ExxonMobil (XOM +3.11%) anticipates the world will face a shortfall of liquified natural gas (LNG) over the next few years. While there are adequate natural gas resources, especially in the U.S., there's not enough liquefaction capacity. That's because building LNG production and export facilities takes a lot of time and money.
That puts the integrated energy company in a strong position, as its LNG investments should pay off in the coming years. Here's why the company and its peers see a bright future for this fuel.
NYSE: XOM
Key Data Points
Exxon's strategy is about to pay big dividends
Russia's invasion of Ukraine upended the LNG market this year. Russia cut its natural gas supplies to Europe in response to sanctions, causing an energy crisis across the continent. European nations raced to lock up additional gas supplies by turning to the global LNG market.
The problem is that it's not easy to ship natural gas to global markets. It must be supercooled and turned into a liquid for transport on specialized ships. Those liquefaction facilities are expensive and take a long time to build.
Because of that, Exxon's CEO Darren Woods had this to say about LNG at a recent conference when surveying the global market: "You look around the world, and the balance is, the world will be short [of liquified natural gas] probably through 2026. That's how we're seeing that balance play out -- it just takes time to bring these very large, capital-intensive projects on stream."
Exxon is in an excellent position to capitalize on this opportunity. That's because, as Woods pointed out: "If you look at the pandemic, when everybody pulled back from their investments, we were investing in a very large LNG export terminal in the U.S. We never stopped that investment or slowed that investment down, which was fortunate, because now that we find ourselves in this very short world and the desperate needs of Europe, we're in a good position to bring that LNG terminal online and start to support the need for LNG in Europe."
Overall, LNG is a big part of Exxon's growth strategy. While it's already a global leader, with 23 million tons per year of capacity, it aims to grow that output to 27 million tons per year by 2027. It has joint ventures with QatarEnergy to build Golden Pass LNG in the U.S., with a 2024 start date, and a further development of Qatar's North Field East project that will come online in 2026. These investments will enable the company to help meet global demand while generating strong returns for investors.
Lots of growth still ahead
Those projects by Exxon are part of a wave of LNG facilities that should come online over the next few years to help bring supplies up to demand. However, the world will need a lot more LNG capacity in the future. According to an estimate by Shell, global LNG demand will grow to 700 million tons per year by 2040, up from 380 million tons last year.
Asia will drive the bulk of this growth, at 70% of the projected incremental demand. This outlook means that the industry will likely continue building new LNG export capacity.
Several projects are currently under development. For example, midstream giant Energy Transfer is progressing toward a final investment decision on its Lake Charles LNG project. It recently signed an LNG sales agreement with Shell to support the proposed export facility. It now has secured contracts for nearly 8 million tons of its expected 16.5 million ton capacity.
Energy Transfer could bring this project online as early as 2026 if it approves construction early next year. The company anticipates that Lake Charles would substantially boost its natural gas pipeline business as it transports gas to that export facility.
Meanwhile, oil giant ConocoPhillips has made several LNG-related moves this year. It signed a 20-year agreement for 5 million tons of LNG to support phase one of Sempra Energy's Port Arthur LNG project. It will also take a 30% equity interest in the $10.5 billion project that could start up in 2027.
Meanwhile, it's also partnering with QatarEnergy on an LNG project in Qatar. They recently agreed to sell some of that gas to Germany starting in 2026.
LNG's future looks bright
ExxonMobil doesn't believe there's enough LNG capacity to meet global energy needs over the next few years. Because of that, prices should remain high, positioning it to make big money on its LNG investments. Meanwhile, demand for that fuel should continue growing in the coming years, which bodes well for energy companies investing in LNG. These investments could fuel strong returns for their shareholders in the coming years. That's why investors should consider adding an energy stock with LNG-fueled upside to their portfolio.
