Via Financial Times

A worldwide slump in fuel prices is putting billions of dollars of liquefied natural gas investment on ice. 

LNG has tied together once-disparate energy markets, as natural gas is condensed for shipment overseas. But the price differences have collapsed on either side of the ocean, removing much of the imperative for the once-booming marketplace. 

Global gas demand will decline this year for the first time in more than a decade as the pandemic drags on industrial output and power generation, the International Energy Agency estimates. Long-term forecasts are in tatters. 

The looming gas glut is clouding prospects for an ambitious queue of projects designed to export shale gas from the US and Canada. “We don’t see any additional North American export capacity getting sanctioned in the next decade,” said Ross Wyeno, an LNG analyst at S&P Global Platts. 

Exporting LNG requires massive investments in liquefaction plants and ports whose financing usually hinges on long-term sales contracts. Projects designed to ship out more than 900m tonnes a year await approval from developers, with North America accounting for two-thirds of this capacity, according to the International Gas Union. 

Developers had been preparing to profit from a period of scarcity expected in two or three years. But the low demand and the 41.8m tonnes of new capacity already added last year will prolong the glut into the mid- to late-2020s — and possibly later as the low-cost supplier Qatar forges ahead with a huge expansion push, the gas union said. 

Line chart of $ per million British thermal units showing World gas prices converge as coronavirus saps demand

Strains are showing at some North American LNG developers. Houston-based NextDecade furloughed staff, cut executive pay and set out plans to lease smaller office space as it postponed a decision date on its $10bn project in southern Texas. “Our balance sheet is strong, we have no debt outstanding and the fundamentals of our Rio Grande LNG project remain firmly intact,” said Matt Schatzman, NextDecade chief executive.

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US utility Sempra Energy this month delayed a final decision to at least 2021 on a $9bn project in Port Arthur, Texas. Justin Bird, chief executive of its LNG subsidiary, said the market will need more supplies in the mid-2020s, and “we believe Sempra LNG projects are the leading candidate to supply this need”.

Tellurian, developer of a $30bn project in Louisiana, has cut its headcount by 40 per cent and stretched out a loan repayment while it weathers what chief executive Meg Gentle called “extreme energy and financial market conditions”. 

Charif Souki, the Tellurian co-founder and chairman who owns 10.7 per cent of the company, has put his Aspen, Colorado ranch up for sale with an asking price of $220m, the Wall Street Journal reported last week. A person close to the company said the offering was for personal property that had nothing to do with Tellurian.

Only one terminal is under construction in Canada, a Royal Dutch Shell-backed project in British Columbia known as LNG Canada. The pandemic has forced contractors to “significantly” curtail the workforce at the site to avoid contagion, the company said last week

Line chart of Billion cubic feet per day showing US LNG plant use falls by a third

Gas prices in Europe are now cheaper than in the US, discouraging exports from North America, according to S&P Global Platts. In east Asia, the biggest import market, the price of gas was just 40 cents more than in the US, well below the cost of liquefying and shipping gas from the western hemisphere.

After running at full speed until April, the six operational US export terminals are now using only 65 per cent of their capacity, with gas prices indicating future sales would be out of the money until at least September, the consultancy IHS Markit said. 

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The slowdown is a challenge to the Trump administration’s rhetoric of “energy dominance,” which officials adopted as American oil and gas production became first in the world.

“Energy dominance is predicated on energy demand,” said Charlie Riedl, executive director of the Center for Liquefied Natural Gas, a trade group in Washington. 

Over the past decade the LNG market organised itself around large price disparities between North America, Europe and Asia, said Nikos Tsafos, senior fellow with the Center for Strategic and International Studies, a think-tank. 

“And now we’re headed in a world where that may not be true, it may not be true for a long time,” Mr Tsafos said. “It may not be true ever. You may never get back to the types of disparities you saw over the past 10 years.”