With the U.S. well on its way to becoming the world’s largest liquefied natural gas export capacity by YE 2022, we wanted to take a step back and take stock of broader trends at home and abroad – in particular, the role of natural gas and LNG in the energy transition. While outcomes will vary sharply, perhaps even dramatically, across different markets and regions, we believe that LNG and natural gas will expand their role due to the increasing worldwide rejection and even stigmatization of coal. With coal in retreat and widespread renewables adoption years or even decades off in developing markets, we believe that many Asian energy-importing countries will increasingly turn to LNG. China’s coal policies and LNG affordability for countries such as India will have decisive implications for future LNG demand. 

U.S. LNG: 2021 in review

After a brutal 2020, U.S. LNG enjoyed a run of good fortune in 2021. International LNG competitors struggled to operate at full capacity, world economic and energy demand picked up on widespread vaccinations, and there were few U.S. Gulf Coast weather-related outages (besides those related to Winter Storm Uri).

U.S. LNG also created its own luck through excellent execution, as two major LNG projects, Sabine Pass Train 6 and Calcasieu Pass LNG, came online sooner than expected. Moreover, unlike other producers, the U.S. upstream and midstream supply chain remained resilient (save, again, for Winter Storm Uri). With other potential or existing natural gas producers such as Mozambique and Russia demonstrating unreliability on domestic instability and geopolitics, respectively, supply assurance continues to be a major competitive advantage for U.S. producers.

U.S. LNG in 2022: tight markets, possible Chinese slowdown, and project FIDs

LNG markets are running red-hot across the world, particularly in Europe. Pipeline and liquefied natural gas outages are constraining supply, post-vaccine economic demand is boosting demand, and closures of nuclear and coal plants are supporting natural gas power burn. These factors have led to record natural gas spot prices in many markets, most notably Europe, which is facing a supply crunch due to tensions with Russia. Moreover, some LNG importers such as Turkey and China are facing significant economic challenges. China, which has surpassed Japan to become the world’s largest LNG importer, my face a real estate-led economic downturn in 222, which would cool world economic growth, limit LNG demand growth, and put downward pressure on prices. Western-Russia tensions remain a major wildcard for natural gas markets in 2022.

We do believe that one or more U.S. LNG projects will announce a positive FID in late 2022 or early 2023. In recent months, Venture Global’s Plaquemines LNG and the Cheniere’s Corpus Christi Stage II have made significant commercial progress in securing bankable term offtake agreements. Still, many of their agreements have been signed with Chinese customers and are subject to significant geopolitical risks. Any new FIDs will form the 3rd (and probably last) tranche of new U.S. LNG capacity.

Coal-to-gas switching

Finally, in 2022 we will continue to watch the most important long-term trend for the future of natural gas and LNG: China and India’s willingness to convert their baseload generation profile from coal to gas. There were some signs in 2021 that the two Asian giants will reduce coal intake, at least in the long-term. China pledged to stop building coal plants abroad while committing to zero-carbon emissions by 2060 and peak emissions no later than 2030, while Delhi announced net zero emissions by 2070 and peak emissions by 2040-2045. However, these pledges are decades-long and could have no impact for years. 

Coal plant construction in the Belt and Road Initiative (BRI), a Chinese economic and geostrategic initiative, is a key energy transition issue to watch in 2022. China has pledged to stop building coal plants abroad through the BRI; the initiative did not invest in any new coal plants in 1H2021. Still, the BRI project pipeline includes about 14 GW of new coal-fired plants. Even if China eliminates overseas coal construction, there remains the question of domestic coal consumption, as the PRC accounts for about half of world coal consumption. China’s domestic and international coal policies will have huge consequences for climate – and LNG uptake.

Some green (fuel) shoots for Asian LNG demand?

We see some reasons why China and other Indo-Pacific economies could ramp up LNG consumption. South Korea announced it would label LNG as a green fuel while phasing out coal by 2050. A referendum to build a 4th nuclear power plant in Taiwan failed at the ballot box while voters approved construction on an LNG import terminal. On the other hand, however, Japanese LNG demand appears shaky amid nuclear plant restarts, a reluctance to abandon coal, and interest in ammonia and hydrogen. South and Southeast Asian LNG demand is also highly consequential, if often overlooked. (If you’d like a deeper dive on our view of long-term Asian LNG demand, drop us a line: info@enkonenergy.com).

2022 will be an important year for coal, as well as the future of LNG demand. We’ll look to see how China, India, and other Indo-Pacific economies approach the energy transition. We expect that coal will increasingly face headwinds in the energy mix, providing more opportunities for LNG.