Demand

LNG export facilities and their demand for supplies will drive a large portion of U.S. natural gas pipeline construction through 2026, according to an analysis of S&P Global Market Intelligence data.

Of the 45 pipeline projects projected to come online over the next five years, at least 16 are tied to liquefaction terminals that are operating or under development on the Gulf Coast, with six export facilities expected to begin commercial service in 2024 alone. Other pipeline projects are designed to bring gas to utility distribution systems, power generation plants and other end uses.

Venture Global LNG plans to build just over 400 miles of gas pipelines to serve its proposed Calcasieu Pass, Plaquemines and Delta LNG terminals, which would have a combined production capacity of 50 million tonnes per year of LNG.

Tellurian Inc., meanwhile, has 323 miles of pipeline under development for the planned Driftwood LNG LLC terminal, anticipated to begin construction in 2022. The company also said it may buy up more acreage in the Haynesville Shale or enter into a business combination that would allow it to fill out its upstream portfolio.



LNG is the fossil fuel poised to have the biggest earnings advantage as the North American midstream sector's great pipeline build-out cycle winds down, according to a July Sanford C. Bernstein & Co. report. In 2022, capital expenditure for most midstream companies is expected to be minimal, and "in some cases, over 70% lower than 2019 levels for the company," analysts wrote.

With traditional natural gas maintaining a slower growth curve and facing minimal rate reduction risks as hurdles to new infrastructure construction get higher in the U.S., LNG will perform best when it comes to long-term volumes, Bernstein said. Overseas demand for gas supply in Asia and Europe is lifting the prospects for the fuel.

Other LNG projects putting pipe in the ground through 2026 will include NextDecade Corp.'s Rio Grande, Sempra's Port Arthur, and Exxon Mobil Corp. and Qatar Petroleum's Golden Pass. Delays in the development of Port Arthur, however, recently prompted Polish Oil and Gas Co. to end a deal for buying 2 Mt/y of LNG from the facility and to sign similar agreements to purchase the same amount from Venture Global terminals. Sempra executives also confirmed the expiration of a deal with Saudi Arabian Oil Co. to finalize a supply agreement for 5 Mt/y of LNG from Port Arthur LNG terminal and take a 25% stake in the project's first phase.

Several gas pipeline projects scheduled to come online by the end of 2026 have also faced permitting delays, including the Equitrans Midstream Corp.-led Mountain Valley Pipeline LLC and Williams Cos. Inc.'s Northeast Supply Enhancement project out of the Appalachian Basin.

Prices

Asia's LNG importers expect high spot prices this winter on the back of tight demand-supply fundamentals, which could derail procurement plans and increase power prices, especially if temperatures drop sharply similar to cold snaps seen in the previous winter season.

The key difference in 2021 is that LNG demand surged much earlier in the year on the back of the Chinese economy rebounding sharply from COVID-19 and spot LNG prices never dropped below $5.50/MMBtu, while last year they languished in the low single digits for several months. As the northern hemisphere summer kicked in, spot LNG spot prices soared to an eight-year seasonal high, almost touching $18/MMBtu last week. The S&P Global Platts JKM for October was assessed at $17.460/MMBtu on Aug. 25.

JKM LNG futures on ICE peaked at nearly $20/MMBtu last week for cargo deliveries during the coming winter through to January, reflecting broad-market expectations of tight market conditions persisting till the end of this year.

"Asia's spot LNG trade has moved into unchartered territory from this summer, trading for an extended time above oil-parity prices," Jeffrey Moore, Asia LNG manager for S&P Global Platts Analytics, said.

"Demand growth in China is expected to more than offset loss from Japan, Korea and Taiwan entering this winter with higher inventories. The market is running out of mechanisms to counter higher demand and higher prices," Moore added.



Trading activity

Trading activity has also started to reflect concerns about a steep price trajectory for the winter months, with market participants, who would have typically sold their oil-linked term cargoes to benefit from high spot prices, adjusting to the winter contango and pulling back from spot purchases. JKM futures indicate January prices of nearly $18/MMBtu.

The buying interest from Chinese importers is being closely watched.

Most Chinese national oil companies have covered their winter positions via strip tenders issued earlier in the year, such as state-run trader Unipec's procurement of around 40-50 cargoes for delivery in the second half of 2021 and February 2022, through a strip tender in April, traders said.

