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European and Chinese energy groups race to lock in LNG shipments from US

A race between European and Chinese energy groups to lock in shipments of liquefied natural gas from the US is driving investment in a range of export projects that will boost a market facing a potential supply shortage.

The growing number of long-term contracts signed by European and Chinese buyers will help the US to expand export infrastructure to bring LNG supply online in the next two to three years.

European demand for LNG — gas that is cooled to liquid form for safe storage and transport by sea or road — has risen sharply during the war in Ukraine as the region scrambled to replace gas that came from Russia through pipelines.

Demand for the gas has also increased despite pressure to switch to renewable energy to meet net zero emissions targets, creating a tight market and causing prices to surge last year.

In the past few weeks, US LNG exporter Cheniere signed a 15-year deal to supply Norway’s Equinor, and a contract for more than 20 years with China’s ENN.

In addition, rival Venture Global LNG inked a 20-year deal with Germany’s Securing Energy for Europe (SEFE), while France’s TotalEnergies bought a $219mn stake in a Texas terminal to transport LNG, which is being developed by Houston-based energy group NextDecade.

The announcements add to a steady stream of deals between US exporters and European or Chinese entities over the past few years.

Together Europe and China accounted for nearly 40 per cent of the US’s LNG supply contracts agreed between 2021 and late June 2023, data from S&P Global Commodity Insights showed. China accounted for 24.4 per cent, owing to large volumes being signed in 2021 and 2022. So far in 2023, Europe has contracted more volumes than China.

These long-term purchase agreements are needed for new or expanding LNG projects as they underwrite the financing needed.

The pressure on supplies of LNG had a profound impact on developing nations such as Pakistan and Bangladesh last year, whose energy security was crippled as Europe outbid them for LNG cargoes.

Analysts said increased capacity would also make it easier for these nations to secure gas to replace dirtier coal in their power generation.

“More volumes are good for the market, and with the new deals we will see more LNG export projects being developed,” said Sindre Knutsson, partner of gas and LNG research at Rystad Energy.

More supplies “can create opportunities for emerging markets that cannot commit to long-term contracts”, he added. This is because of factors such as the flexibility in contracts to resell to developing nations.

Any loosening of the market from new projects will take time, however. Most of the planned additional US export capacity is not due to come online until the middle of the decade.

European buyers have been wary of signing long-term LNG deals, as they attempt to decarbonise their economies. But the contracts offered by US exporters often allow buyers to divert cargoes to other entities, mitigating the risk for European buyers of being stuck with gas for longer than they want.

“The European buyers are giving an additional tailwind for US projects to push towards the finishing line,” said Michael Stoppard, global gas strategy lead at S&P Global Commodity Insights.

“It can really help a US LNG project if it can get a portfolio of Asian and European buyers together as it reduces the risk for them.”

Europe’s interest in securing US LNG is a stark shift from just a few years ago, when concerns over pollution prompted the French government to intervene to scupper a $7bn deal between utility Engie and NextDecade.

Speaking after his company signed a deal with NextDecade a few weeks ago, TotalEnergies chief executive Patrick Pouyanne said it “strengthen[ed] our ability to ensure Europe’s security of gas supply”.

Shortly after Vladimir Putin sent Russian troops into Ukraine last year, US president Joe Biden and European Commission president Ursula von der Leyen announced a strategic pact under which EU companies would seek to guarantee more demand for US LNG, a bid to spur investment in more export capacity.

US developers are confident that European demand will endure. Cheniere chief commercial officer Anatol Feygin recently told analysts that European LNG imports were forecast to remain stable at elevated levels “despite net zero rhetoric and policy induced pressure on the demand outlook”.

On Asia, he said the economic growth and the “energy evolution” of the region would “underpin decades of growth in LNG demand driving the need for substantial investment in new liquefaction capacity”.

Source: Financial Times