Future Demand for LNG Will Remain Robust, Especially Less Methane Emissions Intense LNG, with Asia Leading the Pack

 

     The supply and demand picture for LNG export and import growth in the coming years is pretty straightforward, at least until around 2030. From now until 2030 it is likely that LNG exports and imports will grow modestly to robustly. The U.S. and Qatar will continue to dominate exports. China and Asia will continue to dominate imports. Europe’s imports will likely grow modestly then plateau.

     Wood MacKenzie’s Ed Crooks noted in September that some new LNG import market areas are emerging in Asia in Vietnam, the Philippines, and Hong Kong. Other countries in the region such as Thailand are seeing increased LNG demand due to decreasing domestic gas production. Vietnam plans 13 LNG-to-power projects to be online by 2030. They have been suffering rolling blackouts due to reduced hydropower output as a result of droughts. These outages have affected manufacturing output and have stressed supply chains. For the long term WoodMac predicts “global imports of LNG will grow from about 554 billion cubic metres this year to about 857 billion cubic metres in 2040. Over that period, we expect demand to drop about 20 bcm in Europe, but to rise by 67 bcm in China, 100 bcm in Southeast Asia, and 103 bcm in South Asia.” They also note that new technologies like hydrogen and ammonia won’t be developed quickly in these emerging economies and thus won’t reduce natural gas demand any time soon, probably not before 2040. They don’t have the capital needed to get those industries going. They do, however, want to buy gas that is methane emissions abated. This is a much cheaper way to get slightly lower emissions energy.

     Demand for methane emissions abated gas is indeed growing around the world. Initiatives by big oil & gas companies like the Oil & Gas Climate Initiative (OGCI) and by governments like the Global Methane Pledge aim to reduce emissions as much as possible. While many of those efforts have been voluntary, there will soon be more mandated efforts as well. Environmental Defense Fund’s (EDF) Mark Brownstein, who has been working on oil & gas industry methane emissions abatement for a long time, says voluntary efforts are not enough and too slow to effect so mandated rules will be needed. EDF plans to launch MethaneSAT in early 2024 which will be “the most advanced methane tracking satellite in space, measuring methane emissions virtually anywhere on earth.” They expect to quantify emissions at the basin level. OGCI utilizes GHGSat, which collects and analyses emissions data from satellites and aircraft.

Source: Project Updates: Data Sneak Peek: An Inside Look at What MethaneSAT will Measure. MethaneSAT. MethaneSAT | Solving a crucial climate challenge

     LNG buyers want to be safe from volatility in price and potential supply disruptions. The war in Israel is seen as a potential supply disruption from Qatar and the Middle East. Buyers are tweaking their contract terms to guarantee supply. LNG markets will remain tight well into 2025. After that they could ease as more export supply will be online.

     The U.S. may see some changing supply/demand dynamics. Gas supply to California, a major natural gas market, could face some disruption as volumes in Western pipelines are diverted to Mexico for LNG export. Natural Gas Intelligence (NGI) and the London Stock Exchange Group (LSEG) in a webinar about LNG predict that natural gas prices will increase in 2025 but will come back down as the market loosens due to more supply availability. Most analysts see the U.S. natural gas sector able to keep supply up to meet growing demand, as has been the case in the past 6 years since U.S. LNG has grown from less than 1 BCF/day in 2016 to about 11 BCF/day through 2022. They also predict that natural gas growth will plateau and begin to fall as wind and solar overtake it in replacing coal in the power sector. They suggest 2025-2030 for when that will happen, but I am a bit skeptical about that timeline. I think 2030-2035 is more realistic.

     Producing regions in the U.S. that will supply LNG growth will primarily be the Permian and Haynesville regions. While the Appalachian region has the most and often cheapest supply, it is still thoroughly constrained due to the limitations of pipelines exiting the region. The addition of the Mountain Valley Pipeline volumes, set to begin flowing in 1Q or 1H 2024 will help but there are no other major pipeline buildouts on the horizon. The 2.5BCF Matterhorn pipeline running from the Permian region to the Gulf, expected to come online in 2024, will help supply U.S. LNG exports. Haynesville producers have developed a successful hedging system to keep price volatility less of a concern. Their issues are mainly with getting shippers to buy pipeline capacity since new pipelines are not usually planned until FIDs are reached for new LNG export projects and volumes.

     Mexico is now the world’s eighth largest gas market. Most of the gas comes from the U.S. since Mexican production has declined under AMLO’s unfavorable policies to Mexican oil & gas production. That could change after new Mexican elections. Pipelines to Mexico from the U.S. still have capacity to grow volumes and can supply new combined cycle gas plants planned for Mexico as well as LNG exports from Mexico. There are export projects on both the east and west coasts of Mexico. It is expected that 0.2BCF/day of LNG export capacity will be online on Mexico’s west coast in 2025 and 0.4 BCF/day from Mexico’s east coast. After that the west coast is expected to dominate with up to 6BCF/day in export capacity in planning. Forecasts show about 2BCF/day export capacity available in 2027. West coast exports have the advantage of avoiding the Panama Canal, which is suffering significant delays in moving ships through due to low water levels as a result of an ongoing drought. The problem is not expected to go away anytime soon and is already delaying shipments from the U.S. Gulf Coast to Asia. While there are alternative routes, they cost more. In August, ships were delayed by 17 days and costs per ton to ship through the canal have increased significantly since 2021-2022.

 

  

     Globally, there is well over 100BCM in new LNG supply that is now post-FID. LSEG predicts that the global LNG market will remain tight until the second half of 2025. Oversupply could become a concern by the late 2020s. That is dependent on how well renewables do to replace coal and gas, which does not look very promising in the near term. It also depends on economic growth in importing countries. Thus, I would bet that oversupply may not become apparent until post 2030. Japan has been restarting nuclear plants and importing less LNG for themselves although they do use their considerable receiving infrastructure to resell LNG to other Asian buyers. China, Taiwan, and South Korea continue to import more LNG. LNG demand in South Europe is expected to peak in 2026 and begin declining in 2028. Northwestern Europe became a premium market due to the Russian invasion of Ukraine and subsequent abandoning of pipelined Russian gas. It is expected to remain so and peak in the 2026-2028 timeframe before slowing. Strong evidence is simply that Europe is still buying Russian LNG at robust levels, and this is not expected to change until more non-Russian LNG is procured. One scenario that could happen in the U.S., although I would rate it unlikely, is that if oil prices drop, then Permian production will slow and along with it, Permian associated gas production would drop, increasing natural gas prices.

     Overall, LNG has a strong future in the near term and a decent future into the medium term. It may be post-2040 before global demand really begins to drop. Although peak demand is now expected around 2030 it could plateau for a long time.

 

References:

Strong gas demand raises questions over emissions. Ed Crooks. Wood MacKenzie. September 11, 2023. Strong gas demand raises questions over emissions | Wood Mackenzie | Wood Mackenzie

NGI + LSEG 'A New Era' for Natural Gas Webinar. November 2, 2023.

Drought at the Panama Canal delays energy shipments, increasing shipping costs. Energy Information Administration. October 31. 2023. U.S. Energy Information Administration - EIA - Independent Statistics and Analysis

Project Updates: Data Sneak Peek: An Inside Look at What MethaneSAT will Measure. MethaneSAT. MethaneSAT | Solving a crucial climate challenge