As LNG prices soar, a lesson that timing is everything
An LNG trader with some extra of the heating and power-generation fuel to sell in Asia this month could make $100 million more than what it was worth less than 18 months ago.
The $100 million is not a month’s worth of deliveries; that’s one standard-size 975-foot-long LNG carrier with a full load in its insulated tanks.
In this fall’s lucrative and rapidly escalating Asian spot market, the gas is worth more than half as much as the entire ship cost, brand new.
There appears no question that natural gas producers and liquefaction plant developers failed to fully anticipate the heavy demand for the fuel this fall and winter, or the resulting gas supply shortages that are causing record-high prices and economic pain across much of Asia and Europe.
While producers and traders have some spare gas to sell, not bound under fixed-price contracts, those same companies needed to have invested tens of billions of dollars years ago if they were going to cash in even bigger during the price spike, which has seen liquefied natural gas on the Asian spot market sell for an unprecedented, unworldly and unaffordable $34.47 per million BTU last week.
That’s almost 20 times the low of $1.85 set in May 2020, when the world was shutting down for the COVID-19 pandemic, and just a month after crude oil prices had averaged less than 50 cents a gallon.
Unlike OPEC and its allies, which have significant spare oil production capacity that can ramp up in weeks or months as the global economy recovers, additional natural gas doesn’t move that easily. The industry needs years and at least $10 billion, often double that, to build the complex liquefaction plants to produce new supply for buyers.
Therein lies the challenge — and the risk — of judging the market for a long-term investment that will not start delivering until the market may have changed.
Examples of bad bets are plentiful.
In the first decade of the 21st century, several gas producers, developers and traders saw high natural gas prices in the U.S., declining production from mature basins and rising demand, and decided the country would become a major LNG importer. They spent billions reactivating unused receiving terminals from the 1970s and building new LNG import facilities. They thought they were going to get rich.
Then some smart gas producers figured out how to drill and market prodigious amounts of shale gas, overwhelming U.S. demand. The imperative to import the fuel disappeared within a few years.
The owners of those unused import terminals later spent billions more to turn the facilities into export projects, so they could reverse course and profit from selling much of that surplus U.S. gas overseas. A happy ending, but only after heavy losses for years.
More recently, Norway’s Equinor and Russia’s Gazprom, which together supply about 60 percent of Europe’s natural gas, found themselves cashing record-size checks for pipeline gas deliveries to the continent.
The European Union had liberalized its gas market years ago, shifting away from long-term contracts at fixed prices, often linked to oil, moving to short-term or flexible contracts that worked to their advantage during a long period of low natural gas prices. Europe’s luck ran out this year as the tight market and multiple other factors drove up prices by 300 percent, without contracts to protect buyers.
“The rapid increase in gas prices happened at the best historical time possible for Equinor,” company economist Eirik Waerness told Reuters last month.
In Asia, buyers that were traditionally bound under oil-price-linked LNG purchase contracts clamored for more flexibility and better terms when oil was above $100 a barrel 10 years ago. Many switched to shorter-term contracts or spot purchases as new LNG supply flooded the market, driving down prices.
As in Europe, buyers in Asia enjoyed low prices, but only until the market reversed course. Now, as the spot-market is at record highs amid tight supplies, those oil-linked contract LNG cargoes are less than one-third the cost of spot buys.
Timing is everything, and prices seem to always look better on the other side of the forecast.
Meanwhile, it’s getting more complicated.
In addition to knowing whether ample supply will hold down prices for years, or whether short supplies will drive up prices and profits, gas producers and investors now have to calculate how much renewable energy will cut into their market share in the years ahead. It’s made many of them cautious. No sense building a fossil-fuel project that needs 20 years for payback if green energy will take over the electric meters of the future.
Unless renewables don’t, in which case LNG suppliers will be happy to oblige at a profit, as long as they are willing to risk the investment years ahead of time.
As is Qatar, the world leader in LNG production and exports, which is proceeding with a multibillion-dollar, 40 percent expansion of its output capacity this decade.
This year’s record-high gas prices are “due to the market not investing enough in the industry,” Qatari Energy Minister Saad al-Kaabi said on the sidelines of the Gastech industry conference last month in Dubai.
The lack of investment in new supply, either due to risk aversion or fear that renewables will dominate the future, is not good for anyone, he said.
“We don’t want these high prices, we don’t think it is good for the consumers. We don’t want $2 and we don’t want $20, we want to have a reasonable price that is sustainable,” Reuters quoted al-Kaabi.
All those years of low gas prices, while comforting for buyers, are part of the reason for today’s tight market, said a U.S. LNG developer.
“The world was kind of lulled to complacency because (gas) prices were low for five years so no one felt an urge to plan and everyone got very religious on environmental protection and it is wonderful,” said Charif Souki, co-founder of Tellurian, which wants to build an LNG export terminal in Louisiana.
“But we should look at what things actually work rather than simply what we hope for,” he told Reuters last week.
Larry Persily is a former Alaska journalist, state and federal official who has long tracked oil and gas markets and projects worldwide. He can be reached at [email protected].