EU Energy Crisis May Lead To $100 Billion In New U.S. LNG Projects

Developers of U.S. LNG export facilities could launch $100 billion worth of new plants over the next five years as high prices and the need for energy security create strong momentum for long-term LNG demand and contracts. 

The United States is set to overtake Qatar and Australia as the world’s top LNG exporter this year after Freeport LNG resumes operations in the spring, energy consultancy Wood Mackenzie said in a recent report.    

U.S. LNG exports could reach 89 million metric tons per annum (mmtpa) in 2023, according to WoodMac.

“However, it won’t stop there,” the consultancy said, noting that U.S. capacity could jump by the end of this decade, potentially doubling American LNG exports.  

The energy crisis and the need for energy security—especially among European buyers after the Russian invasion of Ukraine—afford U.S. LNG developers the perfect opportunity to sign long-term contracts for planned facilities that would underpin final investment decisions (FIDs) of the projects. 

Europe’s LNG Demand Soars

Europe, previously reluctant to commit to long-term gas deals due to climate goals and emissions considerations, is now installing floating storage regasification units (FSRUs) to welcome LNG cargoes that are replacing Russian pipeline gas supply. 

For example, German utilities are signing long-term deals with LNG exporters, including with major American developers. A year after Russia invaded Ukraine and showed Europe how unreliable a supplier it is, Germany already has two floating import terminals up and running, in Wilhelmshaven and Lubmin, while a third LNG terminal, at Brunsbüttel, is in the commissioning phase. 

Until solar and wind can replace much of the gas-fired electricity generation, natural gas will be needed in Europe and on other continents to keep the lights and heating on. Diversified natural gas supplies will be vital for countries looking to shake off dependence on one large supplier. 

“Energy supply will no longer be taken for granted,” Simon Flowers, Chairman and Chief Analyst at WoodMac, wrote last week.  

“No country can ever again allow itself to become reliant on imported energy from a single supplier. In future, energy security will be about the diversity of fuels and sources, and the primacy of domestic resources,” Flowers added.

The U.S. LNG industry has fared well as countries race to ensure diversified gas supply, WoodMac notes. 

“There’s growing confidence that Europe can muddle through the next three years, albeit with relatively high and volatile prices. New supply volumes, mainly US and Qatari LNG, arrive from 2025, helping prices to ease back to ‘normal’,” Flowers said. 

The surge in LNG demand in Europe is set to intensify competition with Asia in the short term and dominate LNG trade in the longer term, Shell, the world’s largest LNG trader, said in its annual LNG outlook earlier this month. 

LNG could become a core energy supply for Europe to meet energy security needs, while China could increasingly provide more flexibility to the global LNG market, the supermajor said. However, Shell warned that another supply-demand gap could be looming in the late 2020s without new investment in additional supply. 

Forever-Changed Markets Set To Encourage New U.S. LNG Projects 

Concerns about energy security are laying the foundations for more LNG projects to be planned, announced, and potentially developed over the next five years, WoodMac said. 

Based on the combination of projects already under construction and the momentum of potential projects, U.S. LNG capacity could grow between 70 mmtpa and 190 mmtpa before the end of the decade, potentially more than doubling current exports, it added. The increase in capacity will need a number of new projects, which could lead to as much as $100 billion in new projects in the next five years. 

“Record-high prices and the need for energy security drove buyers, which included portfolio players and US producers and infrastructure companies, to seek long-term US LNG deals in 2022 and created huge contracting momentum for projects,” said Giles Farrer, head of gas and LNG asset research for Wood Mackenzie. 

In 2022 alone, 65 mmtpa of long-term U.S. deals were signed, compared to just 18.5 mmtpa in 2021. 

“This activity has pushed a host of pre-final investment decision (FID) US projects forward and we could see a wave of FIDs this year and next,” Farrer noted.  

For example, Sempra Infrastructure said in January that the required offtake capacity for Port Arthur LNG Phase 1 was fully subscribed, with Poland’s PKN Orlen, U.S. ConocoPhillips, UK-based INEOS, France’s ENGIE, and Germany’s RWE all lined up for the purchase of LNG from the proposed project. Sempra aims to complete the remaining steps necessary to make a final investment decision for the project in the first quarter of 2023, with the first cargo deliveries expected in 2027. 

U.S. LNG liquefaction capacity could vastly exceed that of its competitors Qatar and Australia by 2030, but not all possible projects in America would proceed—some are likely to be delayed or canceled, WoodMac says. 

A key constraint could be cost inflation, which is already at over 20% on the U.S. Gulf Coast, according to the consultancy. Despite the surge in costs compared to projects built in the past five years, competition to attract customers is keeping liquefaction fees low, potentially at $2-$2.5 per million British thermal units for fixed price long-term agreements, said Sean Harrison, research analyst, gas and LNG for Wood Mackenzie. However, these low fees could undermine future project profitability, Harrison added.