LNG Insights: Supply, Demand, & Investments

Shaheen Chohan (00:16):
Hello and welcome. My name is Shaheen Chohan and I'm the Vice President of IIR's Global Analytics team, and I'm based in our Dubai office. I've been with the company now for 15 years focusing on delivering strategic market intelligence across global industrial sectors.
Before we get into the discussion, we do have to say a very big thank you to today's podcast sponsor, HILCO — the world leader in motion control and filtration systems. Since 1905, HILCO Filtration Systems have been the industry standard. They bring fluid contamination problems under control cost-effectively with a full range of engineering filters, cartridges, reclaim coolants, recyclers, and fluid conditioning systems.
Today's session will be focusing very much on the LNG sector. We're going to be exploring the key themes, emerging trends, and the shifts in investment that are shaping the market. And to help unpack these insights, I am delighted to be joined by Shane Mullins, who is a multi-decade subject matter expert of natural gas research. And Shane is also joined by Jesus Davis, our VP for Energy Market Research. Welcome, gentlemen.
Together we will break down the data, look to interpret what that means, investigate what our research managers are uncovering across the world, and hopefully identify some of the opportunities as well as some of those risks that lie within this space. Now, our discussion around capital spending in the global LNG market comes at a time when both buy-side and supply-side fundamentals remain very positive. In the past, a lot of that demand growth was coming from developing Asian economies, and obviously the big demand driver being US domestic consumption. But most recently we have seen geopolitical tensions, a new Trump administration, and obviously the use of energy commodities now very much as a tool to negotiate trade agreements. And so much of today's discussion will be around getting beneath some of these prevailing trends.
So welcome, guys — really excited. Let's start. Very top line, what are some of those big drivers that are currently shaping LNG capital spending, and also, more importantly, the pace, shape, and location of where we're seeing new liquefaction capacity being developed?

Shane Mullins (02:58):
Well, it's been the same thing since Russia invaded Ukraine. We saw a dramatic shift in LNG supplies — our gas pipeline supplies were cut off to Europe, and that was replaced with LNG supplies from the US. Europe became the market of last resort for LNG cargoes, and that was a dramatic change. Europe has been absorbing much of the available spot cargoes in the market for several years now. That's going to continue, and that has really encouraged long-term contracts to be signed, which is encouraging more LNG development not only in the USA but also in Qatar, in East Africa, and West Africa as well.

Shaheen Chohan (03:40):
What we can see — and this is data direct from our global researchers, what we're tracking globally around the world — there's clearly a raft of investment coming through the pipeline, certainly in the US. Now Shane, we kind of had a bit of a pause in activity last year — we saw no new FID approvals. Can we expect to see a little bit more positive momentum coming through, certainly with a very supportive Trump administration?

Shane Mullins (04:10):
Yeah, we've got several projects in pre-FID construction and we've been waiting to see which one will move ahead first. We have some permitting tailwinds now — finally, with the Trump administration lifting the pause on permitting. We saw Woodside go ahead and FID their Driftwood project, which is a very new development — not one of the ones that I would have picked to move ahead this week, but that's what's happening. And there are several other projects that we expect to fall in behind that. Of course, during the LNG pause last year, we had several projects that we felt were in great position — pole position to move forward with an FID — but the DC District Court challenged some of the permits that FERC had approved. And FERC is still reviewing several projects that are listed at the top of the slide for US LNG projects, and those are the projects that we think are going to be moving forward next.

Jesus Davis (05:14):
If there's anything I want to add to that — yeah, I was actually really surprised when the Driftwood project got approved, considering they only have one metric ton of capacity that's under contract. We were just looking at that and comparing it to some of the other projects — that one had a lower amount of contracted capacity, but it's moving forward. And I'm assuming just because Woodside is the one that's behind it, and since they are a marketer, they're able to take that capacity and deliver it around the world. But there are several other projects that do have the contracts and are ready to move forward. But like Shane said, they're going through the DC District Court. One of those that's really interesting is the Commonwealth LNG project, mainly because it is fully contracted. And just recently the developer, Kimmeridge, has actually reached out to FERC and basically tried to ask to have that project expedited and approved by June — so we expect to see that potentially as maybe the second project to FID, if they do get that FERC approval.

