Alaska Journal | As LNG Prices Soar, A Lesson That Timing Is Everything

An LNG trader with slightly more heating and power generation fuel to sell in Asia this month could make $ 100 million more than he was worth less than 18 months ago.

The $ 100 million is not a month of deliveries; it is a 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, gas is worth more than half the total cost of the brand new vessel.

There is no doubt that natural gas producers and liquefaction plant developers did not fully anticipate the strong demand for fuel this fall and winter, or the resulting gas supply shortages, which are causing record prices and economic hardship in much of Asia and Europe.

While producers and traders have alternative gas to sell, not bound by fixed price contracts, these same companies must have invested tens of billions of dollars years ago if they were to cash in even more during the surge. prices, which saw liquefied natural gas in the Asian spot market last week selling for an unprecedented, supernatural and unaffordable $ 34.47 per million BTUs.

That’s nearly 20 times the low of $ 1.85 set in May 2020, when the world came to a halt for the COVID-19 pandemic, and just a month after crude oil prices averaged less. of 50 cents per gallon.

Unlike OPEC and its allies, which have significant spare oil production capacity that can increase in weeks or months as the global economy recovers, additional natural gas does not move as easily. The industry needs years and at least $ 10 billion, often twice as much, to build the complex liquefaction plants to produce a new supply for buyers.

Herein lies the challenge – and the risk – of judging the market for a long-term investment that won’t start to pay off until the market perhaps changes.

There are many examples of bad bets.

During the first decade of the 21st century, several gas producers, developers and traders saw high prices for natural gas in the United States, declining production from mature basins and increasing demand, and decided that the country would become a major importer of LNG. They spent billions to reactivate unused receiving terminals from the 1970s and build new LNG import facilities. They thought they were going to get rich.

Then some smart gas producers figured out how to drill and market stupendous amounts of shale gas, crushing US demand. The imperative to import fuel disappeared in a few years.

The owners of these unused import terminals then spent billions more to turn the facilities into export projects, so they could turn the tide and profit from the sale of much of this surplus US gas. abroad. A happy ending, but only after heavy losses for years.

More recently, the Norwegian Equinor and the Russian Gazprom, which together supply around 60% of Europe’s natural gas, have found themselves cashing record checks for pipeline gas deliveries to the continent.

The European Union had liberalized its gas market years ago, moving from long-term fixed-price contracts, often tied to oil, to short-term or flexible contracts that worked to their advantage for a long time. low price of natural gas. Europe’s luck ran out this year as the tight market and several other factors pushed prices up 300%, with no contracts to protect buyers.

“The rapid rise in gas prices has come at the best possible historical time for Equinor,” company economist Eirik Waerness told Reuters last month.

In Asia, buyers who were traditionally bound by LNG purchase contracts tied to the price of oil demanded more flexibility and better terms when oil exceeded $ 100 a barrel 10 years ago. Many switched to shorter-term contracts or cash purchases as new LNG supplies flooded the market, driving prices down.

As in Europe, buyers in Asia benefited from low prices, but only until the market reversed. Now, as the spot market hits record highs amid tight supply, these oil-linked contract LNG shipments account for less than a third of the cost of spot purchases.

Timing is everything and prices always look better on the other side of forecasts.

In the meantime, things get complicated.

In addition to whether an abundant supply will keep prices up for years or if insufficient supply will drive up prices and profits, gas producers and investors must now calculate how much renewable energy will reduce their market share in the market. coming years. It made a lot of them cautious. No need to build a fossil energy project that needs 20 years to pay off if green energy takes precedence over the electricity 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’re willing to risk the investment years in advance.

So is Qatar, the world leader in LNG production and exports, which is expanding its multi-billion dollar production capacity by 40% this decade.

Record gas prices this year are “due to the market not investing enough in the industry,” Qatari Energy Minister Saad al-Kaabi said on the sidelines of the industry conference Gastech last month in Dubai.

Lack of investment in the new offering, due to either risk aversion or fear that renewables dominate the future, is not good for anyone, he said.

“We don’t want these high prices, we don’t think it’s good for 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 these years of low gas prices, while comforting for buyers, are part of the reason for the current tightening market, a US LNG developer said.

“The world was kind of lulled into complacency because (gas) prices were low for five years, so no one felt the need to plan and everyone got very religious about protecting the environment. and it’s wonderful, ”said Charif Souki, co-founder of Tellurian. , which wants to build an LNG export terminal in Louisiana.

“But we should be looking at what things actually work rather than just what we hope,” he told Reuters last week.

Larry Persily is a former Alaskan journalist, state and federal official who has long followed oil and gas markets and projects around the world. He can be contacted at [email protected].

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