From the editor: Trump or no Trump, be careful with that drill bit [Global Gas Perspectives]
Donald Trump will inhabit the White House once again and has made no secret of the plan to ‘drill baby drill’. This ignores somewhat the fact that this was pretty much the policy under outgoing president, Joe Biden. Last year, US oil production hit record levels above 19mn b/d, while gas output for the first time climbed over 1 trillion m3. Nonetheless, Trump’s election success suggests a four-year period of little or no restraint -- should market conditions allow.
The last few years have been good, very good, for LNG producers, but the credit should be laid at Vladimir Putin’s door rather than on the White House lawn.
US support for Ukraine may have sucked billions more out of the US’ ever growing budget deficit, but it has been great news for the country’s gas producers.
Before the war in Ukraine, Russia was on a path to becoming a major LNG producer, but its once ambitious LNG expansion plans have been effectively decapitated by western sanctions. The Arctic LNG-2 project is reported to have stopped commercial operations and four of its initial cargoes are floating at sea unsold. Novatek, operator of Arctic LNG-2, and the architect behind the fulfilment of Moscow’s LNG aspirations, has suspended investment in further capacity, such as Murmansk LNG.
Not only that, but the loss of Russian pipeline gas supplies to Europe boosted the region’s LNG demand massively. European LNG imports jumped from 107.5bn m3 in 2021 to 172.1bn m3 in 2022 and 169.1bn m3 in 2023. Putin’s invasion of Ukraine has resulted in the curtailment of competition and handed non-Russian LNG producers a massive demand boost. It is rare to get everything on a Christmas wish list, but with Trump returning to the White House, it is hard to think what more US LNG producers could ask for.
With Russia and Iran both under sanctions, two of the world’s gas giants are effectively dead in the water when it comes to LNG, leaving the market a two-camel race between the US and Qatar.
Supply glut looms
But whether there is sufficient room in the global LNG market for even two gas giants is an open question.
Qatar has continued to boost its targets for expansion. North Field East will add 32mn t/yr in 2026-27, followed by North Field South’s 16mn t/yr in 2027-28 and, according to an announcement earlier in the year, a further 16mn t/yr in 2029-30, all together raising the country’s LNG capacity to 142mn mt/yr.
North American LNG capacity will grow even faster, more than doubling by 2028. The bulk comes from the US, but with additions also from Mexico – increasingly an extension of the US gas system – and Canada. Based on projects under construction, North American LNG capacity will jump from 86.6mn t/yr in 2023 to 183mn t/yr in 2028, according to the US Energy Information Administration.
In total, Qatar and North America will add about 160mn t/yr of new capacity by 2030. A further 34mn t/yr is expected from elsewhere in the Middle East, Africa and Asia.
This is unprecedented growth. In the period 2001-2010, the LNG market grew by 114mn t/yr; in the decade 2011-2020 by 119mn t/yr. From 2021-2030, it is on course for an increase of almost 240mn t/yr.
Where will it all go?
The old adage that there is nothing like high prices to cure high prices, also works in reverse. If there is surplus LNG on the market, prices will fall and demand will rise. But such profundities do not take the energy transition fully into account.
A large amount of LNG is currently consumed by mature markets, which have adopted net zero carbon targets by 2050 and have embarked on major expansions of renewable energy generation and/or nuclear power. Neither Japan nor South Korea, the second and third largest LNG markets, can be expected to provide much demand growth no matter how cheap the price of LNG. The intention is to replace all fossil fuels with cleaner alternatives.
Europe can be considered equally mature, if not more so. In France, the UK, and Italy, there is little or no coal use left from which to switch to gas. The trauma induced by the loss of Russian pipeline gas has not been beneficial for gas’ long-term image. Europe may have survived, but only by swapping one import dependency for another, albeit one based on more friendly countries and with a more robust market structure and supply chains.
With coal moving firmly to the exit, gas, whether Russian or otherwise, is the next target of the energy transition. Even if LNG prices fall, any uptick in demand – maybe from reindustrialisation and limited progress in establishing hydrogen as an alternative – will likely prove temporary. Increased gas demand is not aligned with European policy settings.
Asian focus
All sights are thus set on developing Asia.
China has already emerged as the world’s largest LNG consumer but, while the coal-to-gas switching potential is enormous, it does not use gas heavily for power generation. Beijing prefers to reduce coal consumption through growth in renewables, including hydro, and nuclear power. Industry and residential and commercial demand account for the bulk of gas demand, but China’s formerly rapid rates of economic growth have slowed, and its population is ageing.
Some forecasts for Chinese LNG demand now see a slowdown. Consultants Energy Aspects, for example, recently forecast average growth in Chinese LNG demand of 6-7mn t/yr from 2025-2028, down from an average of 10mn t/yr from 2017-2024, excluding 2022, owing to the impact of Covid.
As a result, analysts are becoming more excited about Indian LNG demand.
India has emerged as the fourth largest LNG importer in the world, but the rate of expansion remains below that of China. While China’s population is aging, India’s is young and it has yet to experience anything like the level of Chinese urbanisation. The International Energy Agency forecasts 6% a year growth in Indian gas consumption through to 2030, much of which is likely to be met by LNG, owing to the lack of import pipelines and limited growth in domestic production.
But even if India’s LNG imports doubled from the 2023 level of 22.8mn t/yr, it would not make a great dent in the tsunami of new production coming to the LNG market. Just as in China, the coal-to-gas switching potential in India is massive, but the country’s ability to absorb LNG is much lower, owing to a lack of infrastructure and its dysfunctional and debt-ridden power markets. Even cheap LNG will struggle to compete with the embedded nature of India’s domestic coal industry.
Tipping point
Although the impending glut of LNG may be delayed by project delays, the demand/supply balance should tip decisively in favour of surplus around 2027-28. Prices will likely fall to levels at which variable costs are no longer covered, resulting in capacity shut-ins and ushering in a period of demand growth adjustment which is wholly dependent on developing Asia and which could be thrown off-track by energy transition progress and policies.
Sound a bit like 2020/21? It should, but much more so. Supply growth then was smaller, and, by the end of 2021, LNG spot prices were at record highs. Putin invaded Ukraine in February 2022 profoundly altering the trajectory of the LNG market, but that is not an event that can be repeated with the same effect. This time around, the energy transition will dominate. From the high prices of recent years, LNG producers are heading into harder times as too much supply is brought to the market too quickly.
So, careful with that drill bit baby.