The world is likely to be awash in LNG later this decade, but the surplus isn’t expected to last forever and divisions over how long the market would take to balance are coming into sharp relief.
Russia’s invasion of Ukraine two years ago and its decision to cut nearly all gas exports to Europe created a scramble to secure supplies that sent prices skyrocketing. As buyers sought cover from the volatile spot market and stronger energy security, they signed more long-term deals, raising prospects for investment in liquefied natural gas terminals.
In some cases, the energy crisis helped push projects across the finish line. A bevy of new liquefaction trains are now set to come online starting next year, with additions poised to accelerate in the years after that. Nearly 40 million metric tons (mmt) of LNG capacity is expected to come online annually between 2026 and 2028.
That would push the world’s liquefaction capabilities well north of 500 mmt/year (mmty) and far surpass each of the previous two supply cycles dating back to 2009. The market currently consumes about 400 mmty.
“You have this huge amount of volume coming into the market at a time when demand is growing,” but not nearly fast enough, said Poten & Partners’ Jason Feer, global head of business intelligence.
The three-year period from 2026 to 2028 looks “quite unbalanced,” added Wood Mackenzie’s Massimo Di Odoardo, vice president of gas and LNG research. What’s unclear is exactly how long the glut could stretch beyond that point and into the 2030s.
“The market has to balance at some point because you can’t just store vast amounts of LNG indefinitely,” Feer told NGI.
To be sure, the LNG market has long moved in cycles where supply catches up to demand and vice versa. However, the last two years have been characterized by a precarious supply balance, highly volatile natural gas prices and an energy crisis that upended global energy flows.
In its latest annual LNG outlook, Shell plc said it expects global demand for the super-chilled fuel to rise by more than 50% by 2040. Industrial coal-to-gas switching is expected to gather pace in China, while South Asian and Southeast Asian countries should use more LNG to support economic growth, the world’s largest LNG trader said.
The International Energy Agency (IEA), meanwhile, expects global gas consumption to peak by 2030 and maintain a long plateau before gradually declining by 2050.
Renewable energy growth is expected to cut into gas’ share of the energy supply stack, but the IEA also acknowledged in its latest World Energy Outlook that the rates of post-peak gas demand decline could vary widely.
A Shift Back To Asia
In many ways, the energy crisis hastened the transition away from fossil fuels as regions like Europe accelerated policies to gain energy independence and rely more heavily on renewables. While Europe has dramatically stepped up its intake of LNG over the last two years, overall, natural gas demand has declined by about 20% on the continent.
“There was this idea that the global market would be underpinned by robust European demand for the foreseeable future” that hasn’t entirely materialized, said Clark Williams-Derry, an energy finance analyst at the Institute for Energy Economics and Financial Analysis (IEEFA).
Europe’s LNG demand is likely to peak this year and buyers on the continent are likely to be over-contracted by 2030 as efforts to displace Russian natural gas over the last two years have been successful, according to the European Union Agency for the Cooperation of Energy Regulators (ACER).
ACER said the EU’s reliance on the spot LNG market could shift by 2030 under REPowerEU. The plan was rolled out in March 2022 shortly after the Russian invasion to help Europe diversify natural gas supplies, accelerate the use of renewable energy and replace natural gas in heating and power generation.
A probable demand decline in Europe has the market pinning hopes for strong growth on Asia, where the outlook is more opaque.
Demand in wealthier Asian nations like China, Japan and South Korea has slowed recently.
Despite a slow rebound, weaker economic growth, along with more pipeline imports and domestic supplies, have kept Chinese LNG imports below 2021 highs. Japan and South Korea are slowly bringing back more nuclear capacity, which will cut into LNG demand, as well.
“If you think about the wealthiest part of the market, that chunk of the market that can afford expensive LNG, it’s seeing overall demand decline, so that leaves the rest of the market, which is mostly countries that can’t afford LNG or where $10/MMBtu LNG is kind of expensive,” Williams-Derry told NGI. “Pakistan or Bangladesh don’t pin economic growth on $10 gas.”
Moreover, Williams-Derry, whose organization advocates for a faster transition to sustainable energy sources, said some parts of the developing world soured on LNG during the energy crisis when prices skyrocketed and securing cargoes without term contracts proved difficult.
