Certain US LNG projects would see a near-term revenue increase if the European Commission implements its proposal to cut Russian gas imports by two-thirds, Fitch Ratings says. Longer term, additional upside for US liquefied natural gas (LNG) projects as a result of EU demand may be practically capped by EU clean energy goals, challenges expanding LNG import capacity in key countries, and competition from other LNG producers and marketers.
Lower natural gas production and inventories in the EU and lower natural gas prices in the US contributed to increased US exports to the EU over the last five years. This resulted in the US becoming the largest source of LNG to the EU and the UK in 2021, providing 26% of all LNG imports, according to data from the US Energy Information Administration, International Group of Liquefied Natural Gas Importers and CEDIGAZ. This increased to more than 50% in January 2022.
Purchasers in existing long-term contracts with US LNG producers hold most of the US LNG production and are the main beneficiaries of EU demand given they will be able to sell to buyers in the EU. The few projects with uncontracted capacity are also able to produce and market low-cost LNG to the EU to capture meaningful revenue. Additionally, those projects that self-procure gas to produce LNG for buyers in exchange for a variable fee will see fee revenue rise with increased purchases.
The European Commission (EC) plans to build reserves and diversify energy sources away from Russia, which currently supplies 40%-45% of the EU’s gas. The EC will introduce legislation that increases gas imports from other markets while moderating gas demand by expanding renewable sources of energy and energy-efficiency initiatives. A key goal is to eliminate Russian gas imports by 2030 – a gap of about 112 million tonnes per annum (MTPA) – based on 2021 volumes. The legislation will include a requirement for 90% of gas storage capacity to be filled by Oct. 1, 2022, and annually thereafter to prevent higher winter gas prices, benefiting LNG suppliers during 2022, if enacted.
Several US LNG projects obtained permits to build large facilities, indicating favorable prospects for a large expansion to help fill the gap in EU imports. However, the potential is constrained by clean energy policies, EU import capacity and competition among producers.
The funding of new LNG projects is underpinned by long-term offtake contracts for most capacity that provide a stable revenue stream, typically with 20-year terms to fully amortize the large investments required. European LNG buyers considering long-term contracts need to balance this against EU climate change regulations. More aggressive renewable energy buildout to replace gas may also temper EU interest in long-term LNG contracts. US developers may also be affected by climate regulations to secure new pipeline capacity to obtain feedstocks.
Buyers and other global marketers may also hold back from making additional long-term commitments to US projects if they are not confident sufficient LNG import capacity will emerge in key EU countries. The necessary investment in import facilities would crystalize a more permanent commitment to LNG that is at odds with their climate pledges.
US developers also compete with other LNG producers to secure long-term contracts. Most notable is Qatar, which has production capacity similar to the US and two projects in construction to boost LNG production by 49 MTPA by 2027. Qatar will need contracts to underpin those capacity additions, and having projects in construction and very low gas supply risk gives it a competitive advantage. Most US projects will not obtain funding to begin construction until they secure contracts that cover the majority of their production capacity and gas transportation requirements.
Source: Fitch Ratings