Twists and turns: As the LNG industry turns 60, is it nearing its sunset years?

• LNG marks diamond jubilee in 2024 with ~14% share of global gas supplies
• Prospect of 2040 LNG demand peak creates risks for pre-FID projects
• Buyers’ increased need for flexibility offers opportunities for agile players
• Sector can play key role in ramping up hydrogen production and supply in future

Sixty years ago this month, the LNG industry was born.

What began with a single commercial shipment of LNG from Algeria to the UK in 1964 has grown into a global business worth hundreds of billions of dollars. 

At the dawn of the LNG industry, many anticipated continuous growth as countries with depleting or no natural gas reserves looked set to trade with those who had it in abundance.     

But as LNG celebrates its diamond jubilee, the question looms large: will LNG continue to grow robustly for decades to come? Or is it nearing its sunset years as the world speeds up its energy transition? 

Through times of war, economic turmoil, the impacts of the Covid-19 pandemic and the early years of the energy transition, LNG has remained a resilient and crucial lever in the global energy system. 

Over the past decade this lever has been used more than ever as countries grapple to meet their varied and often urgent energy needs. 

When Russia’s shock invasion of Ukraine in 2022 constrained pipeline gas to Europe, LNG shipments helped to avert an escalating energy crisis.  

When Japan suspended nuclear operations following the 2011 Fukushima accident, LNG helped fill the gap.  

China’s rise to become the world’s top LNG importer in 2021 was partly fuelled by Beijing’s desire to switch from coal to gas to cut air pollution. 

Appetite for LNG grew in south Asia’s burgeoning economies as domestic gas production fell.   

Today, LNG provides around 14% of global gas supplies and 3% of the world’s total primary energy supply. 

The tiny 0.11 mt of LNG traded sixty years ago has skyrocketed to an expected 407 mt in 2024. 

Expect the unexpected 

While the first 50 years of LNG’s rise were defined by steady growth, the rapid pace of change over the past decade have transformed the industry profoundly. 

Back in 2014, few in the industry could have predicted the scale and speed of the US’s rise. Within eight years of the first LNG shipment leaving the US’s lower 48 states, the US overtook Qatar to become the world’s biggest LNG exporter in 2023.

This opened the door for more diverse players. Infrastructure developers entered the fray, offering more flexibility and challenging the dominance of established energy giants with long-term contracts.

At the same time, landmark global climate agreements helped to accelerate the energy transition. After years of stagnant UN climate negotiations, the strength of the 2015 Paris Agreement even took campaigners by surprise.  

Today, most new LNG projects incorporate emissions reduction measures. 

Whether it is about shrinking the methane footprint, using renewable energy to power operations or introducing carbon capture and storage (CCS) technology, greener LNG projects have the edge – particularly as the EU and US tighten environmental rules. 

Forecasting the future of LNG has become a tricky business. If the past decade is any indicator, the industry's future will be shaped by further unexpected twists and turns. 

Customer is king  

Asia, which imported 65% of the LNG supplied in 2023, is a crucial market with diverse and evolving needs. As demand in Europe and Japan levels off, growth in the price-sensitive markets of South and south-east Asia could define the future of the LNG market. 

The complex interplay between price, infrastructure, renewable energy penetration, domestic policy and geopolitics will continue to shape and segment the market. But flexibility has also become a key priority.  

Japan, for example, is pushing for more flexibility in its long-term contracts to allow for re-selling LNG to third parties if domestic demand falls short.  

This demand for adaptability has created opportunities for nimble portfolio players, who manage supply risks and offer buyers flexibility. 

Over the past three years, LNG traders and portfolio players – or intermediary companies that both buy LNG and resell it around the world − have become the largest counterparties to new long-term LNG offtake contracts. 

The rise of US LNG exports, most of which are sold on a free-on-board (FOB) basis, contributed to this trend. It allowed buyers to take ownership of cargoes and bear the risks once they left US export terminals – an arrangement which allows them to send LNG to high-demand, high-price destinations. 

This was illustrated with dramatic effect in 2022 when LNG cargoes were diverted from Asia to Europe after Russia’s invasion of Ukraine cut the continent’s pipeline gas supplies and jeopardised its energy security. LNG cargoes provided a lifeline, albeit at unprecedented prices.  

Another indication of the growing appetite for short-term deals is the fact that LNG trade on the spot market has boomed from 5% in 2000 to 35% in 2023.   

In addition, active floating storage and regasification units (FSRUs) more than doubled, from 20 to 51 units, over the past decade, offering greater flexibility than onshore import terminals. 

But, as the market shifts towards flexibility, smaller players risk being squeezed out by state-backed enterprises and international oil companies, who have the scale and financial resilience to weather volatility.  

Portfolio players that have signed offtake deals without having secured deals with end-use buyers could make losses if that demand fails to materialise and they are forced to sell on the spot market during a period of weakening demand. 

