Along with economic slowdown and potential recession, European countries are also facing severe energy crisis. Since the onset of the Russia-Ukraine war, supply of gas from the former has reduced significantly, and Europe has to depend on the expensive liquefied natural gas (LNG) and other forms of natural gas. Increasing the number of terminals is necessary to achieve long-term stability in LNG prices says IMF.
The global natural gas market exhibits price variations due to the intricate infrastructure required for its transportation, unlike crude oil, which has a more integrated market with a single price. This fragmentation leads to differing prices across regions, and high prices in one area do not necessarily impact buyers elsewhere.
The variation in prices and the protection of the United States against global gas market fluctuations are attributed to the unique characteristics of gas extraction and transportation. Another significant determinant of gas prices is the technology involved in converting the fuel into LNG for shipment via specialized carriers.
In the short term, LNG export capacity remains fixed, as the infrastructure for liquefaction, exporting, importing, and regasification necessitates substantial investments. Consequently, regional events such as Russia’s invasion of Ukraine can cause prices to diverge across different regions.
Russia’s invasion of Ukraine led to a significant decrease in gas flows from Russia to Europe, causing gas prices in Europe to skyrocket by 14 times in August 2022. Similarly, global prices for LNG also surged.
However, in the United States, LNG prices only tripled and remained significantly lower than in Europe and Asia. Despite having fixed LNG export capacity, the United States became a crucial alternative for Europe as Asian customers redirected their LNG shipments to sell in the European market, which was offering higher prices.
Natural gas pricing formulas typically use US prices, allowing Asian customers to purchase gas more affordably from the US and then redirect tankers to sell the cargo at higher European spot market prices.
European LNG import capacity, despite being used as an alternative to Russian pipeline gas, has not been a limiting factor in market integration. European import terminals have ample spare capacity, and the addition of mobile floating storage regasification units enables Europe to accommodate greater volumes of LNG imports.
Conversely, the United States and other gas producers are exporting gas at their maximum capacities, necessitating expansions in global LNG export capacity to restore historically normal price levels in Europe and Asia.
The US is set to continue increasing its LNG export capacity, building upon rapid gains since the opening of the country’s first LNG export terminal in 2016.
Expansion projects under construction in the US, Africa, the Middle East, and elsewhere are set to increase global LNG export capacity by 14% by 2025. Additional planned projects could bring export capacity to approximately 1 trillion cubic meters, equivalent to a quarter of last year’s global gas consumption.
However, securing financing for these projects can be challenging, as companies require long-term contracts spanning 15 to 20 years to obtain bank financing.
Terminal construction typically costs between $10 billion and $15 billion and takes two to four years to complete. Projects without long-term sales contracts face uncertain timelines and may not be realized.
Increasing the number of terminals is necessary to achieve long-term stability in LNG prices says IMF. Expanding LNG export capacity, particularly for the United States and other producers, is crucial for establishing balanced global gas markets.
As advanced economies increasingly rely on renewable energy sources like wind and solar, there will be periods of heightened demand for supplemental natural gas to meet power generation needs.
Integrating global gas markets and developing necessary infrastructure allows prices to stimulate demand and supply reactions in more interconnected markets, providing resilience against supply shocks in the global energy markets.
Source: IMF Blog