Chairman’s Message

On January 26, the Biden Administration announced a pause to the LNG export authorization process to non-FTA countries. It came as a big shock to LNG importing countries such as Japan. The responses in the US were mixed. Some experts, including those in the US administration, argue that the impact of the pause is very limited while other may consider it as sending the wrong message to the market. I believe that we must investigate the reasoning behind these differences. This is why I have prepared an extra edition.

<Main Points>

Current LNG capacity + FID capacity insufficient to meet demand towards 2040

Commitments to procure LNG exceeds FID by 65 million tons (Mt) per year globally

Authorization for export does not automatically translate into FID

Commitment to procure 30 Mt of US LNG has not yet received authorization

Pause disrupts business activities of many market players

Uncertainty about the future role of the US as the largest LNG exporter

Inconsistency with the policy to reduce dependence on Russia

Need to consider concerns of allies, LNG users and market players

1. Current global LNG capacity together with the capacity that already reached FID is insufficient to support the global LNG demand towards 2040.

The energy crisis triggered by the Russian invasion of Ukraine led to a surge in FID for new LNG projects worldwide, centering in the US. As a result, we will most probably have a surplus of supply capacity in 2030 and this prospect has been cited as one of the reasons to downplay the impact of the pause.
But what about the demand & supply condition beyond 2030? The current global LNG supply capacity is expected to decline, due to natural depletion, to 280 Mt as of 2040. If we add the 180 Mt of LNG projects that reached FID, including the 80 Mt of U.S. projects, the total world supply capacity of LNG in 2040 will be 460 Mt.
IEEJ, my institute, projects in its Energy Outlook’s Reference scenario that the global demand of LNG could reach 600 Mt annually in 2040. Even under its Advanced Technology scenario, which incorporates a massive introduction of clean and efficient technologies, the demand is projected to reach as much as 500 Mt in 2040. In both scenarios, we expect a very robust demand coming particularly from Asia because it must support its strong economic growth while transiting from coal to gas to reduce CO2 emission.
According to those scenarios, the shortage of supply capacity would range from 40 Mt to 140 Mt annually in 2040. To make matters worse, this prospect assumes that 25 Mt of capacity of Russian LNG continue to be operational.
Thus, we believe that more investment for LNG capacity beyond those already with FID is needed to meet the global demand beyond 2030 towards 2040.

2. The market believes that more investment is coming

In fact, our view is endorsed by the market’s strong appetite for LNG term contracts. The commitment to procure LNG for the long term, including SPAs and HOAs, reached 75 Mt each in 2022 and 2023. Another 15 Mt of procurement has been announced this year.
Some of these commitments have already turned into FIDs for future projects. For example, the capacity expansions with FID reached 30 Mt in 2022 and 40 Mt in 2023. While these FID figures are impressive, the total commitments to procure LNG exceeds additional capacity with FID by 65 Mt per year. It is clear that the market believes that there needs to be more investment than what has already been decided through FID.

3. Authorization does not automatically translate into FID.

The US DOE is stressing that authorized US LNG projects amount to 350 Mt of capacity which is more than three times the current US export capacity of around 100 Mt per year. This argument is used as the basis to explain that the pause would not affect the LNG supply.
This point requires further scrutiny. The 350 Mt of capacity with authorization includes 100 Mt under operation, 50 Mt through Mexico’s LNG facility and 80 Mt under construction with FID. About 120~130 Mt of projects with authorization are still waiting for FID.
Out of these 120~130 Mt of projects (authorized but pre-FID), 100 Mt are still searching for off-takers. More than 90 Mt of projects may not even be able to start within the time limit or deadline of the authorization and would require an extension of the authorization. Even though DOE says those extension applications will be reviewed during the pause, the question is whether a timely extension will be granted. A close look at reality shows that authorization does not automatically translate into FID and the scale of projects with authorization does not necessarily ensure a sufficient supply.

4. Commitment to procure 30 Mt of US LNG has not yet received authorization

The 75 Mt of global LNG procurement commitment for 2022 and 2023, as described above, includes a total of 30 Mt of US LNG projects that have not yet received authorization. These projects are directly affected by the pause. It would be a serious mistake to assume that LNG projects will not be affected because so much capacity has already been authorized. Authorization should not be confused with commitment to procure or FID.

