LNG Terminals Expansion Needed to Hold Down Prices: IMF

LNG Terminals Expansion Needed to Hold Down Prices: IMF
The IMF said stabilizing LNG prices in the long term entails building more terminals to achieve market integration.
Image by NicoElNino via iStock

The International Monetary Fund (IMF) has said stabilizing liquefied natural gas (LNG) prices in the long term entails building more terminals to achieve market integration, though it warned the cost of expanding the infrastructure poses a “major hurdle”.

Natural gas has a “partially fragmented global market” because it relies mostly on pipelines for transport, “unlike the market for crude oil, which is more integrated and tends to trade at a single price in most places”, the Washington-based lender said in an article Tuesday.

“Such fragmentation in the natural gas market means not only that prices differ across regions, but also that high prices in one part of the world don’t necessarily transmit to buyers in other places”.

Comparing the LNG transport system in the USA and Europe, the IMF said the Russia-dependent continent saw a more dramatic rise in gas prices than the USA due to Europe’s dependence on pipelines.

“Pipeline flows to Europe from Russia dropped by 80 percent since mid-2021, sending the continent’s gas prices up 14-fold to a record level in August 2022”, it said. “Prices for globally traded liquefied natural gas saw a similar jump. But LNG prices in the United States merely tripled, remaining several times below Europe and Asia”.

The USA is insulated against global shocks in the gas market because it has a competitive terminal network that allows easier export and because gas production and pricing in the country is integrated with oil production and pricing, the IMF said.

“Historically, the US market was linked to crude oil prices because gas was mostly a byproduct of oil drilling, but this relationship, sometimes called artificial integration, has been unwinding over the past decade, mainly because of rising shale gas production”, it explained. “And as gas production surged in the US, which surpassed Russia in 2012 as the world’s largest producer, and export terminals were built, it became easier to sell into markets beyond North America”.

However, though more terminals allow greater gas outflows, unstable pricing formulas can still keep prices high for consumers, the IMF said. It noted Europe has had the infrastructure to accommodate more LNG imports but the raised capacity has not translated to lower prices because price premiums can change quickly relative to the USA.

“With gas in Europe commanding a temporary price premium during the spring and summer of 2022, Asian customers of US LNG decided to reroute their cargoes to sell in Europe”, it said.

“Pricing formulas for long-term delivery contracts with US companies usually use US prices. That meant Asian customers with long-term deals could buy more cheaply from the US, then reroute tanker ships at sea to sell cargo at the much higher European spot market price”, it added.

“Despite an increasing reliance on LNG as a substitute for Russian pipeline gas, European LNG import capacity turned out not to be a binding constraint on market integration”.

But the IMF maintained that an expanded LNG export capacity helps guard against supply shocks by “creating truly global gas markets that are balanced across regions”.

It said “expansions to global LNG export capacity are needed to bring European and Asian prices back to historically normal levels over the longer term”.

The IMF also sees demand increasing for natural gas as a transition energy to serve power generation.

“Sizable expansion projects already under construction in the United States, Africa, the Middle East, and elsewhere are likely to increase global LNG export capacity by 14 percent by 2025”, it said. “Other planned projects could bring export capacity to around 1 trillion cubic meters [35.31 trillion cubic feet], roughly a quarter of last year’s global gas consumption”.

However, the IMF acknowledged lenders would not readily jump into such projects.

“Companies need 15- to 20-year contracts to obtain bank financing for construction. Terminals usually cost $10 billion to $15 billion and take two to four years to complete. Timelines are less certain for projects without long-term sales contracts, and some may never be built”, it explained.

To contact the author, email jov.onsat@rigzone.com

What do you think? We’d love to hear from you, join the conversation on the Rigzone Energy Network.

The Rigzone Energy Network is a new social experience created for you and all energy professionals to Speak Up about our industry, share knowledge, connect with peers and industry insiders and engage in a professional community that will empower your career in energy.

Most Popular Articles