Pathways to a new future – the LNG bridge

It will come as no surprise that the future is bright, and it is also green. Oil majors are accelerating their pivot from hydrocarbons to clean energy. Political economies are dominated by pledges and road maps to achieve net-zero by the mid-21st century. The next industrial revolution is unfolding in front of us, powered by clean energy and developed through big data.

The need

However, pledges are precisely that: pledges. There is no single silver bullet, no panacea. Wind and solar alone will 
not reliably power the world.

There is work to be done to improve the fuel mix – globally, within Europe and, to a lesser extent, in the UK. Both hard coal and lignite (brown coal) make up significant proportions of Germany and Poland’s generation mix. Both are large energy producers and consumers.

Although a hydrocarbon, with natural gas, and by extension liquefied natural gas (LNG), there is a large disparity in CO2 grams per kilowatt-hour. Natural gas produces 200–365g of CO2 equivalent per kilowatt-hour (gCO2e/KWh), compared to lignite and hard coal’s 400–718g, depending upon the efficiency of both the coal and the plant.

So, what happens when the sun does not shine and the wind does not blow? In short, there are technologies to be developed and applied – notably, hydrogen for fuel and carbon capture and storage (CCS). The EU has committed to significant funding of both these technologies. The UK continues to trial hydrogen as a domestic fuel. Studies suggest that CCS, coupled with gas generation, could see gas generation at 140 gCO2e/KWh. In a world where emissions trading schemes and tax regimes are only going to get stricter, marginal gains here could see significant rewards and returns. There is not only an apparent moral imperative, but also a financial incentive.

The floating pipeline

In 1970, the world produced 3bn cubic metres (BCM) of LNG. In 2011 this had risen to 330BCM, and 400BCM in 2019. In 2020, despite the pandemic, LNG is still expected to have exceeded the 2019 figure. Traditionally LNG trade has focused on North East Asia, Japan, South Korea and Taiwan. LNG, primarily a maritime commodity, offers the ability to act as a waterborne pipeline, moving ‘stranded assets’ in the Arab peninsula to other islands and peninsulas where conventional pipeline infrastructure is not practical.

Development

Why was there such a dramatic increase in the LNG product? One answer is the rise of China and its increased energy demand to support its economic and industrial development. The other side of the coin lies in North Dakota. The shale revolution offered the US energy security, and eventually the opportunity to flip from being a net importer to a net exporter. While the primary aim was crude oil, there was a secondary product: natural gas. And instead of flaring – burning off the gas at the wellhead, which releases carbon, the simple solution was to monetise the methane and export it. During the past five years there has been significant investment in infrastructure and business models, spearheaded by terminal developers such as Cheniere – the largest LNG producer and exporter in the US. This has had a cumulative effect on Henry Hub pricing, a mainstay of US gas pricing, giving it a larger role and more influence in the fundamental pricing of LNG.

As the world transitions away from an oil-based economy to clean energy and technology, gas will become the dependable lower-carbon alternative 

Purchasing

Traditionally the LNG market has been dominated by long-term procurement deals, typically 20–25 years, seeing huge arbitrage potential as a product of relatively static pricing. The development of Platts Japan Korea Mark (JKM) has set LNG on a liberalisation trajectory. There are significant incentives for major exporters, notably the US, Australia, Qatar and Russia.

Why is LNG important to Europe and the UK? Markets, logistics and storage. The UK National Balance Point and Dutch Title Transfer Facility (TTF) are mature liberal gas markets. TTF is sometimes called the Brent of Gas, and Europe acts as the balancing mechanism underpinning global pricing.

This is supplemented by the duration of transit for each voyage. Qatar has the geographical advantage: on average, it takes 12 days to reach South Korea, and 14 days to reach the UK through the Suez Canal. The US voyages take 22 days to reach the Korean Peninsula through the Panama route, whereas transatlantic voyages are just over 10 days, depending on weather.

In North West Europe, including Amsterdam, Rotterdam, Antwerp and the UK, there is ample storage and domestic demand to absorb cargoes.

The path ahead

LNG continues to go from strength to strength. Despite the pandemic, it has attracted attention as one of the few energy commodities to exit 2020 stronger than it entered the year.

Although only one project – Mexico’s Energia Costa Azul (ECA) LNG export plant, phase one – had been sanctioned at the end of 2020, the next two years will be pivotal, with many developers having delayed final investment decisions to 2021 and 2022. Financing remains a concern for some of the smaller players involved in the sector, and the price increase of LNG may help these projects move forward again.

At time of writing, tight LNG supply and rising demand have seen JKM trading between US$8.50–9.00 MMBtu – close to two-year highs – while freight costs have strengthened to two-year highs following disruption and delays in the Panama Canal.

Investors are more comfortable with taking a risk-on position, and investment decisions are being made. There are numerous ongoing infrastructures in the US, on the Gulf Coast and the Eastern Seaboard. Total has confirmed its participation in the ECA LNG phase one project.

Globally, there are potential LNG projects in Mozambique and Papua New Guinea. In November, China’s offshore oil and gas producer CNOOC Group set out to add a further 1.62 MCM LNG storage at the Binhai Terminal, in the eastern province Jiangsu.

As the world transitions away from an oil-based economy to clean energy and technology, gas will become the dependable lower-carbon alternative that enables the world to traverse the challenges of achieving net-zero. LNG will continue to play an important role, and with increased investment in infrastructure, trading is set to see LNG cargoes increase in the foreseeable future.

The future is bright for LNG, meeting clean energy requirements globally and turning a tidy profit for those in the trade of this exciting and fashionable commodity.

Major projects to watch

Commonwealth LNG Liquefaction and Export Facility

Value: US$4bn
Startup: Q2 2024
Stage: Pre-FEED
Status: Planning consent applied

Driftwood LNG (Calcasieu Parish LNG Liquefaction Plant)

Value: US$16bn
Startup: 2025
Stage: EPC
Status: Contract awarded

Energia Costa Azul (ECA) LNG Terminal Liquefaction Conversion Phase 1

Value: US$2.5bn
Startup: 2024
Stage: EPC
Status: Contract awarded

Goldboro LNG Liquefaction Plant

Value: US$7.45bn
Startup: Q3 2025
Stage: EPC
Status: Contract awarded

Lake Charles LNG Liquefaction Plant (Trunkline LNG Export)

Value: US$12.3bn
Startup: Q3 2025
Stage: EOC
Status: Tendering and bidding

Rovuma LNG Liquefaction Plant

Value: US$22.4bn
Startup: 2024
Stage: EPC
Status: Contract awarded

By Christian Beasley, Risk and Market Analyst, ZTP