US Hesitates to Invest Despite Surging Gas Demand

Long-term demand remains uncertain due to eco-friendly policies... Difficult to find investment destinations for facility construction

[Asia Economy Reporter Park Byung-hee] After the European Union (EU) signed a large-scale natural gas supply agreement with the United States to reduce its dependence on Russian gas, U.S. natural gas prices have surged. However, the U.S. energy industry forecasts that investments will not be properly made due to long-term demand uncertainties. For the time being, gas prices may remain high due to supply-demand imbalances, potentially fueling inflation.

According to Bloomberg News, current U.S. natural gas prices are at their highest since the 2008 global financial crisis. New York Mercantile Exchange (NYMEX) natural gas futures were $4.5 per MMBTU just before Russia's invasion of Ukraine, but on the 18th, prices broke through $8 per MMBTU during trading, reaching as high as $8.07. Paul Phillips, senior investment strategist at Uplift Energy Strategy, said, "Gas prices are somewhat wildly fluctuating."

U.S. natural gas futures prices have risen 24% this month alone, with a 90% increase so far this year. Bloomberg also reported that a large-scale contract trading July delivery natural gas futures at $10 was made on the 31st of last month, suggesting that gas prices could rise by about another 25% in the future.

Last month, the EU signed a contract with the U.S. to import 50 billion cubic meters (bcm) of liquefied natural gas (LNG) annually until 2030. This volume corresponds to about one-third of the natural gas the EU imported from Russia last year. In 2022, the EU imported 155 bcm of gas from Russia.

However, many LNG facility construction projects currently planned in the U.S. are struggling to find investors. This is due to the green policies aimed at phasing out fossil fuel use, which keep long-term gas demand uncertain, as well as rising raw material prices that have significantly increased LNG facility construction costs.

The current annual LNG production in the U.S. reaches 120 bcm. When three LNG facilities begin operations in 2025, production will increase by 70 bcm. Foreign media also report that another LNG facility construction plan with a capacity of 206 bcm has received federal government approval but is awaiting approval from investors.

The biggest factor causing hesitation for new investments is Europe's long-term transition to eco-friendly renewable energy. According to the energy plan proposed by the EU Commission at last month's EU summit, the Commission clearly states that it will expedite the transition to green energy while reducing dependence on Russian energy.

Nikos Tsafos, an LNG expert at the Center for Strategic and International Studies (CSIS), a think tank based in Washington, U.S., said, "Europe is currently a major LNG customer, but there is no certainty about how long this will last." The Biden administration in the U.S. is also based on green policies.

The significant rise in LNG facility construction costs is also a burden. LNG facilities inherently require high construction costs and take a long time to become profitable. Companies proceed with construction plans only after securing long-term contracts of at least 20 years or sales channels for about 80% of production volume. Michael Smith, CEO of Freeport LNG, said, "Steel prices have doubled over the past two years," adding, "It used to cost $500 million to build a 1 million ton LNG facility, but now it approaches $1 billion."

This content was produced with the assistance of AI translation services.