WoodMac’s Gas, LNG & Future of Energy conference – five key takeaways
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Wood Mackenzie hosted its first Global Gas, LNG and the Future of Energy conference in London this week, featuring the CEOs of E.ON Energy Markets and TotalEnergies as keynote speakers as well as senior leaders from bp, Cheniere, Citi Group, Engie, Eni, Equinor, ExxonMobil, MUFG, Tellurian Inc, Shell, Vitol and many more. Here are our five key takeaways:
1. European LNG demand: policy risk is hampering long-term investment
The crisis is far from over. Prices will remain high and volatile for years to come. LNG is at the heart of Europe’s push for energy security, the ready-baked solution to replace Russian pipe gas in the near term. The penny has dropped that demand may be stronger for longer.
Panellists bemoaned the misalignment between their requirement to anticipate customers’ needs and ambitious government emission reduction targets. There is a sense of inevitability that this will lead to market volatility well beyond the relief that the arrival of the next wave of LNG imports is expected to bring post-2026.
Contracting has perked up, with Shell, TotalEnergies and Eni among others committing long-term contracted volumes to Europe. Utilities including Engie and RWE and industrials such as INEOS and BASF are also signing longer-term deals to meet rising demand and manage anticipated volatility.
But the massive range of expectations for future supply requirements neatly encapsulates the quandary around committing to additional volumes under long-term contracts. The EU thinks the need could be close to zero by 2050 whereas the European Commission has recently argued for up to 100 bcm – an entire Germany! It’s little wonder that LNG off-takers are demanding short-term contracts and destination flexibility.
2. In LNG, the portfolio player is king
All LNG players are seeking to optimise the business model in what is the last growth segment in fossil fuels. Price volatility over the last two years has rewarded portfolio players, armed with equity and third-party volumes and, critically, destination flexibility – amply reflected in the earnings of the Big 3 portfolio players, Shell, TotalEnergies and BP.
More suppliers will seek greater portfolio flexibility including US players – among them ExxonMobil, Chevron and ConocoPhillips – that have traditionally followed the integrated point-to-point LNG model. PetroChina looks set to do the same as it expands its international reach, including access to the market in Europe.
Different players will pursue different strategies, leveraging individual advantages, whether low-cost supply, regional market access or low-carbon molecules. But trading capability is increasingly a must-have in the armoury of all players.
3. Asia needs to get serious about carbon prices
Future LNG growth is all about emerging Asian markets, with demand set to double over the next 10 years as gas displaces coal and supports industrial output. However, with abundant cheap coal across key markets, displacement can’t be taken for granted.
Asian governments must move faster on carbon policy and pricing to underpin LNG demand growth. But a higher price on carbon will also increase the cost of gas. Players must address the dual challenges of sustainability and affordability in tandem. With a ‘green premium’ proving elusive, the entire LNG value chain must work to deliver the low-carbon molecules that will bolster the resilience of Asian LNG demand. Certifying and reducing life cycle methane emissions is low cost and high impact and will quickly satisfy policy makers and nullify some of LNG’s critics
4. US LNG competitiveness is at risk from infrastructure regulation
The emergence of US supply has been transformational for the global market, commoditising LNG and helping to solve Europe’s energy crisis. Monetising its abundant, low-cost shale gas resources, the US’s share of global supply has leapt to 20% in less than a decade. And the story is far from over: with continued innovation and new sources of capital, we expect export volumes to more than double by the mid-2030s.
But regulatory risk is mounting for the planned new pipeline infrastructure required to bring more low-cost gas from Northeastern US shale gas plays, including the Marcellus and Utica basins. Some US$10 billion of proposed pipelines from the Northeast to the Gulf Coast have already been cancelled due to environmental opposition. Without additional Northeastern pipe capacity, US LNG projects will need to secure feedgas from higher cost plays, potentially adding as much as US$2/mmbtu to our current Henry Hub forecasts later next decade.
With US LNG remaining the marginal price setter for global LNG, a higher Henry Hub price will spook price-sensitive buyers across Asia.
5. Financing LNG may be getting harder, but opportunities remain
Perceptions about the prospects of raising capital to develop new LNG supply are gloomy, given rising ESG concerns over fossil fuel supply, high interest rates and the challenges of equity financing. Despite this, multiple projects continue to move forward, with evidence there is still capital available. NextDecade’s US$12.3 billion of debt financing and US$6.2 billion of equity investment by its partners for Phase 1 of the Rio Grande project in the US is the latest example.
To close financing, projects must be best in class – low cost and low carbon and with the right partners in place as well as a workable risk structure. Developers are increasingly looking outside of traditional sources of funding. Contrary to reports that European banks are closed for business, some are still active in the project finance space. Investors elsewhere are also active, with infrastructure funds, private equity and sovereign wealth all getting in on the game.
- The world is finally realising what the gas industry always knew – that gas is essential to energy security and nobody can be complacent that supply will always being there.
- China will become the new Northwest Europe in terms of providing flexibility to the global LNG market.
- Qatar and the US dominate new LNG supply, but we heard strong advocacy for the development of alternative sources. There are plenty of undeveloped projects – from Tanzania to Mozambique, Guyana to Namibia and beyond – but it’s far from clear which will emerge as competitive on costs and low-carbon emissions.
- Shipping faces numerous challenges in a market dominated by Asian demand growth and US supply. Despite investment of over $50 billion in new ships since the start of 2022, more are still needed. Looming environmental legislation and a (brief) over supply in 2025 will force older ships out of the fleet. The limitations of the Panama Canal means more cargoes will have to go the long way round.
- The route to sustainability isn’t just about gas but must be a combination of different solutions: CCUS, synthetic fuels and hydrogen. There is no silver bullet.
What wasn’t heard:
- Russia – not in the conversation. What does this imply for Russia’s long-term position in gas?
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