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Oil industry’s dash for gas comes with risks

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There are early signs of a new wave of investment in liquefied natural gas, oil’s cleaner cousin. The industry is trumpeting a new capital discipline, but it might not be enough to stop another glut.

This week, Qatar signed off on a 40% expansion of its LNG production capacity. The petrostate’s North Field East project, due to complete in 2026, ranks as the single largest investment in the fuel ever approved.

Even after a traumatic 2020, the wider industry may find it hard to resist competitive responses. LNG—the liquefied, shippable version of the gas that heats homes and generates power across the world—plays a key role in the strategies of all big five oil-and-gas “supermajors.” It has better growth prospects and emits fewer greenhouse gases than oil, yet offers a more familiar business model than renewable energy.

LNG projects often take four to five years to build and need buyer commitments covering 80% to 90% of production to get funding. Until recently, gas customers had moved away from contracts, instead preferring to buy on the spot market at persistently low prices, but a recent spike in the Asian LNG benchmark reminded buyers of the risks of that approach. Customers increasingly want long-term supply contracts, creating an opportunity to fund new projects.

The risk is that everyone moves at once. Capital spending cuts following last year’s plunge in commodity prices put many LNG plans on hold. Reviving them all would result in about a billion extra metric tons of the fuel a year, according to consulting firm Rystad Energy. That’s nearly 10 times the amount it expects to be required by 2030.

Even now, global gas supply exceeds demand. The Asian benchmark jumped nearly 10-fold in the second half of last year, but mainly due to four temporary factors: a cold winter, traffic jams in the Panama canal, an LNG ship shortage and Beijing’s ban on Australian coal imports. Prices have already fallen back. New LNG ships and Chinese plans to build more local gas-storage capacity will ease the pressure longer term.

Over the coming years, demand for gas is likely to grow globally. Emerging markets will need more as their economies develop. So will utilities as they switch from coal to gas. Still, there is significant uncertainty about the trajectory, and the clampdown on greenhouse-gas emissions will eventually cut gas usage too.

All told, by 2030 the world will need another 104 million metric tons of new LNG supply, according to Sindre Knutsson, an analyst at Rystad Energy. Qatar’s new project will provide nearly a third of that amount. In addition to the supermajors, other LNG producers in Russia, Australia and the U.S. are all eager to supply more. The space could get very crowded.

Requiring sufficient supply contracts is a good hurdle for any new LNG investment, but even that is no guarantee of good returns. Subsequent Qatari expansion could undercut other projects: Qatar’s break-even costs on LNG delivered to Asia are $4 per million British thermal units, compared with around $7…



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