LNG industry rebounds from pandemic, but faces long-term challenges

Marcy de Luna, Staff writer  April 25, 2021  houstonchronicle.com

Industry analysts were raising concerns about a glut of liquefied natural gas coming onto global markets when the coronavirus pandemic hit in early 2020. As national economies shut down and energy demand plummeted, the future of the industry and multi-billion-dollar LNG export terminals along the Gulf Coast looked grim.

A year later, however, LNG has bounced back, recovering faster than the oil industry and resuming its expansion. The Houston LNG company Cheniere Energy recently completed its third processing unit at its Corpus Christi complex while moving ahead with the construction of a sixth unit, scheduled for completion next year, at its Sabine Pass facilities in Louisiana.

The Virginia company Venture Global told U.S. regulators last month that its Calcasieu Pass in Cameron Parish, La., could ship its first cargo in late 2021. Sempra Energy, which also operates an LNG export terminal in Cameron Parish, is moving forward with the development of another LNG complex in Port Arthur.

“Basically,” said Jordan McNiven, an analyst at investment bank Tudor Pickering & Co., “the industry has fully recovered.”

The LNG industry has proved itself resilient, not only navigating the pandemic year, but also a record hurricane season that sent 11 named storms barreling into the Gulf of Mexico, and eight making landfall in the energy corridor along the Louisiana and Texas border. Among them: Hurricane Laura.

The category-four storm on August 27 hit near Cheniere's Sabine Pass in Cameron Parish, La., forcing it to shut down operations on Aug. 25, and Sempra's $10 billion Cameron LNG terminal south of Lake Charles, which stopped operations on Aug. 26. Gas deliveries fell as low as about 2.1 billion cubic feet per day, the lowest level since February 2019, according to the research firm S&P Global Platts.

Meanwhile, the industry struggled with slumping global demand through most of 2020. At least 175 cargoes across the country were said to have been canceled for loading between April and November, S&P Global Platts said.

“The LNG market, already challenged, got kicked in the gut by COVID-19,” McNiven said.

The market, however, began to turn in September as demand began to grow in Asia, where countries such as China and South Korea brought COVD-19 under control, and extremely cold weather in North Asia caused natural gas demand for heating to soar. LNG prices began rising, reaching an average of $5.50 per million British thermal units for November 2020 delivery to Asia and increasing to $5.70 per million British thermal units in December, trade sources said.

With China lowering retaliatory tariffs on U.S. LNG last year, Asia overtook Europe as the primary destination for U.S. LNG, accounting for nearly half of exports. In November, total U.S. LNG exports soared to 9.4 billion cubic feet, up nearly 50 percent from 6.3 billion in Nov. 2019, according to the Energy Department.

“We think the future for LNG is bright,” said Stephen Ellis, an analyst with the investment research firm Morningstar.

Riding it out

Liquefied natural gas is still a new industry for the Gulf Coast and the United States, the result of the fracking boom that has produced massive volumes of natural gas. Cheniere Energy shipped the first LNG cargo from the lower 48 states in 2016.

Since then, at least six more LNG export terminals have been built, including four along the Gulf Coast.

Cheniere, the industry leader, rode out the pandemic with help from fees collected from buyers that canceled contracts. The company reported it received more than $900 million in such fees last year.

Cheniere ended the year on solid footing. The company said fourth quarter revenues rose 4 percent from the previous year, while profits fell to $409 million from $448 million from the fourth quarter or 2019. Cheniere also said that it had added contracts to ship another 4 million metric tons of LNG per year.

Cheniere now operates five liquefaction units, which supercool natural gas into a liquid, at Sabine Pass. The company shipped its first cargo from its Corpus Christi complex in 2019; it now has three liquefaction units, with the capacity to process 5 million metric tons a year.

“It was an unprecedented year in 2020,” said Anatol Feygin, Cheniere’s chief commercial officer. “The global LNG market, even with everything that played out through 2020, actually grew a little over 1 percent. And not only did it grow, but it rebounded very rapidly into the end of the year.”

Venture Global’s Calcasieu Pass facility is ahead of schedule on six of 18 production units. Venture Global lined up contracts to ship 8 million metric tons per year from Calcasieu Pass before moving ahead with the project in 2019, according to S&P Global Platts. Venture Global said in the FERC filing that it expects to contract another 2 million tons per year — the balance of the complex’s 10 million tons per year capacity — before completing construction next year.

The California company Sempra Energy and its partners, including the French oil major Total, began shipping LNG from their Cameron LNG facility in Hackberry, La. in 2019. Sempra, with the global engineering and construction firm Bechtel, is now developing a Port Arthur LNG export terminal, which would have the capacity to produce up to approximately 13.5 million metric tons per year.

Sempra said it expects to make the final decision to move forward with the Port Arthur project this year.

Not all rosy

Certainly, the past year has dealt setbacks to the industry. The Houston company Annova LNG last month canceled its planned project at the plant at the Port of Brownsville, one of three LNG facilities planned there.

Another Houston LNG company, Tellurian, laid off more than 40 percent of its 176 employees, reshuffled executives and cut expenses in a bid to save its Driftwood LNG project in Lake Charles, La. Tellurian, co-founded by former Cheniere CEO Charif Souki, struggled to find long-term customers in a market weakened by the pandemic.

Tellurian’s losses widened in 2020 to $210.7 million from $151.8 million in 2019.

Driftwood, with a projected cost of nearly $18 billion, holds permits but lacks contracts and financing to begin construction. Driftwood, if built, would have the capacity to export nearly 28 million metric tons of LNG per year.

Souki said in an email that he expects demand for natural gas to only grow around the world. The drive to slow climate change not only will require more electricity, but also countries to phase out coal- and fuel oil-fired plants in favor of cleaner-burning natural gas.

For example, Saudi Aramco said it expects to have 50 percent of Saudi Arabia powered by natural gas and 50 percent by renewable energy by 2030.

“With increased demand for global electrification, the natural gas industry is structurally short of supply,” Souki said. “With Driftwood LNG, we expect Tellurian to be at the heart of this dialogue to reduce global pollution.”

Future of LNG

It remains to be seen if the LNG industry can balance long-term supply with demand. Analysts worry that if most of the planned projects — not only on the Gulf Coast but around the world — come online over the next four years, supply could outstrip demand.

In addition to the slate of U.S projects, Qatar Petroleum recently committed nearly $28.8 billion to develop the world’s largest liquified natural gas project, capable of producing 32 million metric tons per year of LNG. The expansion would help Qatar become the world's largest LNG producer by 2030, according to energy research firms Wood Mackenzie and Rystad.

“If Qatar presses ahead with its ambitions, potential projects in other parts of the world could face a grim outlook in competition against low Qatari breakeven prices,” Rystad said in a report. “Future additions in Qatar are likely to hamper the prospects for key LNG projects in Russia, Papua New Guinea and the U.S.”

The increasing urgency of climate change presents another challenge to the industry. Natural gas was once viewed as a bridge fuel to an emissions-free energy future because it burns cleaner than coal or petroleum products. But the release of methane — a powerful greenhouse gas that is the primary component of natural gas — by producers, processors and pipelines has undermined both the fossil fuel’s image as clean and its role in the energy transition.

While things are looking up for LNG over the next few years analysts at Tudor Pickering & Co. say the industry faces challenges in the second half of the decade as supply potentially overwhelms demand.

“We expect material oversupply remerging in the 2026 to 2030 range,” said the analyst McNiven said. “Qatar is the largest contributor to the supply surge but also Russia, U.S., Canada, and potentially Mozambique are bringing on world-scale projects.”