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Dr. Ken Rietz |
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Liquefied Natural Gas (LNG) has generated a golden reputation. It seems to solve so many problems all at once. It is abundant, inexpensive and viewed as the perfect transition to green energy. Many countries are building dock machinery to either import or export LNG, at a frenzied pace. But now there are storm clouds on the horizon; many annual import rates are dropping. Oversupply looks to be gathering steam. The wise will be preparing for change. We will look at the situation, and rough out some strategies to cope with the problems. First, here are the monthly export numbers for LNG from the US. |
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Figure 1: Monthly US exports of LNG, in million cubic feet. Source: EIA The graphs certainly don’t show any problems, even on the horizon. And indeed, there are only a few people who seem to be aware of any approaching headwinds. Given the long lead times needed to work with LNG, a more far-reaching view is important. While natural gas looks to be moving up right now, BloombergNEF publishes overviews of global LNG supply and demand covering the major regions of the world. These reports detail global oversupply risks that begin about 2027. The only good news is that they will be weaker than expected earlier. The number of LNG projects that are forecast to be completed by then will be able to ship out much more than the projected demand for natural gas at that time. For example, BloombergNEF projects that by 2030, the global demand for LNG will be 560 million metric tons, but the global LNG export capacity at that time will be 11% higher. The biggest source of uncertainty is Russian LNG and how effective are the sanctions on it. BloombergNEF is hardly the only voice carrying that message. The Institute for Energy Economics and Financial Analysis (IEEFA) has put out a report that provides a detailed, usually country- by-country, global outlook. They predict a demand crunch within two years, a bit sooner than BloombergNEF, and show that the oversupply is already in view. They note that the total LNG imports to Japan, South Korea, and Europe (together accounting for more than half the world’s demand for LNG) dropped in 2023 and will likely continue to drop until 2030. The three biggest exporters of LNG are the US, Qatar, and Australia. It is worth noting that the LNG oversupply projections happen even though Australian exports of LNG are likely to drop around 2027, in order to supply shortages anticipated in the southern states of the country. So, how do we adjust for the anticipated oversupply of LNG? Caution will need to be exercised with all investments in LNG operations. The US administration’s temporary ban on new LNG projects, albeit for different reasons, turns out to be helpful. Short- to medium-term LNG investments, up to two years, should be examined, but not necessarily avoided. Longer-term investments face declining profits as the price of LNG drops because of the oversupply. And trading on LNG futures should focus more on the short side as the oversupply begins to manifest itself more and more. |