Obviously, pre-COVID assumptions are no longer valid. In the near-term, markets will remain even more imbalanced on sharply falling demand. Over time, however, fewer LNG projects taking FID will lower supply. Will project cancellations reduce future supply enough to outweigh the drop in demand? We estimate that more than 200 MMTPA of LNG liquefaction capacity that was expected to take FID in 2019/2020 has been pushed back by at least 1.5 to 2 years, if not indefinitely. Not everything can be blamed on COVID-19, however, as many of these projects were already struggling to attract bankable customers willing to sign 20-yr agreements. So, even if the world can magically  win the COVID-19 battle, the ability of these projects to sign up customers is highly questionable – particularly for Greenfield U.S export projects. Finally, supply chain disruptions, restricted air travel, and other virus-related precautionary measures will significantly slow down construction and prolong the LNG imbalance. Please drop us a line if you’d like to see our more detailed, post-COVID analysis of the international supply/demand balance or if you differ with our assessment.

Is LNG losing the fuel-on-fuel competition race?

Let’s consider one of LNG’s structural challenges. Natural gas is the cleanest of the hydrocarbons, but also a fuel that is more reliable and persistent than renewables, which are often too intermittent for baseload power requirements. For these reasons, natural gas has often been regarded as a “bridge” fuel, occupying the “Goldilocks” mixture of reliability, cost, and environmental benefits. Trends in alternative power generation sources are worth watching carefully, however. The People’s Republic of China and other Asian countries are increasingly turning to coal amid economic challenges, while renewables are increasingly competitive on cost and reliability. Gas is being squeezed by fuel-on-fuel competition.

As we wrote in our earlier Insight, the U.S. domestic coal industry faces severe challenges due to increasingly unfavorable economics, policymaking, and normative dynamics. We believe the U.S. coal industry could be defunct by 2030, or even as early as 2025. Coal is also under enormous pressure across Europe. The United Kingdom is the birthplace of coal, but Great Britain’s electricity grid operated without any coal-fired electricity for over fifty days. Germany has also committed to phase out coal power by 2038 (and, frankly, we think German coal will be phased out long before then). Coal is being phased out across North America and Europe.

In Asia and other markets, however, coal increasingly appears ascendant. For many developing economies, coal is the cheapest baseload fuel and often the quickest, cheapest path to electricity required to sustain economic growth. Furthermore, coal can often be sourced through domestic reserves, avoiding the need to rely on external partners. If environmental preferences take a back seat to cost and energy security in the post-COVID world, coal could benefit. Indeed, the People’s Republic of China is adding a new wave of coal plants and leading the charge from gas to coal. While coal is squeezing natural gas in some key markets, LNG exporters also faces pressure from renewables. Solar power costs have fallen dramatically over the past decade, both in OECD countries and throughout the developing world. Indian solar power is particularly noteworthy, as some projects are already directly competing with coal: Adani Green just won a tender for the world’s largest industrial-scale power project. The Indian solar sector is also attracting international investors, as evidenced by the Adani-Total link up.

Obviously, solar and wind still face challenges. Both fuel sources face intermittency problems, supply chains are in flux, and the renewables sector needs to continue to make technological progress to lower costs if it is to successfully challenge incumbent fuel sources such as coal and natural gas. Still, wind and (especially) solar have become much more cost-competitive, while advances in battery technology could make renewables a “baseload-lite” fuel source, pressuring LNG demand.

LNG: tough times, uncertain future Like almost every other commodity, LNG prices and exports have been pressured by the COVID-19 demand shock, along with other factors such as an unseasonably warm winter and European gas dynamics. Although the picture appears to brighten in the fall on recovering demand from Asia and Europe, U.S. LNG exports will likely be out of the money for the remainder of the summer. LNG’s medium-term challenges are even more serious. LNG demand could be constrained by growing international coal and renewables usage. The price collapse makes executing long-term commercial contracts nearly impossible – but few LNG projects will move forward without decades-long commitments. In short, U.S. LNG is in a difficult spot, and things may only get worse.