5. The pause disrupts the business activities of many market players.

I recognize that there are some who argue that the pause is not a permanent suspension of authorization and should not affect the business activities significantly.
Even if we assume that the pause is just for a few months before the project reviews could proceed, the business activities cannot avoid being affected. The pause will certainly result in delays and the various activities and opportunity costs that would be incurred due to the delays will not be insignificant. The cost recovery period will be prolonged.
What is even more serious is the rising uncertainty. There is no assurance for the period of the pause and for the smooth authorization of the pending projects after the pause. There is an increased risk that the projects may not materialize. Players may have to start considering projects in other regions as part of their contingency plan. The uncertainty is damaging for LNG projects which are very expensive and long term.

6. Uncertainty about the future role of the US as the largest LNG exporter

Eight years ago, the US started new LNG export from the lower 48, thanks to the shale gas revolution. The US LNG has supported the world’s economic growth, especially in Asia, and it has also enhanced the flexibility of the global LNG market. More recently, the US LNG has also helped the European countries address the potential shortage of gas triggered by Russia’s invasion of Ukraine. The US is now the largest exporter of LNG, surpassing Qatar and Australia.
As the world expects a steady demand of LNG to support economic growth and CO2 emission reductions, especially in Asia, and as the world attempts to secure alternative sources to the Russian gas, the US is considered as the primary candidate to supply LNG globally. In fact, in 2022, out of the 75 Mt of LNG that was newly committed globally to be procured for the long term, 60 Mt of LNG was to be exported from the US. The US is considered as a very important player with the role of supplying LNG to the world.
But the decision to pause the authorization process is casting uncertainties to this view. The prospect of changing the policy will regrettably erode the trust of the market players that the US is a reliable source of LNG supply and a stable/secured destination for investment. This is unfortunate not only for the US but also for those countries and players who have placed high expectations for the US to supply LNG to the world.

7. Inconsistency with the policy to reduce dependence on Russia

The timing of the decision came at a very unfortunate moment. After two years of war in Ukraine, the West is trying to shore up its support for Ukraine facing difficulties in the front line and the G7 members, led by the US, have been strengthening their sanctions against Russia. The need to reduce the world’s dependence on Russian energy is stronger than ever before.
But to reduce the dependence on Russian energy, alternatives are necessary. While renewable energies can be helpful, they require long lead time to replace conventional energies. In the meantime, alternative sources of energy are essential and for the reasons described above, alternative sourcing of LNG is particularly important with the US considered to be the leading candidate for providing it.
There is a fundamental inconsistency between the policy to reduce dependence on Russia and the decision to pause the authorization of LNG export. Although the pause may eventually result in delays of only several months, it is casting a great deal of uncertainty. The pause is sending confusing messages to allies who are willing to stand together against President Putin for his aggression and to reduce their dependence on Russia.

8. The need to incorporate concerns of allies, LNG users and market players

Some of my contacts in the US have explained that the pause was decided to deal with the domestic politics in the upcoming presidential election year. While I do understand the reality of domestic politics, this issue is much broader than election year politics.
I understand that during the pause a review process has been initiated to assess the future direction. In this review process, I strongly hope that the concerns of allies, LNG users and market players in the world will be fully incorporated.
The pause has already affected business activities and cast uncertainties about the future. I sincerely hope that the conclusion from the review process will help ensure a sufficient supply of global LNG in the mid- to long-term, help remove uncertainties about the future role of the US as the leading supplier of LNG and help develop alternative supplies to reduce dependence on Russian gas.
I also hope that the pause could end in a very timely manner to resume the authorization process and minimize the disruption caused to business activities and mitigate uncertainties as soon as possible.
The decision will have substantial impact beyond domestic politics during the election year. In the mid- to long-term, the decision will impact the global LNG supply that is required to support the world’s economic growth and CO2 reduction, and will affect various players in the market who have been investing in the US. The decision can unfortunately impede the efforts by allies to diversify away from Russian energy.
I sincerely hope that the review will fully take these legitimate concerns into consideration.

I would like to conclude this message by introducing the 14th IEEJ Webinars for the World to be held on March 26th. In this webinar, IEEJ will present a short-term LNG market outlook. In addition to the market outlook, this special edition’s topic will be covered. Please feel free to click the hyperlink below to register.

The 14th IEEJ Webinar for the World
1.Date/Time: March 26th, 08:00-08:45PM ET/07:00-07:45PM CT/05:00-05:45PM PT
2. Webinar App.：Zoom
3. Agenda：“LNG Market Outlook in Light of Recent Developments including Pause on Pending Approvals of LNG Exports from the United States”
4. Registration: https://us02web.zoom.us/webinar/register/WN_PTnuHs8ESz2D_vGA3p_TyA