A new breed of investors is expanding into liquefied natural gas, one of the world’s hottest commodities, offering billions of dollars for new projects and squeezing out established players.
With billions of dollars at their disposal and strong government backing, national oil companies – primarily from the Middle East – have been splurging on global LNG production, with capacity set to nearly double in the next ten years.
Lured by the ballooning profits of current industry leaders such as Shell, they’re making bold moves, as Abu Dhabi’s US$19 billion (S$24 billion) offer for Australian LNG producer Santos this week indicated. Saudi Aramco has just positioned itself among the world’s biggest LNG players to supply energy-hungry Egypt, and QatarEnergy, a major supplier for years, is proceeding with developing its export project in Texas.
While still overshadowed by oil in terms of its importance in the global energy system, LNG is seeing faster growth and more sustained demand, thanks to its role as a transition fuel backing up renewables. But many projects have been held back by delays and cost overruns, and are in need of cash to make it across the finish line. For Gulf countries, it offers a chance to pursue more international heft in energy, finance and geopolitics, as well as diversify their oil-focused economies.
“LNG seems to be still the best bet across all different hydrocarbon commodities,” said Mr Ogan Kose, a managing director at Accenture. Margins from investing in and trading LNG are “almost unheard of in any other hydrocarbon commodity”.
The investment push by Abu Dhabi National Oil, Aramco and QatarEnergy is joined by Bahrain, Kuwait and Oman looking to expand in LNG trading, which has been a successful venture for involved companies in recent years. Some of those countries also currently depend on fuel imports and are therefore looking to expand production for domestic use.
The trend is not limited to the Middle East, though it’s where most recent activity has come from. Petroliam Nasional Bhd, Malaysia’s state-owned oil and gas company, and other South-east Asian companies are looking beyond their borders as domestic LNG production is declining.
Adnoc, Aramco, QatarEnergy and Petronas didn’t immediately respond to requests for comment.
For the US LNG developers and oil majors that have so far dominated the space, it’s become more challenging to get multibillion-dollar projects across the finish line as climate goals restrict some buyers’ ability to sign decades-long supply deals.
Many projects are suffering from time and cost overruns, and are subject to operational risks as well as volatile trading. Middle Eastern competitors have significantly more firepower, with Adnoc’s international gas and chemicals investment unit XRG boasting an enterprise value of over US$80 billion.
“One of the issues on the market has been the issue of finding capital,” said Mr Massimo di Odoardo, a vice-president at WoodMackenzie in London. “Increasingly you are seeing more private capital helping those projects to cross the line,” with part of that coming directly from national oil companies.
As many of these Middle Eastern firms will also act as LNG offtakers before selling the cargoes onwards, there’s less need for project developers to sign deals directly with buyers in order to reach a final investment decision.
Some players, such as QatarEnergy, are already in a stronger position as they have LNG buyers lined up after nearly three decades of exporting domestic fuel, as well as access to import capacity in European terminals.
“Oil companies that have in the past produced oil at home have realised that they need to do gas internationally,” said Mr Christopher Strong, a partner for energy transactions and projects at law firm Vinson & Elkins LLP.
Still, the spending push is not without risks, primarily as buyers could become more difficult to find as countries progress towards net zero targets, even if the additional supply helps to lower prices. The International Energy Agency estimates gas demand will peak by 2030, and there’s a risk that LNG supply will outstrip consumption.
In addition, violence in the Middle East during the past week has highlighted the vulnerable nature of trading fuel across long distances and the gas market’s exposure to sudden shifts in geopolitics.
A major focus for most of the involved firms – including QatarEnergy, Aramco and Adnoc – has been on building trading desks early. Trading is a key element to support growing LNG ambitions outside their home countries, as it allows them to find the best priced markets for rising supply, Accenture’s Mr Kose said.
A greater pool of suppliers should also benefit buyers of LNG, according to Mr di Odoardo, as it will help boost competition and optionality. Fluctuating demand and persistently high prices have led some tankers to hold on to partial cargoes, posing a challenge for traditional commodity traders. A key question is how easy it will be to find these buyers once more projects come online.
“The risk is a market that has already built quite a bit of LNG and is looking to build a bit more,” Mr di Odoardo said. “And the question mark is how much additional demand will emerge?” BLOOMBERG
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