Peak LNG demand 

With the energy transition speeding up in Europe and indigenous gas production and pipeline gas imports increasing in China, global demand for LNG will likely peak to around 745 mt by 2040 before gradually declining, according to Gas Strategies’ 2024 analysis.    

But a supply gap could open up, as Gas Strategies models only ~ 520 mt of LNG supply from existing and currently under construction projects by 2040. This gap could emerge by 2030 as latent demand growth remains strong. 

This creates opportunities for existing LNG projects to profit by expanding or debottlenecking, benefiting from economies of scale and utilising existing shared infrastructure, which is considerably cheaper than developing new greenfield projects.  

Similarly, demand for floating liquefaction (FLNG) plants could rise as the offshore units are less expensive to build, can be deployed in already developed gas fields and minimise infrastructure development related disruption.  

Conversely, the prospect of LNG demand peaking and declining within the next 16 years creates pressure for projects that have yet to take final investment decision (FID), as it typically takes between four and six years to build a new liquefaction terminal. 

Buyers signing contacts for 20 years or more could find themselves still receiving LNG at a time when their own demand for it is falling. Bearing this possibility in mind, the popularity of spot and short-term contracts could continue to rise, particularly in the already mature markets of Europe and Japan.

Adding to the complexity is the looming LNG glut expected around 2026-28, which could lead to a drop in prices and potentially curtail further investment. This might prevent an investment “bubble” in LNG, but it could also mean some projects never get off the ground. 

As banks have backed away from funding fossil fuel projects, infrastructure funds and private equity firms have played a greater role in financing LNG projects in recent years. But continued regulatory uncertainty around US LNG exports have jangled investors’ nerves.

Supply side challenges 

A prolonged freeze on US export licences and a recent court ruling that could overturn Federal Energy Regulatory Commission (FERC) approvals for NextDecade’s 27 mtpa Rio Grande project have cast doubts over the reliability of US LNG. 

In addition, profit margins for US LNG projects have slimmed amid increasing competition. Against this backdrop, the full extent of Qatar’s LNG expansion – set to add 65 mtpa of LNG into the global system by 2030 – will be watched closely.   

The sheer distance that US LNG carriers must travel to reach the demand centres of Asia is also a mounting concern and risks a return to a bifurcated market between basins. Drought and bureaucracy have reduced the number of transits through the Panama Canal, requiring the rerouting of exports via the much longer Cape of Good Hope, increasing shipping costs for Asian buyers and reducing competitiveness of US LNG compared to Middle Eastern and Pacific basin production.

Meanwhile, attacks by Houthi rebels in the Red Sea have made crossing the Suez Canal route too dangerous.   

Worsening Middle East conflicts, already impacting shipping routes, could cause further disruptions. Harmony between the world’s biggest seller and the world’s biggest buyer of LNG, namely the US and China, will be crucial to the trade.  

The industry will remain sensitive to any potential flare-ups between Washington and Beijing on hot button topics such as trade, Taiwan and disputes over the South China Sea.

Despite western sanctions on Russia’s LNG, the country was still the world’s fourth largest LNG exporter in 2023, according to the International Gas Union (IGU), and could regain its position as a key LNG player in the future. 

Australia, currently the world’s second largest LNG exporter, may have to mothball some LNG infrastructure projects because of high production costs and declining upstream supply. The anticipated LNG glut in the next few years is set to make Australian LNG less competitive.  

LNG and the energy transition 

With natural gas being the cleanest burning fossil fuel, LNG has a key role to play in the energy transition. For emerging economies, it can provide a cleaner alternative to coal, bridging the gap until renewables can take over fully. 

But the LNG sector urgently needs to tackle methane emissions to secure its position as a transition fuel. Advances in CCS at LNG facilities will also help.  

A US study which argued methane emissions from LNG production made it more harmful than burning coal reportedly influenced US President Joe Biden’s decision to pause LNG export licences to non-Free Trade Agreement countries in January 2024.  

The EU’s move to cap methane emissions and introduce the Cross Border Adjustment Mechanism (CBAM) indicates that less emissions-heavy LNG would be more attractive to the bloc.  

Even if renewable energy provides the baseload power for more European and Asian countries in the future, LNG will still have a role to play in helping provide power during peak demand periods, balancing intermittency and boosting energy security.  

With the LNG industry’s expertise in shipping and methane being a feedstock for hydrogen, the sector can play a key role in ramping up hydrogen production and supply in the coming years. Moreover, blending hydrogen into natural gas pipelines has been proposed as a possible medium-term solution for building the hydrogen economy and eventually reducing emissions.

Opportunities for agile players

If the LNG sector is entering its sunset years, then that period will still be filled with colour and drama. The decline in global LNG demand will be gradual. Gas Strategies still models demand around 580 mt in 2050. This offers opportunities for smart players and innovators who can bring forward LNG production more quickly, cheaply and cleanly.

As the LNG industry turns 60, its future looks far from being uneventful.

Continued and unpredictable shifts in geopolitics, supply side dynamics and the energy transition make this a sunset worth watching. - HQ