U.S. and world LNG markets are facing a new normal: regulators, off-takers, and end-users are all increasingly conscious of greenhouse gas (GHG) emissions. The ultimate impact on U.S. LNG and natural gas demand is unclear, but some players could be left behind. Engie cancelled a planned long-term supply agreement with Next Decade’s Rio Grande LNG project in November, Pavilion and Qatar Petroleum have included a carbon emissions tracking feature in shipments, and Cheniere is including cargo emission tags in its shipments. We expect that environmental, social, and governance criteria (ESG) will be an enduring, permanent feature in LNG markets as “Carbon neutral” LNG cargoes increasingly gain market and investor attention.

Faster project development could also reshape markets. Cheniere and Venture Global may be able to complete their Sabine Pass and Calcasieu Pass projects well ahead of schedule – an extraordinarily impressive feat amid a pandemic. If U.S. LNG producers can accelerate production schedules at minimal cost, they will become more competitive.

ESG will weigh on exports to Europe, coal on exports to Indo-Pacific

The LNG-as-bridge debate will continue to play out in different ways across different markets. We continue to believe that ESG concerns and increasingly competitive renewables/battery costs will pressure U.S. LNG exports to Europe in the long term. Indeed, the IEA is projecting that the EU’s 2030 gas demand will be 8% lower than in 2019. We believe that LNG may be a beneficiary of the ESG wave, however, as it can lower carbon emissions at the expense of coal and oil.

Indo-Pacific markets are likely to be much more receptive to U.S. LNG exports. While U.S. LNG long-term supply agreements with buyers in China and India will remain constrained because of politics and geographic distance, respectively, we are much more optimistic that U.S. volumes will find their way into Southeast Asian markets in Vietnam, Thailand, Indonesia, Malaysia, etc. We believe that South and Southeast Asian markets (along with niche Latin American markets) will largely determine the long-term future of U.S. LNG, as we project that the “Rest of Asia-Pacific” markets will add nearly 8 Bcf/d of demand from 2020 to 2030.

Some market participants are predicting peak world LNG demand by 2030. We think it’s too soon to call a peak, as governments in Asia try to increase their reliance on low-carbon fuels such as LNG. 

Supply trends: Qatar adds volumes, as construction schedules may be compressed

Qatar Petroleum is betting on continued, robust LNG demand, as it announced a major supply expansion in early February, adding 33 MTPA (~4.34 Bcf/d) to world supply by 2026 or 2027, roughly the equivalent of adding an additional 6-train Sabine Pass LNG to world markets. QP’s aggressive move is intended to intimidate and deter new entrants, of course. Competitors may be adapting by rapidly accelerating their construction schedules.

As a rule of thumb, LNG projects traditionally take 4-6 years to complete. That timeline may be changing, as both Venture Global and Cheneire appear to have dramatically accelerated their construction time. Cheniere announced it would ramp up production on its sixth train at Sabine Pass by the end of the year. We expect will they will achieve consistent flows by no later than 2Q2022. Cheniere took FID on Sabine Pass T6 only in June 2019 and anticipated a start up by mid-2023: and some in the industry criticized their initial timeline as too aggressive. Cheniere’s T6 will likely go from FID-to-first gas in under 36 months, which will break all speed records for mid/large-scale LNG producers in the United States, and possibly across the world.

Venture Global says it will begin LNG production at Calcasieu Pass as soon as October 2021. We are more skeptical. We believe that operations will more likely start in late 2022. Still, even completing the LNG project at that speed is impressive: Calcasieu Pass only took FID in August 2019, the project is a greenfield investment, and construction took place amid a pandemic.

We are adjusting our forecast accordingly: U.S. LNG annual export volumes may reach 12 – 13 Bcf/d by YE 2022, up from ~6.5 Bcf/d in 2020, when volumes were suppressed due to COVID. There is also some upside risk to these estimates, since Sabine Pass T6 and Calcasieu Pass may be able to achieve their ambitious construction completion goals. Both projects will undoubtedly seek to receive first gas prior to the high-demand winter months.

Bright short and medium-term outlook for LNG LNG demand will likely expand this year, assuming that the COVID-19 pandemic continues to recede in European and Asian demand markets. Netbacks are strongly positive, particularly for winter 2021/2022. Although we are keeping an eye on marginal international liquefaction capacity that may be returning to the market, we expect far fewer U.S. LNG cargo cancellations in 2021. Similarly, there may be a window of tight LNG markets in the medium-term.