U.S. energy firms investing billions of dollars in hulking liquefied natural gas export terminals along the Gulf Coast have capitalized on an insatiable appetite for the fuel from Europe and fast-growing economies in Asia.
Now, the conflict in Iran has many of those customers vowing to go on a permanent diet.
As Asia and Europe reel from the energy disruption created by the war, countries there are scrambling to pivot away from imported fuels, throwing a wrench into the expansion plans of American energy companies and fossil fuels’ long-term outlook.
In countries where the power crunch is so dire that workweeks have been shortened, factories are closing and government rationing has been imposed, leaders are looking beyond just diversifying where they buy fuel to changing what fuels they use. Governments from Manila to Hanoi are leaning into alternatives that range from expanding coal power to endeavoring to build fleets of nuclear plants to increasing their fleets of electric vehicles, all in pursuit of cutting their foreign imports.
“The world has just been traumatized by the geopolitical risk of oil and gas,” said Jason Bordoff, director of the Center on Global Energy Policy at Columbia University. “It creates renewed momentum for countries to try to electrify what they can and reduce gas demand to the extent possible.”
The research firm Wood MacKenzie wrote in a report this week that if the disruption persists, it “could accelerate a structural shift in global energy systems,” leading countries to cut their consumption of imported oil and gas to half of current levels by 2050 — a steep drop compared to the firm’s prewar “baseline” forecast. The report notes such a shift would do little to slow climate change, as it includes an expansion of planet-warming coal generation.
The ceasefire the United States and Iran announced this week is unlikely to ease the anxieties of Asian and European countries that have been rattled by the energy crunch. Even if a lasting peace deal is reached, supply chains have been badly damaged and risks of future disruptions remain acute. Fuel deliveries will be constrained for months to come, even under the most rosy scenarios.
That has left nations determined to insulate themselves from future military conflicts or countries that wield their exports as an economic weapon, like the United States.
For American producers, the timing is awkward.
While existing LNG export terminals are running near full capacity, largely insulated by long-term contracts, the next wave of projects depends heavily on demand growth in precisely the countries that are reconsidering their commitment.
In some cases, Asian governments are intervening directly, forcing reductions in energy use to preserve limited supplies, and working to fast-track clean energy projects.
In the Philippines, officials are rushing to bring more than a gigawatt of solar capacity online within weeks while advancing a massive solar-and-battery installation designed to reduce reliance on gas-fired power. Vietnam has signed a deal to develop a new nuclear power plant, reviving a program it had abandoned years ago, while expanding offshore wind. Indonesia is accelerating a major hydropower project to power its industrial sector. It is also exploring small modular nuclear reactors as an alternative to gas plants.
Individually, none of these moves would be enough to displace large volumes of imported energy. Taken together, they point to a broader shift that could erode one of the central assumptions underpinning fossil fuel export growth by the U.S. and other oil and gas-rich nations.
“It is unequivocally clear that the sales pitch for LNG as a reliable, affordable fuel is quickly evaporating” said Sam Reynolds, a research lead at the nonprofit Institute for Energy Economics and Financial Analysis. “The rug has been pulled out completely from under the industry narrative.”
Over the last several weeks, big plans for expanded LNG infrastructure have been thrown into jeopardy in some countries.
The developer of a massive power plant in Vietnam that would burn LNG to produce enough electricity to fuel millions of homes has alerted that country’s government that it wants to scrap the costly project, according to Reuters. The company plans to redirect the spending toward renewable energy.
New Zealand’s plan to build an import terminal for gas — launched last year on the promise it would boost energy security — is now in question as leaders there reconsider whether it makes financial sense. “If it’s not an attractive commercial case, we won’t be doing it,” Prime Minister Christopher Luxon said last week on Radio New Zealand.
In South Korea, which is one of the world’s largest importers of LNG, President Lee Jae Myung late last month launched a campaign to speed up the country’s shift away from imported fossil fuels and toward more renewables, which includes aggressive targets for clean power projects.
China, long considered a robust and growing market for U.S. LNG, cut off its imports last year amid the two countries’ trade war. It has since boosted its domestic production. Even in the tight market, it has an overabundance of supply and is now reselling to other nations the fuel from U.S. shipments that China contracted before the trade war.
For U.S. developers, there is still booming demand for more gas in the short term as countries rush to backfill canceled shipments from the Middle East and lock into long-term contracts for existing capacity. But future projects — including several multibillion-dollar terminals proposed along the Gulf Coast — depend on securing new customers in developing Asian economies.
The last time the world made a decisive energy shift was after the oil embargo of the late 1970s: Oil demand declined for years as economies moved toward coal, nuclear power, natural gas and more fuel-efficient vehicles. But now there are not as many easy replacements for the imports, raising questions about how much demand for those commodities could actually diminish.
“In the 1970s there was low-hanging fruit to pluck,” said Bob McNally president of Rapidan Energy Group and an energy adviser in the George W. Bush administration. “Heavy fuel oil was being burned at that time for power generation. There were scalable, affordable substitutes. Everyone who had an oil burner said, ‘I am done.’ It permanently reduced demand for oil. I do not think we have that kind of low-hanging fruit available today.”
Coal power is expensive and dirty. Wind and solar need costly battery storage to run around the clock, as well as upgrades to power grid infrastructure. That leaves analysts hedging their bets on how much demand for fossil fuels from the U.S. and Middle East will actually decline.
Joseph Brusuelas, chief economist and principal at the consulting firm RSM US, is anticipating countries will aggressively pivot toward homegrown energy as they seek to shield themselves from a repeat of today’s economic trauma. But he said gas exports from the U.S. are still likely to boom for the foreseeable future. “Whatever apprehensions these countries may have, in many cases there is no alternative right now,” he said.
But at a time U.S. producers aim to dramatically increase the export of LNG for decades to come — with plans to build enough new multibillion dollar export terminals to more than double the amount of gas shipped abroad by 2029 — even fossil fuel executives are now questioning if demand into the future will be strong enough to support all their envisioned projects.
Some of them expressed those concerns during S&P Global’s recent CERAWeek conference of more than 10,000 energy executives in Houston.
Among the takeaways, S&P wrote in a public memo publishedlast Friday: “This latest shock to the global LNG supply could permanently change global consumption to other energy sources. … [S]hould regional public policies shift away from natural gas and toward coal or renewables, Asia LNG demand growth may not resurge even under sequentially lower natural gas prices.”
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