In December, Russian troops bivouacked along the Ukraine border distracted global attention from a comparatively minor but related event in Sabine Pass, Louisiana. There, an LNG carrier leaving Cheniere Energy's newly expanded export facility nudged Europe incrementally closer to an alternate energy supply.
The change was enough for the U.S. to seize the title as the world's largest exporter of liquefied natural gas. It notched up the global supply of LNG, a crucial backstop as Europe scrambles to prepare for the chance of a conflict-disrupted supply.
Investors have remained riveted to the LNG space, watching LNG prices spike as Europe moves to outbid Asian markets for limited amounts of the seaborne fuel critical to power grids in Japan, South Korea and, increasingly, China. That, in turn, has trained a spotlight on leading LNG stocks. Those include Cheniere Energy and Bermuda-based Flex LNG. And others, like pipeline operators EQT and big oil companies led by Chevron, Exxon Mobil and Shell. Shares of Cheniere, Chevron, Exxon and Shell, also buoyed by rising oil prices, are all sitting at or near record highs.
The timeline for the Russia-Ukraine conflict is unclear. So is the likelihood of a Russian gas shutdown, and to what degree Europe may lock down sufficient alternative supplies. And while global liquefied natural gas exports are clearly part of the solution, an LNG export trade already running flat out is limited in its ability to ride to the rescue.
Russia-Ukraine Stress Raises LNG Demand
Overall, Europe gets about a third of its natural gas from Russia. About a quarter of that gas travels via pipelines routed through Ukraine. So, as the world uneasily watches President Vladimir Putin's troops loom, countries in the region are on the hunt for alternate sources of natural gas.
Washington warned the Kremlin that any invasion would bring swift and harsh economic sanctions. Most analysts contend that sanctions are likely to bypass Russia's energy sector.
Russia, however, could decide to shut off gas supplies, which would not be the first time it would weaponize its gas trade. Russia is already turning the screws on Europe, paring natural gas deliveries as diplomatic tensions spike.
Supplies through Poland to Germany, through the Russian Yamal-Europe pipeline, have largely been shut down since December. As of late January, Russian gas supplier Gazprom had cut flows of Russian gas through Ukraine to just a quarter of what they were in 2019, Citigroup estimated.
Gazprom's American depositary receipts fell 33% from early October to late January but have rebounded off lows. The issue remains up 37% vs. year-ago levels.
The Algeria/Spain Liquefied Natural Gas Connection
Europe faces other supply snags. Algeria is the third-largest source of natural gas for Europe, delivering about 18% of supplies. The bulk of that gas flowed through the subsea Maghreb — Europe pipeline between Morocco and Spain until early November. Then Algeria shut down the flow due to a dispute with Morocco.
Algeria has tried to make up the difference to Spain by increasing the flow through a smaller, alternate line into the country. It has boosted its LNG deliveries to the country, which is home to about a third of the LNG re-gasification capacity in Europe.
The liquefied natural gas shipments ease the energy hit taken by Spain, but they add further stress to an already tight global market.
While most natural gas comes to Spain from the south, half of Germany's supply comes from Russia. President Joe Biden amplified his warning to Russia on Feb. 7 that development of the controversial Nord Stream 2 pipeline, which stretches under the Baltic Sea and into Germany, would be halted if Russia invaded Ukraine.
Meanwhile, the U.K. receives about half of its natural gas from fields in the North and Irish seas. Another third is piped in from Norway, with much of the remainder shipped in as liquefied natural gas.
The U.K.'s energy regulator raised its price cap on home electric and heating bills 54% for April.
Europe's LNG Capacity
Russia, Algeria and Norway all send natural gas into Europe via pipelines. But any gas supplied from further abroad must arrive by sea. That involves a much more complex process.
Liquefied natural gas is natural gas that is piped into export facilities, where it is supercooled to -260°F. That converts it into liquid form, after which it is stored in cryogenic tanks. Companies like Flex LNG haul the fuel between continents in sophisticated LNG carriers, effectively massive refrigerated tanker ships.
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The frosty carriers require specialized crews, dock only at dedicated facilities and follow highly specific regulations. At their destination, the liquefaction process is reversed. The LNG is offloaded and turned back into a gas via a process called re-gasification.
Europe is in a good position to accept additional LNG flows. Recent expansions have boosted the region's re-gasification capacity. Various European locations, now sitting largely idle, could handle enough incoming LNG to replace two-thirds of piped in Russian imports, according to The Economist.
U.S. Takes Global LNG Export Lead
In the U.S., Cheniere is the leader in LNG production. It is rapidly rising to challenge the world's largest producer, Exxon's Qatargas partnership with Qatar Petroleum.
The U.S. shale gas boom that took off in 2004-05 has left the U.S. with some of the world's lowest natural gas prices. LNG is largely priced on global markets, and recent price spikes have created historical arbitrage opportunities for Cheniere and transporters like Flex LNG.
Investor expectations tied to those opportunities helped drive Cheniere Energy stock more than 76% higher over the past 12 months. The IBD Leaderboard stock is currently in a buy range above a 113.50 buy point.
Flex LNG shares have sailed 152% higher over the same period, even after pulling back from mid-January highs.
Pipeline operator EQT is up a more modest 36%, still easily outpacing the overall market.
In addition, Cheniere owns 49% of Cheniere Energy Partners. CQP, in turn, owns Sabine Pass, which is the largest U.S. export facility by a wide margin.
