U.S. LNG Buildout May not be Needed, IEFFA Report Finds

Liquefied natural gas (LNG) has become a crucial piece of the global energy trade in recent years. Shocks to the structure of the international energy market have created an opportunity for LNG to be used in Europe as a replacement for Russian gas, and the United States has accelerated the development of exporting capacity to meet the new demand. However, a report by the Institute for Energy Economics and Financial Analysis (IEFFA) explains that the LNG ‘boom’ may be short-lived.

It is not a secret that the effects of the Russian invasion of Ukraine have reached global proportions. The European energy market has been reshaped as fuels, and access to them, have been used as weapons of war as relations between importing EU states and exporting Russia deteriorated. Pre-invasion, Europe imported more than 40 percent of its natural gas from Russia. That supply line was squeezed in response to Western sanctions against Russia, and for some EU countries imports stopped entirely after the Nord Stream pipelines were destroyed.

Faced with the risk of not meeting the nation’s energy demand, EU states began importing LNG, primarily from the United States. American LNG exports to Europe began growing in 2019, continued through 2021, and became the top importer in Europe by 2022.

The United States moved quickly to replace missing Russian gas supplies after the February 2022 invasion, striking a deal with the European Commission (EC) to ramp up LNG exports to Europe over the next decade. According to Reuters, American LNG exports grew by 137 percent in the first 11 months of 2022 compared to the previous year. At the same time, spot prices of LNG across the globe rose, reaching all-time high prices in Europe last August.

The growth likely isn’t over for now, according to IEFFA, which argues that imports will continue to grow in 2023, but will eventually begin to fall off later in the decade. As part of the agreement between the US and EC, gas companies in America started projects to boost export capacity; many of those projects will come online within the next few years. As these projects are completed and operational, export volumes from the U.S. are expected to continue to rise sharply.

However, the additional capacity may be unnecessary, as IEFFA predicts that Europe won’t need, or want, the imports as soon as the end of this decade. Ironically, a key reason for the predicted slowdown is energy security concerns, a concern that LNG relieved initially.

Though LNG has alleviated much energy insecurity in Europe during the conflict, reliance on another increasingly expensive foreign fuel supply, especially a fossil fuel, is not in the long-term plan of the EU, and their policies reflect that. The EU’s RePowerEU plan, a long-term plan for clean energy development and climate change mitigating policies, calls for the phasing out of fossil fuels and has invested in research and development to make that a reality in the coming years.

U.S. gas exporters must weigh the costs of developing additional export capacity against the likelihood that the additional LNG may not be necessary, and whether exporting additional natural gas will remain financially beneficial.