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Good morning and welcome back to Energy Source, coming to you this week from New York and London.
I’ve spent the past few weeks working with the Financial Times’ Paris correspondent Sarah White on a deep dive into US plans to break Russia’s grip on the nuclear fuels market.
Over the past three decades, US and European utilities became hooked on supplies of cheap enriched uranium from Moscow, which account for more than a fifth of the fuel needed to power their reactor fleets.
Russia’s full-scale invasion of Ukraine in 2022 forced Washington to review its heavy reliance on Moscow. The US is devising a multibillion-dollar investment strategy designed to reboot its domestic industry, which was ravaged by a collapse in demand following the Fukushima accident in 2011.
Two years later the US Department of Energy is awarding chunky nuclear contracts, Congress is poised to ban Russian imports of enriched uranium and the UK, Canada, Japan and France are working to boost their capacity to produce nuclear fuel. Please email firstname.lastname@example.org to let us know whether you think the US nuclear strategy will succeed — or if is too little, too late.
In today’s newsletter we take a look at the prospects for the LNG industry, which was recently blindsided by a Biden administration proposal to review how it approves new export terminals. Our London-based energy correspondent Shotaro Tani examines an upcoming boom — and what could happen next.
The start of LNG boom . . . and glut?
The liquefied natural gas industry is about to enter a boom. Starting gradually this year and accelerating later into the decade, there will be a massive ramp-up of available LNG supply capacity, a trend that the IEA called “unprecedented”.
The global gas market has been tight ever since Russia cut Europe off from more than 100bn cubic metres of molecules amid its invasion of Ukraine. The tightness led to record high prices in 2022, and while gas prices have come down globally since then, they remain elevated compared with historical levels. Additional LNG capacities will go a long way to alleviate the market tightness.
But will the boom, led by the US and Qatar, create a LNG glut?
By 2030, the world will have 646mn tonnes of LNG supply capacity, an increase of 188mn tonnes compared with 2023, according to S&P Global Commodity Insights. If the projects that have not taken final investment decisions are included (the ones that have less certainty of being built), then the capacity reaches just under 700mn tonnes.
Many analysts believe that the demand for LNG will rise slower than the pace of supply ramp-up, and expect the market to be oversupplied from the middle of this decade into the mid-2030s.
“Record high levels” of contracting for long-term LNG agreements in 2022 and 2023 “[provide] some indication of possible oversupply”, said Michael Stoppard, global gas strategy lead at S&P Global Commodity Insights, as “long-term deal signing is a leading indicator of final investment decisions on new projects and therefore of future supply”.
If there is more supply than demand, prices will inevitably fall. Companies such as Shell and TotalEnergies, the “aggregators” of LNG that buy the super-chilled fuel from multiple developers and sell them on, may struggle to generate as much revenue from their trading business compared with the past year or so.
On the other hand, lower prices would be welcomed in developing countries such as Bangladesh and Pakistan, which have largely been priced out of the market — and have suffered blackouts as a result. It would also be a boon to European consumers who have come to rely on natural gas as a main source of energy; lower prices would help ease inflationary pressures.
But the picture gets more complicated on a longer time horizon. Here’s another chart, courtesy of McKinsey.
Beyond 2035, the outlook under each transition scenario points to an undersupplied market, assuming no new LNG export capacities are built beyond what is currently being constructed or have reached FID by 2023. Aside from a transition scenario pushing for stronger net zero momentum, the undersupply continues well into the back end of the 2040s.
That’s the memo that international oil and gas giants such as Shell and Total are getting. Case in point: the 27-year deals they have signed with Qatar or the request by the likes of Japanese utility Jera to US regulators urging them to approve a big LNG project there.
LNG supply and demand forecasts are difficult to get right. Events such as the coronavirus-induced demand crash, or the demand surge as a result of Russia’s weaponisation of energy, are hard to foresee. The hot debate in the industry right now is the Biden administration’s reconsideration of the way it licenses LNG export terminals, which could delay or torpedo some potential projects. (For more on this topic, read my US colleagues’ reporting here.)
The situation is made more difficult due to the difference in views on natural gas; the industry sees it as a transitional fuel with prolonged demand in the global energy system, while climate campaigners envisage a reduced role for the gas as the world transitions away from fossil fuels.
But if there’s one thing the gas industry has learnt from the European energy crisis in 2022, it’s that security of supply is essential.
It’s so important that it wouldn’t be a surprise to see another wave of LNG projects being built after the current wave in order to reduce the possibility of undersupply — even as climate campaigners step up their fight against fossil fuels. (Shotaro Tani)
Energy Source is written and edited by Jamie Smyth, Myles McCormick, Amanda Chu and Tom Wilson with support from the FT’s global team of reporters. Reach us at email@example.com and follow us on X at @FTEnergy. Catch up on past editions of the newsletter here.
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