In the November issue of Wiley journal Climate and Energy, NERA Senior Managing Director Dr. Jeff D. Makholm examines liquified natural gas (LNG) trade. Oceangoing trade in LNG is more than half a century old, starting as countries and regions with warm climates, small populations, and no ready domestic application for natural gas (like Algeria, Qatar, and Western Australia) sought to monetize their local natural resources by building large export facilities targeting industrial countries with cold winters and without indigenous fossil fuels (like Japan, Korea, parts of Europe, and New England).
The LNG trade attracted heightened attention after the Russian invasion of Ukraine and the subsequent disruptions for energy consumers in Europe and elsewhere. Many in Europe thought the United States, growing from zero exports in 2015 to become the world’s largest LNG exporter in the first few months of 2023, could come to the rescue of a continent suffering from the loss of Russia as its largest source of natural gas.
Dr. Makholm explains why US LNG provides no easy remedy for Europe’s natural gas supply problems. Invisible and lighter than air, natural gas is the most physically inconvenient of all bulk commodities in worldwide trade. Its ocean transport requires great concentrations of capital to transport overland (by pipeline to export sites) and in ocean transport (by liquefaction to reduce its volume by 1/600th for specialized ocean tankers).
Given the inherent volatile spread between US and worldwide natural gas prices (which Dr. Makholm documents), great risk accompanies the $10–$15 billion sunk investment costs for the latest US LNG export projects. Dr. Makholm emphasizes that, given such investment risks, all modern investor-owned LNG export projects, whether in the United States or elsewhere, seek long-term contracts with credit-worthy shippers as the foundation for raising capital on reasonable terms for the liquefaction and connected pipeline facilities. Unlike any other bulk commodity in worldwide trade, capital risks will continue to demand such long-term contracting—which will essentially prevent the exchange-driven spot trade characterizing the trade in crude oil or other bulk commodities.
Makholm, Jeff D. (November, 2023). “The Liquified Natural Gas (LNG) Puzzle: A Singular and Misunderstood Commodity in World Trade,” Climate and Energy, 40/4, ©2023 Wiley Periodicals, Inc., a Wiley Company.
