Thought Leadership

LNG Update

Client Updates

The LNG industry was not spared the turmoil that affected much of the global economy due to the COVID-19 pandemic.  Major themes for 2020 included a demand shock, which the industry worked through, a growing interest in low-carbon LNG, and a strong finish to the year through rising prices and even the launch of an LNG export project.

LNG SPA Force Majeure Claim Relating to COVID-19

The COVID-19 pandemic slowed global economic activity and lead to steep decline of natural-gas demand.  Despite this shock, the LNG industry proved remarkably resilient.  In the U.S., many LNG offtake agreements contained mechanisms that allowed for downward flexibility while ensuring necessary minimum revenue flows to the relevant LNG exports.  Where the LNG sale and purchase agreements (“LNG SPAs”) did not permit such downward flexibility, there were a number of force majeure claims.  Although few sellers acceded to these claims, reports are that the parties have largely worked through these issues as demand for LNG has increased and the market has begun to stabilize.

Growing Interest in “Low Carbon” and “Green” LNG

While LNG has long been regarded as a “bridge fuel” into a lower-carbon future, the natural gas industry has faced increased pressure from investors to expediate the achievement of climate change objectives and other ESG goals. In response, LNG industry participants have begun to look for ways to reduce or offset their carbon footprints.  This search has brought about much discussion of green LNG as a product within the LNG industry.

The “green” in green LNG can refer to reductions of greenhouse gas (“GHG”) emissions in the LNG production lifecycle, offsetting GHG emissions associated with a portion of or all of the LNG value chain, or the utilization of biogas or other low-carbon or carbon neutral sources of methane as the feedstock for the LNG. Companies can reduce GHG emissions in a number of ways, including reducing emissions from upstream and liquefaction facilities, using renewable energy to power their liquefaction facilities, and utilizing various carbon capture technologies.

Because the low-carbon LNG market is in its infancy, a limited number of “low-carbon” LNG transactions have occurred. Each of the transactions look slightly different. For example, Shell recently participated in the sale of carbon neutral LNG where they ensured that the amount of carbon dioxide associated with the production, delivery and use of the fuel had been removed from the atmosphere through a nature-based process or emission saved through avoided deforestation. Conversely, JERA recently used UN certified emissions reductions from an Indian renewable electricity projects to offset downstream emissions from the use of LNG.

Year End Rising Prices and Shortages

LNG markets are currently experiencing a rebound following the collapse in demand caused by the COVID-19 pandemic. At the end of 2020 and heading into 2021, we have seen an increase in LNG demand, fueled by growth in China, Japan, and South Asia. Further, colder weather in certain importing countries, combined with outages at major production hubs have pushed spot prices in Asia to the highest numbers seen since 2014. The demand for LNG is expected to grow at a rate faster than any other fossil fuel.

ECA LNG Final Investment Decision

While the circumstances of 2020 precipitated a slowdown of project activity in the LNG industry, one project took a final investment decision in 2020.  Sempra LNG and IEnova announced the launch of the $2 billion Energia Costa Azul LNG project in Baja California, Mexico (ECA LNG).  Phase 1 of the ECA LNG project will have a nameplate capacity of 3.25 million tonnes per annum.  Exports are expected to begin late 2024.

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