LNG

The Alaska LNG project has emerged as South Korea’s likely first U.S. investment under a $200 billion trade deal, with Seoul signalling a possible announcement in late August or early September.

Costly investment programmes to facilitate Europe’s green energy transition are weakening the credit metrics of regulated gas and electricity networks. Moody’s Ratings hence changed the outlook of European TSOs to ‘negative’ from ‘stable’.

Transparent and established regulation still supports credit quality, but regulators struggle to facilitate infrastructure investment at an affordable cost. “If shareholders consider allowed returns or cost recovery mechanisms to be insufficient, then support will fall short of maintaining credit quality,” analysts commented.

Europe's power grids and gas network operators are hard pressed to handle the substantial growth in load-related Capex required, and planned investments, said Phil Cope, senior credit officer at Moody’s Ratings.“Pressing demands arise from the need to grid-connect more renewables and accommodate rising volumes of electricity demand other sectors, e.g. heating (heat pumps), transport (electric vehicles), and data centres, where demands for capacity will intensify to support the growth in AI,” he explained.

Capital spending has grown significantly in recent years: Five-year Capex guidance for many networks – especially electricity transmission – is at least double that of five years ago. The current regulatory framework allows many gas and power network operators to recover investment over 20 to 50 years. But analysts warn the surge in Capex dwarfs the rise to network companies’ operating cash flow and this, in turn, weakens cash-flow based credit metrics.

TenneT, the TSO handling the power grid in the Netherlands and part of Germany, has seen its five-year Capex guidance soar from €40 billion in 2023 to over €62 billion this year – with no end in sight. The Belgian/German network operator Elia, meanwhile, has seen the same Capex metric almost double from around €16 billion to €30 billion over the same period.

The French and Spanish utilities ENGIE and Iberdrola have either increased or stated their intention to rise their exposure to regulated electricity networks. Moody’s reckons this is because they aim to improve their risk profile by benefitting from the “growth in higher quality earnings” as these networks carry out their investment programs. Others, notably SSE of Scotland and the German regional utility EnBW have reduced their exposure by selling their minority stakes in their power transmission businesses in recent years.

Financial close on US LNG export projects could be at risk by a stable peace deal between Russian and Ukraine, analysts warn. Europe would subsequently rush to accommodate more Russian pipeline gas imports of up to 50 bcm per year, while the lifting of sanctions on Russian LNG would raise exports to 12 mtpa – undermining the economics of US LNG.

In the event of a ‘stable peace’, Wood Mackenzie expects European gas prices at the TTF trading hub to fall well below the US$8-9 per mmbtu that are forecast for 2028/29.

A collapse in TTF prices, in return, would lead to years of US LNG capacity underutilisation and delays to several expected FIDs on well-advanced LNG export projects.

US LNG projects may become collateral damage

As a knock effect, Henry Hub gas prices would plunge since the lower-than-expected LNG exports create a length in gas supply in the United States. This oversupply supports greater gas-burn for power generation and may well reduce wholesale electricity prices to the benefit of American households and industries.

But Wood Mac’s vice president of Gas and LNG research, Massimo Di-Odoardo warned that with an average of 25 mtpa of liquefaction capacity in the United States and Mexico at risk of underutilisation over the next five years, “US LNG would be the collateral damage,”

More shipments needed in event of no peace

On the other hand, a failure to reach an agreement would results in "stronger for longer" gas prices as even less Russian supply comes to market.

“A continuation of the war could see the EU double down on sanctions, pushing even harder to achieve its ambition of independence from Russian energy - banning LNG imports from the Yamal LNG project and the 15 bcm a year TurkStream pipeline,” Di-Odoardo noted.

This scenario strengthens the need for more LNG supply, with US and Qatar capitalising on more investment opportunities.

"The outcome of ongoing negotiations for a peace agreement between Russia and Ukraine remains highly uncertain,” he said, concluding: “All scenarios are possible, including potential combinations of them, however, recent development suggest a peace agreement where the US and EU take different approaches to lifting sanctions, appears more likely.”