January 2022
2021 has been a turbulent year for LNG. After the initial recovery from the brutal shock of Covid-19, there was great optimism for a return to an economic “mostly normal”, with a few caveats.

The release of vaccines through the middle of the year buoyed consumer sentiment and spurred economic recovery, including in the LNG market, but loosening restrictions and increasing freedoms left some countries with soaring infection rates and health systems under stress. The effectiveness of global vaccination programs has yet to be fully evaluated, but so far the news has been positive, with an estimated 96.7% reduction in the lethality of infection after a second dose. This has given industry the confidence to encourage a return to work and has increased energy demand as developed economies begin to drag themselves out of the lethargy of lockdown.

Through early 2021, pricing was subject to significant turbulence dependent on the market. The massive demand for energy around the globe is only going to grow, barring further unforeseen circumstances. LNG has a significant role to play in decarbonising the energy market, which has been a major global focus throughout the year.

Through 2021, the increasing focus on the green energy transition has seen widespread discussion of natural gas and of LNG’s role as a part of the decarbonisation process. So far, it seems to have settled as the ‘bridging’ commodity – less polluting than coal or oil, but not quite good enough – but there seems to be space in the carbon capture, blue hydrogen and ammonia markets for gas to evolve and thrive.

Prices – A Rising Tide

LNG pricing saw an early spike in Asia, reaching US$17.05/MBtu, as a cold snap crashed temperatures in the region. China’s transition away from coal-fired power and towards lower carbon-emitting fuels supported rising prices, while the onset of winter spurred higher demand, but into March, AME’s Asian Composite Price dropped rapidly to US$6.38/MBtu.

Asian LNG prices climbed steadily through the year and saw a rapid increase from July’s US$16.43/MBtu to US$33.27/MBtu in October, around which they have hovered since. European prices have been tracking closely to Asian prices throughout the year.

The end of the year has seen a critical deficit of natural gas in Europe and Asia. Throughout October and November, the two continents saw gas prices skyrocket to over US$30/MBtu, and prices have since remained at these high levels, peaking at nearly US$42/MBtu in Europe in mid-December.

In Europe, upward pressure came from limited pipeline supply and a dire lack of renewable power. Low wind speeds through the European summer reduced wind power generation, with UK power company SSE reporting a 32% drop in renewable generation, which caused prices to climb rapidly from July to October. The increasing globalisation of energy markets has seen the Asian and European LNG prices track more closely together this year than in recent years, as LNG producers hit capacity and struggle to keep up with demand.

 

Supply – Lost at Sea

2021 has seen the rapid return to form of the LNG industry, though disruptions have still been abundant. Energy demand bounced back in 2021, and LNG has had a strong year of business, with projects continuing and operations restored. The advent of Covid-19 has pushed most new developments out by 12-18 months, but new FID announcements and updated supply timelines are now seeing significant production capacity from Australia and Qatar moving ahead.

Global LNG production grew to 399Mtpa this year, up 7.0% from 2020. The return to strong growth after a lesser 3.2% growth in 2020 reflects the robustness of the industry and its prime position in the energy market. The expansion of LNG has continued, with the impact of Covid-19 thought to have mostly passed, represented in delays to LNG project FIDs and delayed developments and expansions.

In Australia, the Santos Caldita-Barossa field development FID in March and the Woodside Scarborough and Pluto Train 2 project FID in November have secured gas supply for the country to 2040, but further exploration will be needed to develop gas supply for the long term. Australia remains the world’s leading exporter in 2021, with a forecast output of 83Mtpa for the year. Most plants in the country had a steady operating year with minimal impacts, but Shell’s Prelude FPSO has been embattled, with shutdown and evacuation required once again in early December. While the forecast growth of the nation’s LNG supply is limited, only reaching 90Mtpa in 2027, it remains one of the top three producers, ahead of Russia in fourth place.

Qatar has removed its moratorium on the North Field East development, confirming FID on a massive expansion of 32Mtpa, to be constructed in four trains, with full production targeted in 2028. Qatar will maintain its place as the world’s second-largest producer, expanding from 77Mtpa in 2021 to 110Mtpa by 2028 off the back of the project. The country also renamed its state energy company, Qatar Petroleum, to Qatar Energy, to represent its broadening interests.

In the US, the completion of Sabine Pass T6 and Calcasieu Pass LNG afforded an optimistic outlook, but FIDs have been thin on the ground this year. Delays have pushed most upcoming projects, including Port Arthur LNG, Driftwood LNG, Corpus Christi Stage 3 and Venture Global’s new CP2 project, into 2022. In Louisiana, the ongoing growth of Cameron LNG has pushed it toward the top end of LNG producing facilities worldwide, though Sempra has scaled back its initial ambitions from 10Mtpa to 6Mtpa of capacity growth. The country’s LNG future is very bright, with numerous projects under construction or in pre-FID development and a long list of FIDs to be made in 2022.

In Malaysia, the commissioning of the Petronas FLNG 2 project early in 2021 is displaying the country’s growth. Petronas FLNG 2 is the country’s sixth major LNG project and is expected to be running at full capacity throughout 2022. In Egypt, LNG has seen some turbulence, with the SEGAS LNG site in Damietta restarted only to be shut down again late in the year in favour of pipeline gas. In January, the Idku plant is expected to follow suit as Egypt’s gas flows through Syria to Lebanon to help mitigate the atrocious power generation concerns there, leaving Egypt with no LNG exports at all. AME suspects that the terminals will consider moving to operate on a tolling basis for neighbouring nations’ share of the gas fields in the eastern Mediterranean, but Egypt may end up mothballing the two sites once again.

