Stacey Morris, director of research at Alerian and Alerian Midstream Energy Dividend UCITS ETF comments on what the Ukraine war means for US energy
What are the near- and long-term implications for US liquefied natural gas (LNG) of the war in Ukraine? Benchmark Dutch natural gas prices have reached record highs in the wake of Russia’s invasion. Unlike oil, there are no strategic reserves for natural gas, and European inventories were already tight this winter. Admittedly, the 60-million-barrel strategic release announced last week did nothing to stave off higher oil prices, representing only 60% of what the world consumes in a day. While it will take time, Europe can reduce its dependency on Russian natural gas through the ongoing shift towards renewables and by purchasing LNG. To facilitate this, additional import capacity may be needed with Germany recently committing to the construction of two LNG import terminals.
The expectation for Europe to look increasingly to the US for LNG is strengthening the long-term outlook for US LNG projects, which benefits Cheniere and others developing projects. Tellurian (TELL), which expects to start construction on the Driftwood LNG project in April, has gained 53.7% from February 15 to March 3. Meanwhile, NextDecade (NEXT), which expects to reach final investment decision on Rio Grande LNG in 2H22, has gained 37.7% over the same period. European LNG customers should be motivated to sign up for long-term purchase agreements from US LNG facilities. While this directly benefits companies with LNG export capacity, it has implications for midstream broadly. In short, more LNG exports means more natural gas production for midstream companies to process and transport, requiring more infrastructure or greater utilization of existing assets (read more).
While the near-term impact of Russia’s invasion on energy commodity prices is readily apparent, the intermediate and long-term implications for the US energy landscape are less certain. Changes in how Europe sources natural gas should have positive long-term implications for US LNG exports with direct and indirect benefits for energy infrastructure. The extent to which US producers will accelerate production growth is less clear but could result in more volumes for energy infrastructure companies to handle."
