INTERVIEW: Supply contracts to drive uptick in LNG project FIDs: S&P Global consultant

Europe's scramble to diversify away from Russian natural gas and an increased desire by buyers globally for security of supply amid the ensuing price volatility is likely to see more long-term LNG contracts concluded and final investment decisions taken on projects over the coming months, according to Michael Stoppard, global gas strategy lead at S&P Global Commodity Insights.

"There is some concern that Asia will face additional competition for LNG from Europe and particularly for supply outside the US," Stoppard said May 27 in an interview on the sidelines of the World Gas Conference 2022 in Daegu, South Korea.

"However, we actually see this as more of an opportunity rather than a threat," Stoppard said, adding that Europe's demand for LNG will likely help bring forward more US LNG projects that can ultimately meet Asia's growing energy needs.

Many contracts have been inked recently, mainly related to the US and firm sales and purchase agreements as well as contracts are a precursor to FIDs, Stoppard said.

"We are projecting further projects will make FIDs on the back of these long-term contracts before the end of the year," Stoppard said, adding that while its proving difficult to agree on what that slope for oil indexation should be in contract for some projects, the US projects were still broadly committed to sell very competitively at a Henry Hub plus rate.

Another aspect is the timing factor to fulfil Europe's gas needs, Stoppard said.

He noted that Europe will want a lot of gas in the short to medium term but not so much in the long term, and so the key lies in reconciling Europe's requirements for medium term LNG with developers' interest in long term security of demand.

Meanwhile, within Europe, the energy transition/decarbonization agenda will likely continue to accelerate, Stoppard said.

"Within Europe, the crisis [emanating from Russia's invasion of Ukraine] has increased the desire for indigenously produced secure resources and that often means renewables," Stoppard said, adding that green hydrogen was already seeing increased traction.

Still, natural gas will play a critical role and remain an extremely important fuel in Europe out to 2050, he said.

Gas prices elevated

"We expect for the next few years at least, the monthly and quarterly averages for prices to remain north of $20/MMBtu," Stoppard said.

While prices above $20/MMBtu are not usually helpful for developing medium to long term gas demand, the alternatives are all also higher cost, leaving buyers will little option but to rely on gas, Stoppard said.

"The coal price is very high, and the expectation is that renewable projects could see inflation because of supply chain issues and access to commodities. So the concern is that emerging markets face no easy low-cost fallback option for energy," Stoppard said, adding that gas prices were likely to stay elevated.

Carbon-neutral LNG

"I think there is an important role for carbon offset LNG but there is a lot of work to be done on the governance side," Stoppard said.

However, it all depends on the quality of those offsets and while some carbon offsets have been "very serious", others have been more questionable, he said.

"One of the developments we're seeing is that more transparency of data is required in the contracts, at the beginning of an audit process, in order to understand what the footprint of the carbon is in its delivery," Stoppard said, adding that the first step would be gaining a better understanding of the carbon intensity of a project and conducting an audit of the gas back to the point of production.

LNG developers worldwide are not just competing on cost but also on intensity and including in their value proposition steps to address carbon intensity.

"We've seen Qatar and a number of both US and non-US LNG developers bring forward their carbon capture projects associated with LNG," which is a positive outcome as the industry embarks on tackling its climate change goals, he said.