Cheniere expanded the Louisiana export facility, launched in 2016, to take advantage of the growing LNG markets. A sixth train, or liquefaction production unit, turned out its first export cargo in December.
Since the start of January, 50 ships have delivered LNG from the facility to Europe, about 70% of Cheniere's total output, according to comments made by Chief Executive Jack Fusco to Reuters.
Sabine Pass reportedly took in record gas flows of 5.1 billion cubic feet on Jan. 20 and 21, according to Bloomberg. One billion cubic feet of gas can supply one day's worth of gas to about five million U.S. homes. The site can produce 30 million metric tons per year of LNG, converting more than 4.7 billion cubic feet per day of natural gas into liquefied exports.
Cheniere's Calcasieu Pass export facility operates 18 trains, with total annual capacity of 12 million metric tons.
U.S. LNG Capacity Expands, Routes Shift
LNG is a recent U.S. export but a fast-growing one. Exports started in 2016 and, on an annual basis, the U.S. is on track this year to take the crown from Australia as the largest LNG-exporting country, according to the Energy Information Administration.
The U.S. has already boosted LNG supplies to Europe, with half of its shipments going to Europe in December vs. 37% earlier in the year, according to the agency. But U.S. LNG export capacity is nearing its limits.
"They can't really increase it much more because they're already running their facilities pretty much as hard as they can," said Ross Wyeno, a senior energy analyst at S&P Global Platts.
As the U.S. routes spot LNG to Europe, Washington has asked Qatar, the third-largest LNG exporter, to do the same. Australia is also considering shifting its shipments to help ease the crisis.
Qatar's energy minister Saad Sherida al-Kaabi said Doha would help allies, but that "the volume of gas needed by the EU cannot be replaced by anyone unilaterally, without disturbing supplies to other regions around the world."
Asian Vs. European Spot Market
The U.S. is the world's largest supplier of spot, or flexible, LNG, according to Wyeno. That is thanks to export contracts that allow for destination flexibility.
Normally Asia receives the majority of global LNG spot cargoes because it is the premium-priced spot market during the winter. Japan and South Korea have little domestic natgas production and storage capacity and must import large quantities of LNG.
But now, "Western Europe has moved into a premium pricing position, comparative to Northeast Asia, in order to attract these spot cargoes," Wyeno said. "And we're seeing a major reorientation of U.S. spot cargoes from Northeast Asia, to Northwestern Europe or to Europe more generally speaking, which is not common for the midwinter period."
The weather has just as big of an impact on energy demand as geopolitics. A warmer December in northern Asia lowered the region's natural gas demand, freeing up spot shipments to voyage to Europe. A cold spell, however, has recently descended on South Korea and Japan.
Even before Russia-Ukraine tensions ramped up, competition for LNG shipments sent spot prices in Asia from $11.60 per million metric British thermal unit in December 2020 to $35.60 for October.
The unusual flows of spot liquefied natural gas are expected to ease up in the spring and summer. In a Feb. 1 note, Goldman Sachs analysts projected Asian bids for spot LNG shipments would increase this summer, leading to a "significant reduction" in European imports.
Natgas Stocks, Price Outlook Uncertain
China also must import LNG to keep the lights on. Last year it overtook Japan as the world's largest LNG importer. The U.S. is the second-largest supplier for China's fix, according to data from Kpler LNG, even as tensions between Washington and Beijing simmer.
But ahead of the Beijing Winter Olympic Games, Russia's Putin brokered a 30-year deal with Chinese President Xi Jinping to supply natgas to China via a new pipeline, signaling a strengthened alliance. The deal could buffer Gazprom revenue in the event of lost exports to Europe. Revenues from oil and gas sales fund a reported 40% of Russia's federal budget.
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In its quarterly report in January, the International Energy Agency estimated European and Asian spot prices would fall from current record highs in the second half of the year. But they will remain above historical averages.
"Even if there is not any disruption of Russian flows to Europe, prices would inevitably jump quite substantially to factor in the risk premium of a possible disruption" if Russia invaded Ukraine, said Massimo Di Odoardo, vice president of global gas and liquefied natural gas research at energy consultancy Wood Mackenzie.
LNG Stocks, Price Outlook
Global LNG export growth in 2022 will largely come from North America, according to the IEA. But current high prices will have little near-term impact on LNG capacity.
While natural gas production can be ramped up in relatively short periods, increasing LNG export capacity takes years. Companies must receive regulatory approvals and then spend millions of dollars to build out facilities.
S&P's Wyeno said LNG facilities approved in 2018-19, like the Sabine Pass unit, are just starting to come online now. It will take until 2024 or 2025 for U.S. export capacity to increase in response to current prices. (Qatar could retake the LNG lead from the U.S. in 2025, as projects underway there now are completed.)
In addition, as the weather thaws and winter warms into spring, natgas and liquefied natural gas prices should moderate. Di Odoardo said the situation in Europe is already less severe than it was in December and January.
"Once you start to lose that trajectory in rising prices, these energy stocks are gonna lose their mojo," said Edward Moya at foreign exchange broker Oanda.
But he still expects one last "really good surge" in prices as recent cold snaps in Europe and in Texas combine with geopolitics and global inflation to give the industry — and LNG stocks — another boost.
Follow Gillian Rich on Twitter for energy news and more.
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