This story is part of a series exploring the natural gas industry's role and prospects in the energy transition — a globe-spanning movement to cut greenhouse gas emissions across the energy industry.
The climate efforts of Asian and European countries and their transition to cleaner energy sources will shape two key demand centers for U.S. LNG exports.
Asia provides U.S. LNG with plenty of room to grow market share, but the opportunities hinge on the U.S. being a low-cost supplier. In Europe, U.S. gas will continue to help balance the fuel supply portfolio, but the region's focus on carbon intensity could alter the relationship's dynamics in the long term.
Energy transition in Asia
Asia's energy transition and net-zero carbon ambitions will likely require LNG to arrive in the form of carbon-neutral cargoes, according to Jeff Moore, S&P Global Platts Analytics' manager of Asian LNG Analytics.
Developed economies, including Japan and South Korea, could take the lead in aggressively pursuing long-term emissions targets for 2050. Importers in these countries have begun discussions about the potential framework for long-term carbon-neutral LNG contracts. These actions could result in competitive hurdles for U.S. LNG.
"One of the key advantages of U.S. LNG was for price-diversification and flexibility purposes, but with the need for more carbon-neutral LNG out there, in order for these countries to meet their carbon-neutrality targets, the main factor most end-users will be focused on is how they can procure this LNG at the lowest cost," Moore said.
Other factors could help preserve a role for U.S. gas, though. Japan shifted to more natural gas after the nuclear accident at Fukushima. The area also saw a spike in gas demand during the North Asian winter crisis of 2020-2021, which pushed JKM — the benchmark price for spot physical cargoes delivered ex-ship into the region — to $32/MMBtu. Such events established U.S. LNG supply as critical to Asia's power mix. U.S. gas offers end-users alternative price benchmarks, such as the U.S. Henry Hub.
Asian countries that rely on gas to eliminate coal and back up renewables will find it difficult to discount the role of U.S. LNG. Moore said LNG will replace declining domestic supplies and benefit from existing gas infrastructure. Platts Analytics expects domestic output from South and Southeast Asia to decline by nearly 20 billion cubic meters over the next decade.
The scope for LNG demand growth in Asia is immense. The electrification of transport in Asia is just getting started, and coal-backed financing is declining. In Japan, power and heat generation account for 68.9% of LNG demand, and in South Korea, the figure is 53.5%. In Singapore, more importers are preparing to boost LNG bunkering operations.
In expanding economies such as India and China, growth is expected to come from industrial demand, fertilizers, petrochemicals and city gas. And in fast-growing sectors such as local gas distribution, methane displaces dirtier fuels such as biomass.
Foothold in Europe
In European markets, U.S. LNG has played an increasingly significant role since the first cargoes were shipped in 2016, providing competition to traditional pipeline gas supplies from Russia and Norway.
Despite Europe's emerging scrutiny of the upstream emissions profile of U.S.-sourced gas, U.S. LNG is expected to retain a near-term role in the market there with plentiful spot cargoes and deliveries under long-term contracts. The relatively short distance to market and favorable pricing have added to the appeal.
LNG will be important as Europe shifts from coal and nuclear power and as gas production in Europe declines, according to Platts Analytics LNG analyst Samer Mosis. But that dynamic is under pressure.
"A reality wherein the carbon-intensity of energy imports becomes a primary factor is becoming increasingly likely, and in this reality, the connection with the U.S. could see a marked shift," Mosis said.
More than 66 Bcm of U.S. LNG, an average of about 13 Bcm per year, has arrived on European shores since 2016, according to Platts Analytics. U.S. LNG made up 4.8% of the European gas market in 2020, up from 0.1% in 2016, surpassing the Netherlands at 4.1% but below Qatar at 5.7%, according to Gazprom data.
Qatar has been expanding production as well as tending to its emissions profile. The country is set to boost its LNG production capacity to 126 million tonnes per year before the end of the decade. It has been busy sealing deals in Europe, adding around 10 Mt/y worth of long-term contracts in 2020. Qatar has pledged to capture and store more than 7 Mt/y of CO2 by 2027 as well as offer CO2 offsets in its term contracts with buyers.
Qatar's position remains an obstacle to U.S. LNG taking a firmer hold in Europe.
"U.S. suppliers looking to ensure they maintain a European option for their exports in the long term will need to take the necessary steps to begin comprehensively and verifiably measuring and mitigating emissions across their value chains," Mosis said.
The European Commission plans to introduce legislation to reduce emissions, including a carbon-border adjustment mechanism and a tool to potentially penalize significant methane emitters.
Emissions concerns prompted the Irish government to impose a moratorium on the development of LNG import infrastructure and to specifically rule out imports of LNG produced from shale gas. Ireland has no LNG import infrastructure at present, but two projects are still under development: U.S. company New Fortress Energy Inc.'s Shannon LNG terminal and a floating import terminal project being developed by U.K.-listed Predator Oil & Gas Holdings PLC.
However, the EU does not see U.S. LNG sales as unviable. Anne-Charlotte Bournoville, head of unit planning and legal affairs at the European Commission's energy directorate, said the EU and U.S. were "not going in different directions."
"We both agree that we have to step up measurement, reporting and verification as a necessary condition to the reduction of methane emissions," Bournoville said in late 2020. That said, European purchasers could show a preference for "best in class" suppliers, Bournoville added.
Royal Dutch Shell PLC's director of integrated gas, renewable and energy solutions, Maarten Wetselaar, in February called on the EU and U.S. to cooperate on emissions regulations.
"If we can get this EU legislation and EU performance standards, if we can get a similar system in the U.S. so we can declare equivalence between the two," Wetselaar said. "[That] would really help the trade between the two in terms of LNG and would set an example for the world to follow."