By Fauziah Marzuki, Head APAC Gas, Power & Carbon Markets, BloombergNEF
Support for the natural gas industry in the joint communique issued by the Group of Seven nations in Hiroshima, Japan alarmed environmentalists but should come as no surprise. Though the statement’s wording suggests efforts to limit or constrain support for gas investments, it sends a signal to the market that gas is here to stay.
Support for liquefied natural gas investments
The statement released on May 20 included a section that talked about the need to wean off Russian energy supply — through energy efficiency measures and gas demand reduction. It also acknowledged what Russia’s war on Ukraine has done to impact global gas prices, inflation and people’s lives. It then reads:
“In this context, we stress the important role that increased deliveries of LNG can play, and acknowledge that investment in the sector can be appropriate in response to the current crisis and to address potential gas market shortfalls provoked by the crisis.
In the exceptional circumstance of accelerating the phase out of our dependency on Russian energy, publicly supported investment in the gas sector can be appropriate as a temporary response, subject to clearly defined national circumstances, if implemented in a manner consistent with our climate objectives without creating lock-in effects…”
The choice of the word “investment” sends a clear message to the industry, highlighting the difference between expressing a commitment to ensuring security of supply versus supporting further investments. Europe could decide to sign more long-term supply agreements for LNG without building new import terminals or supporting new export projects. Enough of what BloombergNEF calls ‘flexible LNG supply’ is available in the market for Europe to do so. Though the continent comes to the negotiating table in a vulnerable position after the energy crisis, a deal can be made. LNG suppliers will try to squeeze them for 20- or 30-year contracts, but a 5- or 10-year deal isn’t impossible, especially if the buyer is willing to pay.
Gas prices have come down to even pre-war levels. BNEF’s latest analysis shows that Europe can reach its gas storage target as early as September. By the time investments are made in more import terminals, prices may be at very affordable levels again. Even so, new investments in LNG supply projects made today are going to come in five years time – along with a flood of LNG already expected to hit the market. More US LNG projects will be commissioned next year, and a massive Qatari LNG expansion will come to market in 2026.
Prices will fall. Supply is coming. The G-7’s leaders choice of wording to support “investments” in LNG shows that the deeply rooted hold that gas has on these economies can’t be shaken off easily. Despite the additional wording in an attempt to constrain this – such as “temporary response” or “without creating lock-in effects” – it will do little good. An investment is a lock-in. It is not temporary by nature.
G-7 countries have a lot riding on LNG
That G-7 member countries would be cautious to vilify LNG should come as no surprise. LNG served as a lifeline for Japan in the wake of the 2011 Fukushima disaster, and again in Europe after the Russian invasion of Ukraine. Japan consumed 18% of global LNG last year. The US is vying for the top LNG exporter spot. France is currently the biggest inlet of LNG flows for continental Northwest Europe. Italy has one of Europe’s oldest LNG import terminals, and the UK’s have the largest capacity. Germany commissioned its first LNG terminal in Wilhelmshaven in December. And Canada is holding on to its gas export ambitions with the under-construction LNG Canada project in British Columbia. The C$40 billion ($29.6 billion) project is led by energy major Shell Plc and will see big supplies go to Malaysia’s Petronas, Mitsubishi Corp., PetroChina Co., and Korea Gas Corporation. The investment is to be Canada’s largest infrastructure project to date.
G-7 countries can’t shut the door on gas — and G-20 countries are now unlikely to do so either. The gas industry will make use of this and ensure the clock doesn’t run out on investments in the industry. An ambiguous signal from the G-7 on gas could have left the industry scrambling in anticipation of what the future holds, but this weekend’s statement was a clear signal that investments will keep coming – even if only for “exceptional circumstances.” A subjective wiggle-room clause if anything.
Give them an inch, they’ll take a mile.