The Geopolitical Value of LNG

The geopolitical value of LNG has significantly increased following the Russian invasion of Ukraine and subsequent sanctions on Russian energy. Europe and other regions of the world raced to find alternative gas supplies to meet their energy demands, and the U.S. was happy to provide. Several oil and gas companies began to make major plans for the future of their liquified natural gas (LNG) production, targeting massive expansion for years to come to fill the demand gap. Now, experts worry that energy companies may have been too eager to develop new LNG projects at a time when the world is focused on a green transition and the demand for gas is expected to wane within the coming decades.

U.S. Project Pipeline

 As several countries around the globe sought alternative gas supplies following the sanctions introduced on Russian energy, they turned to emerging gas markets in Africa and Asia, while the U.S. quickly made plans to increase production to fill the demand gap. The rapid transformation of the U.S. gas industry means that net exports of U.S. natural gas are expected to increase by 6% to 13.6 billion cubic feet per day (Bcf/d) in 2024 compared to last year and grow another 20% to 16.4 Bcf/d in 2025. LNG exports are expected to rise by 2% in 2024 to average 12.2 Bcf/d, and by 18% in 2025 to reach 2.1 Bcf/d. 

Shift in European Demand

While the EU has plans to rapidly expand its gas production, it has spent the past two years sourcing alternative gas supplies to ensure it can meet its mid-term demand while shifting its reliance away from Russia. It has been extremely successful in this mission. In 2021, 45% of the EU’s gas was imported from Russia, a figure that fell to just 15% by 2023. While LNG imports have risen in Europe, the EU has diversified its sources, importing most of its supply from the U.S., Qatar, Algeria, and Nigeria. Although EU imports of U.S. LNG increased by around 7% in 2023, the region is focusing on reducing its gas dependency in the coming years. 

The EU’s REPowerEU Plan, which encourages the diversification of the EU’s energy mix, with a focus on the expansion of the region’s renewable energy capacity, is expected to help eventually reduce the region’s dependence on natural gas. Several countries across the EU have introduced ambitious climate policies that will support the expansion of wind, solar, and other renewable energy sources, as well as nuclear power.  

This year, European gas demand fell to a ten-year low, as countries raced to reduce their reliance on gas in the wake of the Russian invasion of Ukraine while also expanding their renewable energy capacity. Several countries introduced energy efficiency measures in 2022 to try and decrease gas demand until supplies were more stable. In 2023, European gas consumption totalled 452 billion cubic metres (bcm), which is less than that of 2014. The Institute for Energy Economics and Financial Analysis (IEEFA) believes that Europe’s LNG demand will decrease further in 2024 and continue declining between now and the end of the decade. 

A Potential Oversupply

The Europe decreases its gas demand, the U.S. continues to ramp up its gas production, which energy experts believe could lead to an oversupply in the 2030s. Several of the newly planned U.S. gas terminals are expected to take between three and five years to construct, which does little for the immediate shift in gas demand. By this time, Europe is expected to have established alternative source markets to meet its needs. 

The U.S. export capacity of LNG is expected to reach around 173 million tonnes per annum (mtpa), equivalent to 238 bcm, which is predicted to be around 76% higher than Europe’s LNG demand of 98 mtpa (around 135 bcm). The IEEFA explained, “Once again, European energy security has been used to justify the construction of both LNG export and import terminals”, many of which were “considered emergency measures to supply gas to a Europe faced with an energy crisis as Russian gas supplies declined”. Yet “thanks to Europe’s quick response, the crisis so far has been controlled”. 

Alternative Export Markets

While that additional U.S. LNG export capacity after 2030 may be of limited geopolitical value when it comes to Europe, many energy companies are setting their sights on alternative export markets for the long term. The energy demand in Asia is expected to continue growing well into the next decade. In addition, several Asian countries continue to rely heavily on coal, the “dirtiest” form of fossil fuel, with many governments aiming to shift away from coal to natural gas, while they develop their renewable energy capacity. 

Although Russia previously looked like an attractive market for Asian energy imports, many countries are looking for alternative supplies to secure their mid-term energy demand. At present, many Asian countries import their gas supplies from Australia and the Middle East. However, as demand rises and the U.S. boosts its LNG production, it could become a major energy exporter to the region within the next decade.

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