"The Chinese will have to buy more to inject for winter. I doubt they have fully prepared for winter due to higher demand throughout this year. They will likely buy October, the cheapest part of the winter period," a trader said, while a Beijing-based source said that Chinese importers are likely to see their long-term contractual volumes max out.

Other market players pointed out that taking a firm position could backfire if demand fizzles out.

One trader said that China's winter supply security is usually dependent on imported pipeline gas, and supplies have been stable this year. Another Beijing-based source said that Chinese importers were not ramping up purchases yet as they did not want a repeat of 2018 when there was an oversupply of cargoes and a warmer-than-usual winter.

Global Trade

The biggest U.S. LNG exporter, Cheniere Energy Inc., discussed commercially sanctioning an LNG growth project in 2022, and other LNG infrastructure developers have signed supply deals that could push projects forward after a dearth of final investment decisions in the last few years.

"There is a renewed enthusiasm, and you have got a group of American projects filled with people that are good at getting creative and solving problems," said Michael Webber, an independent LNG analyst and managing partner of investment research firm Webber Research & Advisory. "They've had a long runway to adjust their models, and the window looks like its opening, at least for a couple."

The next several months could be pivotal for determining whether new U.S. LNG production capacity will make it to the construction stage. The global gas market appears likely to continue its recovery from pandemic-driven disruptions that muted investors' appetite for new multibillion-dollar LNG infrastructure. But this may also be a time when projects that have struggled for a long time finally fade away.

Energy Transition

Singapore-based Pavilion Energy is building an emission business that taps carbon offsets initially to drive decarbonization across the LNG value chain, its interim chief executive, Alan Heng said at the Asia Pacific Petroleum Conference.

"Until we can get to the point where we can mitigate [emission from] every single molecule [of LNG supplies], what is important is to find a way to offset it and supply what is deemed as carbon neutral LNG so as to allow market forces around these offsets to drive the improvements along the entire value chain," Heng said during a CEO conversation session with S&P Global Platts President Saugata Saha Sept. 27.

"Some efforts include taking carbon offsets from specific, high-quality suppliers that can be packaged with our LNG cargoes," he added.

Pavilion Energy, which is owned by Singapore's state-backed investment group, Temasek Holdings, was the first to import a carbon neutral LNG cargo to its home country in April.

That LNG cargo was delivered one year after Pavilion Energy launched a request for proposal calling on potential bidders to supply up to 2 million mt/year of LNG supplies to Singapore and jointly develop a methodology to measure greenhouse gas emissions tied to the cargoes to be supplied.

In November, Pavilion signed a deal with Qatar Petroleum's trading unit to buy up to 1.8 million mt/year of LNG for 10 years from 2023 that will be delivered to Singapore with a statement from the supplier specifying the greenhouse gas emissions tied to the cargoes, from wellhead right to the discharge port.

Its first carbon neutral LNG cargo drew on carbon credits on forestation projects in Peru and China certified by two recognized not-for-profit standard-setting bodies, Verified Carbon Standard (VCS) and Climate, Community and Biodiversity Standard (CCB).

"We undertook the import of the carbon neutral LNG cargo at our cost [because] it is important for the industry to recognize that we have the capability to do it," Heng said.

Gas to help in energy transition

Trading activity has also started to reflect concerns about a steep price trajectory for the winter months, with market participants, who would have typically sold their oil-linked term cargoes to benefit from high spot prices, adjusting to the winter contango and pulling back from spot purchases. JKM futures indicate January prices of nearly $18/MMBtu.

Pavilion Energy, which was named one of Singapore's first licensed term LNG importers, has ventured into Europe through acquiring the LNG assets there previously held by Spanish group Iberdrola.

The deal was completed last January. It encompassed long-term sale and supply contracts for around 4 million mt/year, access to regasification capacity at the Grain LNG terminal in the UK and in Spain as well as the Spanish-France border pipeline capacity.

In Europe and the US however, investments have ramped up on renewable energy capacity while financial institutions have pulled back support extended to LNG and natural gas projects.

Heng described Southeast Asia as one emerging "hot spot for energy transition" with "great opportunities for solar, wind and geothermal energy projects."

"Aside from these, there's still a need for gas [to] help in energy transition [by buffering] the intermittency of renewables."

Back in Singapore, Pavilion Energy is working with authorities to boost resilience in gas supply network to complement its home country's efforts in building solar energy capacity.

"Natural gas remains a fossil fuel but it is the cleanest fossil fuel we have [and] represents the best chance we have to help with the energy transition," Heng said.

Further Reading