US natural gas export fever tempered by costs and climate concerns

A vessel docked at a jetty on Louisiana’s coast is claiming its cargo of liquefied natural gas. Ice forms on a pipe as chilled fuel extracted from fields as far away as Texas or Pennsylvania is sent into the tanker’s insulated hold for shipment overseas.

Cheniere Energy’s Sabine Pass export terminal is one of seven operating in the US, all of them running flat out to feed a global market desperate for energy.

Europe’s goal to cut dependence on Russian natural gas in response to Moscow’s war in Ukraine should be a bonanza for LNG export companies in the US, the world’s largest gas producer. Investors in these specialist companies are bullish, as reflected in a recent all-time high for Cheniere’s stock price.

But prospects for more than a dozen new American liquefaction projects remain highly uncertain as construction costs rise, the US gas price soars and climate policymakers pursue a long-term shift away from fossil fuels and their associated emissions. Even the most advanced projects will take years to feed additional supplies to the world.

The US began sending out LNG from shale gas six years ago, as new supplies unleashed through fracking prompted Cheniere to build export infrastructure at Sabine Pass, originally designed to handle imports.

Total US LNG capacity now stands at 120bn cubic metres (bcm) a year. Three more plants due online by 2025 will bring 70 bcm of new capacity. Another 206 bcm worth of plants have federal regulatory approval but await a final green light from their sponsors.

European Commission president Ursula von der Leyen announced a deal with US president Joe Biden last month under which the EU would guarantee long-term demand for another 50 bcm a year of LNG. The volumes would offset some of the 155 bcm of gas the EU imported from Russia last year.

“I think everyone felt an enormous uplift over the course of the last three to four weeks,” said Dan Brouillette, a former US energy secretary in the Trump administration and now president of Sempra Infrastructure, which has a majority stake in Louisiana’s Cameron LNG plant. European attitudes to American fossil fuels had undergone a “sea change”, he said.

US LNG executives now believe that another wave of new construction may be imminent.

“The future for US LNG is off the charts,” said Michael Smith, chief executive of Freeport LNG, which operates an export terminal south of Houston. “Europe recognising that they need LNG as opposed to believing that they could get out of this [energy crisis] with just renewables . . . That’s a big positive step.”

Jack Fusco, chief executive of Houston-based Cheniere, said Europe’s decision to include some natural gas in its green taxonomy and its decision to wean itself from Russian energy were “positive” signs of a more “realistic view” of LNG’s role in energy security and the transition to cleaner sources.

No one expects all the US’s proposed capacity to be built. LNG plants are costly and take years to pay off. Before deciding to proceed, developers typically must line up purchase agreements with customers lasting two decades or more, covering at least 80 per cent capacity.

Analysts are sceptical that the EU’s guarantee or soaring global LNG prices will end up spurring as much demand as project developers hope, given other efforts to diversify away from carbon-based energy. Brussels’ “RePowerEU” energy policy statement, released last month, was directed at breaking the dependence on Russian energy but also talked of “reducing faster the use of fossil fuels” in general.

US LNG advocates say their fuel is a less carbon-intensive source of electricity than coal, meaning it could help quickly reduce emissions in some countries. However, methane leaks from gas infrastructure and the full lifecycle carbon intensity of the export plants can undermine this claim.

Project developers say they can add carbon capture technology to lower emissions. Freeport has installed electric drives to power its gas liquefaction process. But European utilities’ long-term appetite would still be uncertain, said analysts.

“There’s a big customer out there that wants LNG, but you’re not quite sure for how long,” said Nikos Tsafos, an LNG expert at the Center for Strategic and International Studies in Washington, referring to Europe. “If anything, they’re trying to get out of the gas business altogether very quickly.”

Supply chain disruptions and tight labour markets can also weigh on new capacity, developers acknowledged. The newest terminal to open, Venture Global’s Calcasieu Pass in Louisiana, came online in just 29 months, but other new projects are moving at a slower pace. Costs are rising as inflation rips through the US economy.

“We’re mostly a steel project,” said Smith. “And steel [prices] have doubled in the last two years.”

Projects that might have cost $500mn for every million tonnes of LNG capacity may now be closer to $1bn, suggested Smith.

US natural gas prices are still a bargain compared with Europe or Asia, but they have recently soared to the highest level since 2008 to surpass $7 a million British thermal units. Strong flows to LNG export terminals are one force behind the jump.

LNG supply scarcity meant “a bunch of wealthy developed economies are competing for the same small pool of LNG”, said Clark Williams-Derry, an analyst at the Institute for Energy Economics and Financial Analysis. Poorer Asian countries that the global LNG industry had counted on to drive growth might rethink their LNG import plans, he said.

For now, most of the US LNG that could go to Europe is already sailing there, making up about 70 per cent of exports this year. The US is not in a position to immediately replace a sudden interruption of Russian supplies, especially while the EU also tries to replenish its storage for next winter.

“I wish I had better news for Europe but it’s going to take . . . at least five-plus years to get anything of size done,” said Fusco.

Additional reporting by Amanda Chu in Washington

*A chart in this story has been amended to reflect that data is shown in million British thermal units (Btu).

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