Russian Aggression, LNG Market Expansion

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Oil and Gas Investor features Tellurian boss Charif Souki on the cover of the October issue, a recognition that his longtime championing of LNG proved prescient. And the timing is right on.

Russia’s invasion of Ukraine —and the European response to the unprovoked war⁠—has upended global energy markets. Meanwhile, the U.S. is exporting more LNG than ever before.

The White House says Russia is using energy as a weapon against European countries. Russian President Vladimir Putin has shut down the Nord Stream 1 pipeline for the second time since its war began. This time, it’s closed indefinitely, and he is taunting European leaders worried about the coming winter.

“The bottom line is, if you have an urge, if it’s so hard for you, just lift the sanctions on Nord Stream 2, which is 55 billion cubic meters of gas per year, just push the button and everything will get going,” Putin said in a Reuters article. The Russian president blames the “green agenda” for Europe’s energy woes.

Nord Stream 2, which lies on the bed of the Baltic Sea almost parallel to Nord Stream 1, was built a year ago, but Germany opted against proceeding with the pipeline in the days leading up to Russia’s invasion of Ukraine on Feb. 24.

Meanwhile, the U.S. has drilled and innovated its way to become a key global exporter of LNG, largely a result of Souki’s persistence. Souki had made a variety of billion-dollar bets on the commodity before it was cool and before it made a profit. Some folks thought he was crazy. But Souki worked on eventually becoming known throughout the industry as the “Godfather of LNG.”

Second now only to Australia, the U.S. boosted its capacity to 86.1 million tones per annum (mtpa) between January and April this year. The growth positioned the U.S. ahead of Qatar’s 77 mtpa and into the second position.

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US Becomes World’s Second Largest LNG Exporter

LNG trade—especially U.S. LNG exports—continues to grow amid geopolitical issues that threaten energy security for numerous countries. At the same time, a continued global push to decarbonize economies has seemingly jettisoned a move away from fossil fuels such as oil and coal and to low- and zero-carbon sources such as natural gas.

The growth shows no signs of abating. Two LNG liquefaction projects under construction in Texas as well as one in Louisiana will add a combined 5.65 Bcf/d of LNG export capacity when completed by 2025.

LNG has evolved as a vital energy source to “secure and reliable functioning of energy systems around the world … a vital tool for controlling emissions, particularly as the crisis in energy supply is forcing even the most climate-conscious economies to turn back to coal, wiping out emissions reductions achieved in recent years,” said the International Gas Union (IGU) in a recent report.

The commodity is “addressing supply constraints is going to be critical to energy security and economic stability in the world.”

Global LNG trade in 2021 “reached an all-time high of 372.3 [mtpa], as the strong post-pandemic recovery resulted in a surge in LNG imports,” up 4.5% compared to 2020, according to the IGU.

Global liquefaction capacity reached 459.9 mtpa in 2021, up 6.9 mtpa compared to 2020. The average global utilization rate was 80.4% in 2021, up compared to 74.6% in 2020 due to economic recovery following the lift of COVID-19 restrictions, a prolonged European winter and drought in Brazil, all which boosted demand for LNG, according to the IGU’s recently released 2022 world LNG report.

But all of these calculations began before Russia invaded Ukraine, upending Europe’s longtime energy dynamic. As such, the situation could prove to be a boon for U.S. producers.

“This will have big ramifications for the broader global economy, as well as for the role of gas as a ‘bridge’ fuel in the ongoing energy transition,” said Barclays analyst Amarpeet Singh in a recent note to investors. “The gas crunch in Europe will have profound and long-lasting global effects.”

Growth in the euro area is likely to be weaker and inflation higher, poorer countries that are unable to compete for LNG cargoes will be squeezed, and the trade relationship between the U.S. and EU will shift in America’s favor, he said.

“Still, there are no easy fixes for Europe’s energy problem. The winter of 2022-2023 will be difficult, even if there are no further cuts to Russian gas supply, as prices stay elevated, dragging on demand,” Singh said. “Should Russian flows drop to zero, and if the weather is colder than normal, storage levels across the EU at the end of March 2023 could be about two-fifths of the average over 2017-2022, while the reliance on storage would increase further. We see a risk of managed blackouts and rationing of power.”