 60 bcm, but it is highly unlikely that Russia will deliver another 60 bcm of pipeline gas in 2023 – and Russian deliveries to Europe could halt completely.”
Now, there is another punter that has taken sides with the bulls. Japan has warned that global competition for liquefied natural gas is set to intensify over the next three years due to an underinvestment in supply.
A survey of Japanese companies conducted by the trade ministry and released on Monday found that long-term LNG contracts that start before 2026 are already sold out, which is worrying for LNG buyers because these types of contracts offer stable pricing and reliable supply for many years. The report notes that there is little new supply coming online before 2026 even from major exporters like the U.S. and Qatar. Meanwhile, Europe is desperately trying to replace Russian pipeline gas with LNG, further exacerbating the global shortage of fuel.
Being the world’s largest LNG importer, Japan probably has useful insights into how the LNG market works.
LNG giant Cheniere Energy Inc. (NYSE: LNG) has revealed that it’s had the most active year for contracting since 2011. Meanwhile, volatile spot prices and a worsening supply outlook have triggered a rush by importers to negotiate long-term deals as they attempt to lock in prices. According to a report by the Oil & Gas Journal, 10-year LNG contracts are currently priced at ~75% above 2021’s rates, with tight supplies expected to persist as Europe aims to boost LNG imports.
Last year, the volume of long-term LNG contracts signed to end-user markets climbed to a 5-year high, and the momentum is showing no signs of abating in the current year. So far this year, more than 10 million tonnes/year (tpy) of LNG has been signed to end-market users according to a report by Wood Mackenzie.
For instance, Louisiana-based LNG company Sempra Infrastructure, a majority-owned subsidiary of Sempra Energy (NYSE: SRE) (BMV: SRE), has inked its sixth long-term contract in five months. The deal calls for Sempra Infrastructure’s Cameron LNG in Hackberry to supply 2 million metric tons of LNG annually to the Polish Oil & Gas Co. Sempra Infrastructure struck another 2 million-ton deal with Polish for its upcoming Port Arthur LNG facility in Port Arthur, Texas.
Most new contracts are from U.S. supply as operators move projects forward. All these contracts are linked to North American prices. Meanwhile, Chinese buyers continue to dominate the market, signing more than 8 million tpy of new LNG sale and purchase agreements this year.
“The Russian invasion of Ukraine has had a dramatic impact on long-term LNG contracts. Many traditional LNG buyers will neither procure spot gas or LNG nor renew or sign additional LNG contracts with Russian sellers. Spot prices have also been high and volatile, pushing many buyers towards long-term contracts. Additionally, some buyers are returning to long-term contracting on behalf of governments to protect national energy security,” Wood Mackenzie principal analyst Daniel Toleman has said.
Natural Gas Shortage
The LNG report from Japan appears to be on the money. This year, the United States became the world’s biggest liquefied natural gas (LNG) exporter as deliveries to energy-starved buyers in Europe and Asia surged. In the current year, five developers have signed over 20 long-term deals to supply more than 30 million metric tons/year of LNG, or roughly 4 Bcf/d, to energy-starved buyers in Europe and Asia.
Unfortunately, whereas the United States has the world’s largest backlog of near-shovel-ready liquefied natural gas projects, takeaway constraints including limited pipeline capacity are seen as the biggest hurdle to growth of the sector. In the Appalachian Basin, the country’s largest gas-producing region churning out more than 35 Bcf/d, environmental groups have repeatedly stopped or slowed down pipeline projects and limited further growth in the Northeast. Indeed, EQT Corp. (NYSE: EQT) CEO Toby Rice recently acknowledged that Appalachian pipeline capacity has “hit a wall.”
Analysts at East Daley Capital Inc. have projected that U.S. LNG exports will grow to 26.3 Bcf/d by 2030 from their current level of nearly 13 Bcf/d. For this to happen, the analysts say another 2-4 Bcf/d of takeaway capacity would need to come online between 2026 and 2030 in the Haynesville.
“This assumes significant gas growth from the Permian and other associated gas plays. Any view where oil prices take enough of a dip to slow that activity in the Permian and you’re going to have even more of a call for gas from gassier basins,” the analysts have said.
By Alex Kimani for Oilprice.com
More Top Reads From Oilprice.com:
Read this article on OilPrice.com