Shaheen Chohan (06:10):
Okay, so we're going to start to see some momentum. And I guess other parts of the world will also be looking to see how quickly some of this permitting occurs. Now there's a lot of production capacity clearly being built and planned for, on top of what is already operational across other geographical markets. We're seeing Qatar in particular ramping up expansions in its North Field, and that's going to start to compete with US cargo and supply into the marketplace. Do you think that the pace of the new liquefaction capacity coming into the marketplace — at a time when Qatar is also ramping up — do you think that we may start to move into a situation where the market is oversupplied?

Shane Mullins (07:05):
I think exactly the opposite. I think demand will be there — supply demand grew greater than the amount of supply that we could bring on in the market last year, and that's going to continue. We're looking at every market, especially in the US where we have contracts that are tied to natural gas prices at Henry Hub. And the contracted cargoes have no destination clause, and they provide that energy security that Asia is looking for and help out with the electric demand growth that we're seeing across Asia right now.

Shaheen Chohan (07:40):
Now I do want to touch a little bit on market prices, if I may. I know we went through a period of volatility — high price, low price, gas prices globally. Are they supportive of pulling through many of these projects?

Shane Mullins (07:58):
Absolutely — we've got good economic fundamentals there, right.

Shaheen Chohan (08:04):
There's obviously a lot resting on global gas demand growth. As you said, the more supply that comes to the marketplace, the demand side starts to ramp up. And I do want to talk a little bit with both of you about the regasification and storage side — the buy side — in a little while. But before we get there, I want to look at some disruptors. What do you think could disrupt some of those FID decisions and permitting decisions moving forward? What are some of the things that you are going to be keeping an eye on?

Shane Mullins (08:38):
Continued delays for the tariff negotiations that are taking place with our trading partners — if that gets extended beyond July and goes on, that will delay further FIDs. I think a lot of people are looking for certainty, and that's not going to be there until we have trade agreements with our key trading partners. China is always going to be very interested in energy security, and then taking advantage of that energy security by reselling cargoes that were meant for China to Europe and gaining profits from that. So we still expect to see more agreements move forward with China. But we also expect to see agreements with our trading partners like Japan and Korea, Singapore, Vietnam, and some other areas. But each year for the next several years, there are a lot of contracts that are going to be expiring that are currently secured through Russia and through the Middle East, and that opens up the opportunity for US trade to our trading partners. So that's going to continue to take place.

Shaheen Chohan (09:41):
Yeah, I guess, Jesus — tariffs. I think every single industry is sitting every morning when we wake up right until we go to bed, it's just tariffs, tariffs, tariffs, and the situation. Okay, there is a degree of a pause, but my question to you is: how sensitive is LNG, and how sensitive are LNG trade flows to tariffs? Bearing in mind we saw China back in — I think it was February — place a 15% import tariff on US LNG. Do you think China's tit-for-tat move will have much bearing on US producers moving forward with projects?

Jesus Davis (10:26):
I do think that 15% is going to make some developers think a little bit longer about those projects, because that just adds to the cost. And not only the tariff on imported LNG is an issue, but also the tariffs on steel and aluminum, and then potentially on some other tariffs from other countries — specifically out of Europe — on some of the compressors and specialty valves and some of that equipment, which would be subject to tariff on import, which increases the cost of the project. So if that project ends up costing more, there are a couple of different impacts. First of all, your EPC contract is probably going to have to be renegotiated because the cost of that project can go higher. And also we're already starting to see that the liquefaction fee has already gone up — it used to be $2.50 plus Henry Hub price, but now it's going to be the Henry Hub price plus at least $2.75, maybe even higher depending on those input costs. So the more expensive that project is to build, the more they're going to have to charge to actually pay back the cost of that project.
And then you add on that 15% on top of that already higher cost — it does make those US projects not as competitive as they once were. They still will be very competitive — these are 30-year assets, and they're being supported by long-term contracts that are greater than 10 to 15 years. This 15% tariff is not necessarily a long-term tariff situation. It simply means that the cargoes will be diverted to Europe or other markets that can take that cargo.

