(Bloomberg Businessweek) -- Russia's invasion of Ukraine has thrust liquefied natural gas into the international spotlight.
LNG is natural gas that's been chilled to a liquid so it can be loaded onto huge tankers and shipped to countries that use it for heating and power generation. While demand for the fuel has soared in Asia, Europe has been slow to embrace it as an alternative to cheaper, piped natural gas from Russia, which supplies 40% of its needs.
That changed when a war broke out on Europe's eastern flank, sending already volatile gas prices surging. In a deal unveiled on March 25, the U.S. has committed to working with international partners to boost supplies of LNG to European countries to about 1.8 trillion cubic feet (50 billion cubic meters) annually by 2030. U.S. shipments to Europe totaled almost 913 billion cubic feet last year, according to research company Rystad Energy. The trans-Atlantic allies are “coming together to reduce Europe's dependence on Russian energy,” President Joe Biden said at a press conference in Brussels to announce the pact.
Six years after the first cargo of American shale gas sailed out of Cheniere Energy Inc.'s Louisiana terminal, the U.S. is vying with Qatar and Australia for the title of world's top LNG exporter. (It's a constantly shifting ranking, but the U.S. is currently in the lead.) Nevertheless, U.S. exports alone won't be enough to wean Europe off Russian gas completely, at least in the short term.
Even operating at full tilt, the seven LNG export terminals stateside would meet only about a third of Europe's daily gas demand. The facilities cost billions of dollars and take years to build, and a lack of financing has created a bottleneck: Roughly a dozen proposed terminals authorized by U.S. regulators over the past several years haven't been built because developers are still trying to line up funds. And Europe doesn't have enough import facilities to absorb a significant increase in U.S. tanker traffic.
Nevertheless, political support for U.S. LNG has never been higher, creating tailwinds for companies trying to develop export projects. “Europe's divorce with Russia, its longtime energy supply partner, leaves an absolutely massive growth opportunity for U.S. LNG exporters,” says Sean Morgan, an LNG industry analyst at Evercore ISI, who calls it a “once-in-a-generation” shift.
Here's a more detailed look at the challenges U.S. LNG companies must overcome to supply more gas to Europe.
● Construction costs and financing
Venture Global LNG Inc.'s Calcasieu Pass export terminal, under construction in Louisiana, will cost about $5.8 billion—and it's one of the less expensive projects. Even a single new LNG‑producing unit at an existing facility takes about two and a half years to complete, according to Goldman Sachs.
Europe's gas crunch is expected to renew interest in some of the U.S. export projects under development that have struggled to attract financing in recent years, hamstrung by relatively low gas prices and competition from Qatar and Australia. In one sign of the industry's newfound confidence, three days after the U.S.-EU deal was announced, Tellurian Inc. greenlighted construction of a Louisiana export complex, even though it hasn't lined up financing for the $12 billion development.
● Federal permits
Before developers can break ground, they're required to submit detailed proposals to the Federal Energy Regulatory Commission—an independent agency that oversees gas transportation—and the Department of Energy. Some projects also need state permits. All of that paperwork can consume years.
In mid-March the Energy Department approved requests by Cheniere to expand export volumes from its terminal in Louisiana and another in Corpus Christi, Texas—a sign that the Biden administration is prepared to risk undermining the president's campaign pledge to combat climate change, for the sake of European allies.
● Contracts
If European countries are serious about getting off Russian gas, they'll have to sign more long-term contracts for LNG from the U.S., says Samantha Dart, head of natural gas research at Goldman Sachs. That's because financing for new terminals typically hinges on 15- or 20-year supply deals that developers sign with utility companies and other buyers.
The European energy crisis has improved the long-term contracting environment for projects with federal permits. Some of the early winners include Cheniere, which plans to expand its Texas terminal, and Venture Global, which is seeking to add three more export facilities in Louisiana.
On the import side, Germany is planning to build two terminals while Italy, Poland, and other nations are eyeing development of new terminals or expanding existing facilities.
● Opposition to exports
An increase in the number of U.S. LNG export terminals—along with the high prices European customers are willing to pay—will divert supplies from the domestic market, potentially raising costs for U.S. businesses and households that have enjoyed years of comparatively low prices.
Industrial Energy Consumers of America, a lobbying group, already blames LNG exports for helping to push up energy bills. U.S. natural gas prices have risen about 45% in the year to date and more than doubled over the past 12 months.
● Production and pipeline capacity
Even as the war in Ukraine has marshaled support for boosting LNG exports, it's not clear how much American gas producers are willing to ramp up output. Although production has rebounded from a pandemic-induced crash in 2020, it's grown only modestly in the past year as investors pressure companies to keep a lid on spending and return cash to shareholders.
There's limited pipeline capacity to transport gas from shale basins to export terminals, with proposals for new conduits facing opposition from regulators and environmental groups in recent years. Democratic Senator Joe Manchin of West Virginia has argued that the Defense Production Act, which gives the president emergency authority to seize control of domestic industries, should be used to rush completion of a stalled pipeline that connects the state-straddling Marcellus Shale deposit to export terminals in the Gulf of Mexico.
● Environmental challenges
LNG has faced increasing pushback in Europe as well as in the U.S. amid concern about climate change. Although gas burns more cleanly than coal when it leaks into the atmosphere, it's composed mostly of methane, which is more than 80 times more powerful than carbon dioxide as a global warming agent.
Hydraulic fracturing, a method for breaking rock and releasing hydrocarbons, also has been criticized for its impact on the environment. Under pressure from the French government and green groups, utility Engie SA scrapped plans in 2020 to buy LNG from U.S. exporter NextDecade Corp., which is trying to build an export terminal in Texas.
Backers of natural gas argue that the fossil fuel should have a role to play in the energy transition, especially if suppliers can deliver on pledges to track and stop leaks of methane from wells and pipelines. In February, the European Commission proposed to label investments in some gas projects as sustainable under the bloc's taxonomy system.
● Window of opportunity
Support from Brussels and Washington may not be sufficient to overcome uncertainty over whether demand for natural gas will hold firm over time. Europe has set ambitious goals for wind and solar energy, which if realized will cut into the market for LNG. That's the biggest long-term risk faced by investors in LNG projects, according to Emily McClain, an analyst at Rystad Energy. “We are moving in the direction of energy transition,” she says. “How soon we get there is the question.” —With Naureen S. Malik and Gerson Freitas Jr.
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