2022 Changed the Perception of Energy Security

2022 was a year when energy security reestablished its importance. Following the Russian invasion of Ukraine, Europe began to unwind its trading relationships with Russia. As a result, Europe has had to compensate for lower Russian natural gas imports through a combination of demand destruction and substantially higher liquefied natural gas (LNG) imports. Since Europe imported more LNG, the global LNG supply/demand balance shifted to being very short, and prices rose sharply. In August, the shutdown of the Nord Stream pipeline, which supplies gas to Europe from Russia, drove prices to a never-before-seen spike of $100/MMBtu in Europe, compared to the 2016-2020 average of $4.57/MMBtu.

Over the past decade, as the number of LNG projects and gas pipelines grew worldwide, most people believed that gas would be a globally reliable and relatively affordable energy source, thus reducing the risk of energy supply interruptions. The increasing supply of LNG from multiple sources, along with the rising linkage of LNG prices to the U.S. Henry Hub price, should have kept prices lower and more stable than the historical price basis of linking the gas price to crude oil prices. Against this backdrop, European Union (EU) countries focused on carbon emission reduction commitments. The EU began to plan for more intermittent renewables in their energy mix, based on being backed by a reliable and affordable natural gas capacity. As the supply of natural gas became a significant issue in 2022, these energy security policy flaws were exposed.

The realization that gas and LNG are still subject to Russian supply risks has opened the door for the continued development of renewable power generation projects, and improved energy storage, as well as for more coal and especially nuclear-supplied power. The year ahead may prove critical in setting the growth trajectory for gas and LNG, and we will no doubt see some major developments in the energy landscape as energy security priorities return.

Nuclear Renaissance (Again)

Back in 2010, there was a wave of interest in new nuclear plants to supply low-carbon electricity. This concept came to a crashing halt after the Fukushima incident in 2011. Now, nearly 12 years later, memories are fading, and the Japanese government is strongly pushing for nuclear plant restarts under the new Kishida administration. South Korea’s newly elected government has reversed the previous administration’s anti-nuclear position. South Korea may add 3 new nuclear power plants in the next two years, with an additional 2 plants proposed. The Netherlands has dusted off old plans and may add two new nuclear power plants by 2035, in addition to extending the operating life of the existing nuclear power plant at Borssele. The UK reaffirmed and strengthened its nuclear commitments by taking a 50% stake in the Sizewell C reactor project.

The reliability of nuclear power and its low carbon credentials make nuclear power an attractive option once the memory of incidents, such as Fukushima, Chernobyl, and Three Mile Island, fade away. In addition, safety procedures have been strengthened, increasing confidence in the ability to safely operate nuclear plants. In 2023, nuclear power may begin to gain ground at the expense of gas in the long-term energy mix. However, as new nuclear plants take a long time – potentially decades – to permit and construct, the percentage of nuclear power generation in the overall mix may fall due to older plant retirements, before rising again later in the decade as new plants are completed. 2023 may finally be the start of a nuclear power renaissance after the Fukushima incident derailed the last growth wave.

European Regas Terminals – an end to Russian gas imports to Europe by 2024?

New LNG regasification terminals in Europe made little progress in the past decade. This is partly due to the focus on pipeline supplies over LNG, as environmental challenges stopped the construction of several proposed terminals. The lack of new regasification capacity, combined with falling indigenous European production, meant that most of Europe did not have sufficient LNG import capacity to compensate for the loss of Russian gas.

After only adding new regas capacity amounting to 1% of European gas consumption in the past 5 years, six times more regas capacity might be added in 2023 than in the previous 5 years. This target is off to a promising start with the startup of Lubmin’s Floating Storage and Regasification Unit (FSRU) in Germany on January 9. With this additional capacity, most of it from new FSRUs, there may finally be sufficient LNG import capacity to replace all of Europe’s gas imports from Russia, thus making the ambition to be independent of Russian gas imports by 2024 a possibility.

US LNG Capacity – Freeport LNG to return to normal operations in 2023

In 2022, Sabine Pass Train 6 and Calcasieu Pass started commercial operations, adding about 14.5 MTPA (1.9 Bcf/D) of capacity. This brought the total U.S. LNG capacity in service to 86.8 MTPA (11.4 Bcf/D), or about 11% of U.S. total natural gas production. This year, no capacity additions are scheduled, although Calcasieu Pass will continue ramping up to full capacity. The next LNG plant to start up is likely to be Golden Pass. While the current plan is for the plant to start exports in 2024, commissioning might begin by the end of 2023.

We could also see Freeport LNG return to full capacity, after exports were disrupted due to a fire in June 2022. Freeport initially expected production to restart in November, and are now expecting the resumption of exports to happen in February 2023. The return of Freeport exports will restore 15 MTPA (2 Bcf/D) of capacity at a time when it is badly needed.

US LNG FIDs – Who will be next?

The race for the next wave of Final Investment Decisions (FIDs) continues after Plaquemines and Corpus Christi Stage 3 reached FID in 2022. Combined, these two projects should bring an additional 22 MTPA (2.9 Bcf/D) of capacity online in 2024-2025. Beyond this, there are more than 10 projects that have been proposed, not including additional export projects located on the West Coast of Mexico. Despite the current shortage of LNG volumes, not all of these projects will reach completion.

There is belief in the industry that there is still room for more FIDs in 2023; however, several challenges remain. For most projects, the most difficult hurdle to overcome is to secure long-term capacity offtake agreements to back the development of these projects. Although the short-term market looks very tight, the longer-term market for 10 to 20-year capacity contracts is much less clear. Uncertainty over long-term energy policies, an end to the Russia-Ukraine conflict, and the energy transition (especially in light of the 2022 gas supply shortages), are impediments to completing these deals. At the beginning of 2023, it is a real question as to how many, and which projects, will reach the FID finish line during 2023.

All-in-all, 2023 looks to be a highly significant year for the future of LNG, energy security, and the role of gas and nuclear power in the energy transition.