Russia has continued strong in LNG, with the Yamal plant operating at capacity throughout the year. Across the Gulf of Ob, construction at Arctic LNG 2 has continued steadily, using some novel strategies. The real achievements for Russia are a 50% increase in exports over the year (up to 43bcmpa) from the Power of Siberia pipeline into China and the completion of the massive Nord Stream 2 pipeline into Germany. The expected 2021 startup of Nord Stream 2 has been foiled by the German energy regulator, which cited monopoly concerns and a background of political turmoil. Both lines present direct competition with LNG in large markets and will apply some downward pressure on both exports to and prices in the areas they serve.

With the impacts of Covid continuing in a year when the European sun didn’t shine and the wind didn’t blow, renewable energy sources have lost some of their lustre. Unfortunately, this was not an energy market shock that gas suppliers were prepared to deal with. The low renewables supply and two cold winters bracketing a warm summer have left LNG market prices sky high at the end of the year. LNG has been extremely desirable this year, and producers have worked at full capacity for most of the year to provide the needed gas.

Demand – A Port in the Storm

LNG demand hit a lull early in the year before returning to growth with a vengeance in the third and fourth quarters. Lower renewable power generation in Europe and a series of unfortunate events in China have left both regions energy-starved and hungry for LNG. LNG imports traditionally sent to Europe in the latter, colder parts of the year have been diverted by China’s willingness to pay astronomical unit prices to secure the nation’s energy supply. As a result, gas-starved Europe has been struggling to secure a supply for the 2021-2022 winter on the back of already low gas storage levels after a hot summer. Prices at record highs have driven down interest in the latter part of the year, and people are making do without a large portion of their usual LNG supply. There was some hope in the September quarter that the Nord Stream 2 pipeline would come to the rescue, but principle has won over expediency for the German energy regulator, locking out the pipeline until owner Gazprom divests out the management functions of the asset.

Japan and South Korea were well positioned for a high-priced market, committed to their long-term contracts and with strong national storage networks to ride out the pricing wave and restock for the new year. Japan maintained its position as the world’s largest LNG consumer this year, importing 78Mt of LNG. China is positioned at number two, with 75Mt, followed by South Korea at 44Mt and India at 26Mt. Overall, Europe imported 84Mt, primarily via Spain, Italy, Turkey, France and the UK.

Early in 2021, China moved to become more environmentally conscious, closing or lowering output from a large number of coal-fired power stations with the aim of decreasing coal’s share of national power generation from 56.8% to under 56%. Plans to replace up to 200bn kWh of coal-generated power with renewable electricity dominated the March quarter and continued into April. This occurred in conjunction with a political spat with Australia which led to an unofficial embargo on Australian coal, stranding many deliveries and diverting even more away from China.

Following the shutdown of these coal plants, March saw pandemic-related restrictions begin in Inner Mongolia. May saw a hydropower drought that caused power shortages in Yunnan province. July saw significant flooding in Henan province, causing 60 coal mines to shut down. By August, smelters in Yunnan had begun to significantly curb production, and power restrictions were becoming draconian. In October, more floods in Shanxi shut down more coal mines. These events combined have left energy firms struggling to supply power and the government struggling to find all the energy supply it can, including LNG.

September saw China beginning to purchase LNG from the spot market to sate its giant energy demand at rapidly rising prices, pushing prices from US$20/MBtu to well over US$30/MBtu. The incredibly high demand for gas in China, combined with the country’s willingness to pay the very high prices, led to a lack of supply for other spot buyers, including the European market. Rising tensions with Russia have simultaneously provided greater impetus for European nations to look elsewhere for their gas supply, a difficult prospect given the sheer volume of gas coming from the east.

The LNG import market is seeing significant growth, with the number of regasification terminals around the world shooting up rapidly. In China, the number of terminals under construction or in final approvals grew to 13 in 2021, with another eight in varying stages of pre-approval. European projects are mostly completed, but low utilisation rates are increasing to service increased imports.

Outside the key ‘obvious’ markets – northeast Asia and Europe – 2021 has also seen significant growth in other markets. Latin America and southern Asia have both seen major growth, as has an emerging market in the Middle East. Latin America, especially Brazil, has had a grim year with regard to the energy market, with extremely limited rainfall collapsing the hydropower sector on which Brazil is so dependent. In the Middle East, Kuwait’s massive 22Mtpa LNG terminal at Al Zour has begun importing gas from Qatar, with contracts currently totalling 6.5Mtpa.

Final Thoughts

LNG is becoming increasingly front-of-mind for both energy suppliers and consumers. Numerous conferences and presentations on the energy transition have pushed the conversion of the world’s energy industry from being heavily oil- and petroleum-dependent to using more environmentally friendly power. For LNG, this means an increasing role as a transportable, energy-dense commodity, as renewables currently have very low transportability of power. With coal forecast to fall out of favour by roughly 2030 in many developed nations, LNG will play a significant role in moving energy from gas-rich nations to smaller or energy-poor nations.

2021 has been a volatile year for LNG, with major price swings and supply fluctuations over the year. The future, however, will see steady growth and strong project prospects for the next 5-10 years. Investment and development have continued, and the industry’s trouble spots are predominantly temporary or out of the control of operators. Significant concerns remain regarding the high-risk project space in Africa, potentially overwhelming supply increases if demand does not expand to match, and concerns around environmental regulation and CCS use around the world.