“The result, we think, is a decline in the pace of demand growth globally and a shift in the market away from” wealthier, more creditworthy buyers to “riskier, more volatile economies,” he added.
However, latent demand across the world – especially in Asia – is widely expected to keep pace with supply additions, particularly if regasification infrastructure investments continue at the robust pace they have been, according to Shell.
Williams-Derry questioned some of the structural demand, or infrastructure, in parts of South and Southeast Asia that would be needed to absorb additional supplies further downstream.
The IEEFA said in its latest Global LNG Outlook that economic, political, financial and logistical issues have challenged structural demand growth in some parts of the region, where projects have been canceled or delayed in favor of alternative energy sources.
‘Price Mechanism’
On the other hand, the coming wave of supply is likely to push down prices in a way that makes LNG more appealing to buyers across the world. The swing lower could be a large factor in balancing the market later in the decade.
To an extent, as prices have fallen from record highs over the last two years, more buyers are returning to the spot market. Prices in Europe and Asia are hovering just above $10 as the summer gets into full swing, luring cost-sensitive buyers back.
“Price mechanism plays a big role in all of this,” said Rapidan Energy’s Alex Munton, director of the firm’s global gas service. “It’s kind of the relief valve at both ends…When you’ve got an excess of supply, the price mechanism operates to incentivize more demand. That’s the nature of the market, and that’s what we’ll see.”
If prices do fall significantly, another wildcard is how much demand returns in Europe. Despite the bearish outlook for gas on the continent, Di Odoardo told NGI that LNG is likely to continue playing a strong role in Europe post-2030 as Norwegian supplies decline and North African volumes prove unsustainable.
Odds also favor stronger demand growth in Asia, he added.
In markets where a new coal capacity moratorium exists, including many of the Southeast Asian markets, and with LNG demand increasing substantially, “gas alongside renewables is the obvious choice for them to go for.
“With prices coming down, the potential for gas demand and LNG demand is quite substantial,” Di Odoardo said. “But also many of these markets face a decline in domestic production. As a consequence, there is a need to substitute that supply” to meet existing structural demand.
There also remains a question of “just how much the industry can invest” to bring on additional supplies after the next wave, according to Di Odoardo. Roughly 60% of the new capacity under construction and coming online over the next three years or so is located in the United States and Qatar.
By 2030, if newer supplies are absorbed, prices could begin to recover depending on how long it takes for less-developed facilities to come online in places like North America and the Middle East.
The timelines of some projects, such as Golden Pass LNG in Texas, are also slipping given the complexity of building large onshore facilities. Moreover, Qatar’s plans to boost current liquefaction capacity from 77 mmty to 142 mmty by 2030 are ambitious and could ultimately take longer to materialize.
“We can track the progress of North American projects pretty well, but we just don’t know what’s happening on the ground in Ras Laffan,” Munton told NGI, referring to Qatari projects.
Balancing Act
Another lever, and perhaps one of last resort, is U.S. liquefaction. Exports from the Gulf Coast have grown exponentially, and the United States is now the world’s largest LNG supplier.
The United States could balance the market later in the decade if prices fall low enough given the flexible take-or-pay contracts that allow buyers to pay a fee instead of loading a cargo.
In that case, U.S. liquefaction plants would be shut-in, curbing supplies, pushing American natural gas prices higher and closing the arbitrage window until the market returns to equilibrium.
It’s unclear if prices would fall that low, but U.S. plants could still run at lower utilization rates to limit excess supplies, Williams-Derry said.
Feer agreed, adding that “as long as you get those lifters performing their obligations, plants might not operate at 100% of capacity all year long and may go offline for periods of time. But the contractual structure sort of allows that to happen and it worked last time.”
In 2020, amid a pandemic-induced glut of LNG, European gas prices fell below Henry Hub as LNG flooded the continent. Asian LNG prices traded near a similar level. As a result, it was estimated that up to 200 U.S. LNG cargoes were canceled before prices recovered.
The market is trying to determine if things would again go that far.
“The next wave is truly kind of gargantuan, but it still has to happen, right?” Munton said. “It doesn’t take much for things to tighten back up when you get a few unscheduled events. It’s not a foregone conclusion by any means that the world is going to be flooded with LNG.”