Shaheen Chohan (12:01):
And actually, coming to that buy side — I remember, you know, we've had conversations in the past where people use a great phrase when talking about Europe's kind of emergencies. It's no longer the market of last resort — it's now the first resort. So we're seeing the potential, though, of some reconciliation in the Russia-Ukraine situation. And that reconciliation could potentially result in some of that Russian sanctioned gas coming back to the market. Do you think that's, first of all, a likelihood? And if it did occur, do you think that could alter the kind of trade flow to Europe?

Shane Mullins (12:45):
If we add on a ceasefire and an end to the war in Ukraine — perhaps — I don't think that's going to take place. I mean, we're already seeing Russia ramp up their military, we're seeing bases opening up along Finland's border. I think Europe is no longer going to go back to a situation where they're solely relying upon one trading partner for natural gas. I don't see things going back to the way they were. Europe is only going to be importing the lowest emissions-intensity fuels from this point forward. Russia has a long way to go on controlling methane emissions to be able to enter the European market, especially after the regulations move forward in 2027. So I don't see that situation changing immediately, especially if something is negotiated successfully in the next few months — it's not going to bring about a change in flows from Russia to Europe.

Shaheen Chohan (13:43):
Could I just — you touched on a really very useful point there about the methane emissions. So US producers in particular are actually investing quite a lot — they're very focused on lowering the emissions from production, which produces LNG that is well-specced from a certified natural gas standpoint. So that's a very attractive position for US gas in export markets, right?

Shane Mullins (14:14):
It's a very big focus. And despite production growth in the Permian Basin and the Haynesville and the Appalachia that we're going to see over the next few years — because of what's currently under construction — we'll still see emissions continue to decrease, to a point where the US market will be the lowest emissions-intensity fuel on an export basis within just a few short years.

Shaheen Chohan (14:35):
Now, I'd like to come back to the regasification infrastructure story. Do you think that the size and pace of import and receiving capacity is moving along at the right pace to get that perfect balance between absorbing new supplies that come online?

Shane Mullins (14:55):
Well, globally, regasification capacity stands at about 40% utilization, and there's $100 billion of new regasification capacity being added. So there's plenty of latent capacity that can absorb it.

Jesus Davis (15:12):
Absolutely right. What I would say is there are some new markets that are going to be opening up, so we do need to see additional regasification in different parts of the world. Some places where we had that 40% utilization — yeah, we don't need more. But there are emerging markets with growing middle-class economies that need that additional gas. We will see more.

Shaheen Chohan (15:28):
Which markets would they be in particular? I guess the Asian markets are high growth. Also that pivot away from coal-fired power generation towards gas as the baseload power provider — I'm assuming that's one of the key drivers there for the Asian markets.
I'd like to sort of get to our conclusion. Maybe if I could just get one major takeaway from each of you — and start with you, Jesus. Maybe on the US market — what's a big takeaway that you want to make sure folks who've tuned in pay attention to?

Jesus Davis (15:59):
The US market is still very, very strong. We still have lots and lots of projects proposed — don't expect to see all of them move forward. But I do expect to see more activity than we've seen in the past, just like we saw yesterday with the first FID since last year. And I would say we're going to see a couple more, which is going to be very healthy for the market. And it's not only healthy for the LNG portion of it, but it's also going to drive downstream spending — so we're going to see new gas pipeline spending, new gas storage assets added. So it's going to ripple throughout the whole oil and gas chain. It's very supportive of the entire market.

Shane Mullins (16:44):
And my big takeaway: I think we're seeing electric demand globally grow at a faster pace than what we've seen in the past few years. And all that means is it doesn't mean that we're going to only be developing wind and solar and batteries — it means that we're going to need even more natural gas going forward. And we're seeing natural gas for the next 25 to 30 years being a major part of our energy mix, while we wait on nuclear and other technologies to take its place at some point.

Shaheen Chohan (17:15):
Okay. Well, there you have it — a great discussion. Thank you very much, gentlemen. That brings us to the conclusion of our podcast. Big thanks for sharing your insights and perspectives today. If any of you who've joined us have any further questions about some of the topics discussed today, then please do reach out to myself, Shane, or Jesus via our contact details that you can see there. And also a final thank you to the folks over at HILCO — many thanks for your support today. So with that, thank you everyone for joining us. I hope we have helped you better navigate some of the currents of change that we're seeing. Thank you.