As the world grappled with year two of the COVID-19 pandemic, the liquified natural gas (“LNG”) industry rebounded from the global demand shock experienced in 2020 and began to navigate the “new normal” from wellhead to burner tip. Several notable trends emerged. First, despite the continuation of the pandemic, surging energy demand resulted in commodity shortages and corresponding volatility in the natural gas and LNG markets. Second, despite some setbacks faced by certain projects, many developers pressed forward with new projects due to forecasted increases in energy demand. Third, LNG sellers responded to growing market demands for lower-carbon energy by finding ways to reduce the carbon footprint of LNG.
Volatility & Shortages
As the economic effects of the global pandemic waned in 2021, global gas demand rose to record levels. LNG buyers that had taken advantage of volume flexibility to reduce their offtake early in the pandemic began to ramp up their purchases, and the number of force majeure claims declined as counterparties worked through persistent pandemic-related transportation constraints in the LNG value chain. Natural gas flows to liquefaction facilities increased steadily throughout 2021 and, as of November 2021, the U.S. Energy Information Administration estimated that U.S. LNG nominal liquefaction capacity reached 9.5 billion cubic feet per day (“bcfd”) and peak capacity was 11.6 bcfd (which is further expected to increase to 11.4 bcfd and 13.9 bcfd, respectively, in 2022). Gas flows to the U.S. Gulf Coast remained strong through the end of 2021. Natural gas prices and spot LNG prices were materially higher than in previous years as the European and Japanese markets prepared for the winter months. At the same time, relatively mild weather in the U.S. incentivized exports over domestic consumption, despite calls from some U.S. politicians for gas producers to divert their production to domestic markets to drive down prices of local consumption.
The challenges of 2021 were not limited to the spot markets for natural gas and LNG. Various forces disrupted long-term plans and caused several project developers to cancel projects both inside and outside of the U.S. For example, Pembina Pipeline Corp. halted the development of its Jordan Cove LNG liquefaction project in Oregon, citing regulatory challenges. Annova LNG, LLC abandoned the development of its Texas Brownsville LNG export project due to changes in the export landscape. Setbacks also occurred outside the U.S., most notably in Mozambique, where Total SE indefinitely suspended the development of its LNG project following attacks by militants in the local province.
Although the high cost and lengthy development timeline of LNG projects limits the ability of project developers to react to short-term price signals in the spot markets, project developers continued to execute on plans to expand the LNG market and to focus on long-term investment strategies. The U.S. drove global LNG supply increases in 2021, as Cheniere Energy, Inc.’s Sabine Pass project brought its sixth LNG train online in the fourth quarter of 2021. Additional developers pressed forward with plans to build LNG export capacity; however, given that more long-term supply than demand existed in 2021, buyers enjoyed relatively strong negotiating positions. Nonetheless, a number of developers, including QatarEnergy and Venture Global LNG, Inc., were able to secure long-term (10–20 year) contracts with buyers.
The pandemic coincided with a growing focus on reducing the carbon intensity of the energy industry, including the natural gas and LNG sectors. LNG market participants continued to explore—and implement—ways to reduce greenhouse gas (“GHG”) emissions in the LNG production lifecycle, including offsets, direct reductions of GHG emissions along the LNG value chain and the use of low-carbon or carbon-neutral feedstocks such as biogas. Concurrently, stakeholders considered the measurement, reporting and verification criteria necessary to establish industry standards on classification of LNG cargo as “carbon-neutral,” including the extent to which upstream and downstream measurement and reporting should be required for particular transactions.
The structure of GHG offset transactions and reporting continued to evolve throughout 2021. From 2019 through the end of 2021, at least twenty-four “low-carbon” LNG cargoes shipped globally. That number is expected to continue to grow throughout the decade. For the most part, industry participants developed bespoke contract structures. However, in November 2021, the International Group of Liquefied Natural Gas Importers (“GIIGNL”) released its Measurement, Reporting and Verification (MRV) and GHG (Greenhouse Gas) Neutral Framework. This framework is intended to provide a standardized definition of “GHG Neutral” and to standardize measurement, accounting and contracting practices for low-carbon LNG transactions. It remains to be seen how widely the industry will adopt this framework.
In the wake of the United Nation’s climate change conference (“COP26”) in late 2021, LNG industry participants are placing additional emphasis on efforts to reduce the carbon footprint of LNG cargoes. COP26 saw over 100 national governments’ non-binding public commitment to reduce methane output by 30% by 2030, as well as many major countries’ non-binding commitments to end public financing for foreign fossil-fuel projects by the end of 2022. In light of increasing pressure from certain public and private industry stakeholders, many investors and financiers for new LNG projects are looking for enhanced environmental, social and governance commitments from developers (sometimes above and beyond the minimum standards otherwise being considered at the international level).
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