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Energy

Ukraine war fuels European and Asian scramble for U.S. LNG

Early bird buyers secure long-term contracts at double the pace of last year

A tanker at Venture Global LNG's Calcasieu Pass terminal in Louisiana. American gas has become a hot commodity amid the war in Ukraine and the global economic recovery from COVID-19. (Photo by Ryosuke Hanafusa) 

HOUSTON, U.S. -- Russia's invasion of Ukraine has sent European and Asian buyers rushing to buy American liquefied natural gas, in some cases securing output from new projects still years away from production.

So far in 2022, U.S. producers have signed long-term contracts of 15 years or more for an annual 20 million tons of LNG -- roughly double the full-year tally from 2021. The figure is equivalent to almost a quarter of annual LNG imports by Japan, the world's second-largest buyer of the fuel.

This scramble has been a boon for Japanese-invested LNG projects.

Sempra Energy on Monday said it entered a preliminary arrangement to provide an annual 2 million tons of LNG to Polish energy company PGNiG for 20 years from its Cameron LNG project. The San Diego-based company is expanding the facility together with Japan's Mitsui & Co., Mitsubishi Corp. and other partners. PGNiG is also expected to buy another 1 million tons per year from a different LNG plant planned by Sempra.

Many such early bird buyers of U.S. LNG are from Europe and Asia. Europe is working to curb its dependence on Russian energy. The U.S. announced in March that it aimed to export an additional 50 billion cu. meters of LNG a year to Europe by 2030. Asia is gobbling up the fuel as well, as economies in the region recover from the coronavirus pandemic and seek to cut carbon dioxide emissions.

As demand rises, so are liquefaction costs for new LNG contracts in the U.S.

Building a new LNG plant requires tens of billions of dollars. Developers usually need to secure 15-to-20-year contracts for 70% to 80% of the planned output before they can receive financing and begin construction.

U.S. developer Venture Global LNG has scored a flurry of long-term contracts since the latter half of 2021. "We are getting close to our final investment decision" for the new Plaquemines export facility in Louisiana, which is expected to make its first delivery in 2024, CEO Michael Sabel told Nikkei. The company has already secured buyers for around 80% of the facility's proposed annual capacity of 20 million tons.

Venture Global began production at its Calcasieu Pass export facility, also in Louisiana, in March, two years and five months after it decided on the investment. This is around half the usual turnaround. "We broke the record by years" despite the pandemic, Sabel said.

"We build our LNG projects faster than anybody else in the world," he said.

LNG headed to PGNiG could be seen being loaded onto tankers at Calcasieu Pass in late April. The facility, which has a total annual capacity of around 10 million tons, runs on 18 compact liquefaction modules developed by oil service provider Baker Hughes.

Normally, terminals of this size are equipped with two or three 5 million ton liquefiers. By using the modules, which are preassembled in Italy and have an annual capacity of just 630,000 tons each, Venture Global  was able to bring the Louisiana facility online unusually quickly.

Boosting LNG imports is a top priority for Europe as it looks to wean itself off Russian gas. Germany is making a public-private push to build four floating storage and regasification units, and has begun LNG supply negotiations with Qatar.

Chinese companies have secured a slew of long-term supply deals with U.S. LNG producers since mid-2021. China has strong ties with Russia, but domestic demand for gas is skyrocketing.

China leapfrogged Japan to become the world's largest LNG importer in 2021. The U.S. is expected to become the largest LNG exporter this year.

Meanwhile, LNG demand in Japan has plateaued. Its utilities are looking to maintain their presence in the market by reselling the fuel so they can remain competitive as buyers against European and Chinese companies.

There are also plans to boost output not only at the Cameron project, but at the Freeport LNG plant in the U.S. state of Texas, an operation that includes Japanese energy company JERA and Osaka Gas as stakeholders. The total volume of requests to purchase LNG is several times the planned output, according to an official involved in the project.

But the outlook for LNG also holds uncertainty. Europe aims to sharply cut demand for gas over the long term by shifting to renewable energy and increasing energy conservation. 

Research firm Rystad Energy forecasts a drop of almost 40% for Europe's gas demand by 2040. This is a risk for LNG development projects, which seek to recoup investments by selling the fuel over decades.

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