America has an abundance of low-cost natural gas. We have more gas than we can use, which is leading energy companies to develop liquefied natural gas (LNG) export terminals to ship the excess overseas where demand is robust. According to energy giant Shell(NYSE: SHEL), global LNG demand will rise by more than 50% by 2040.
That prediction bodes well for companies currently developing LNG export capacity in the U.S. While they recently faced a setback after the Biden Administration temporarily paused new approvals, Shell's forecasts suggest the global economy will need more U.S. LNG in the future.
Drilling down into Shell's forecast
Shell recently released its LNG outlook for 2024. The oil and gas company noted that global LNG trade reached 404 million tonnes last year, up about 2% from 2022. It expects global LNG demand to steadily increase over the next couple of decades, reaching more than 600 million tonnes by 2040.
A big driver is the expectation that China and other South Asia countries will increasingly switch from coal to natural gas to power their economies. Shell also expects Southeast Asian countries to use LNG to help power their economic growth engines.
This outlook suggests the world will need more LNG capacity:
Image source: Shell.
The first graph shows that the world will need additional LNG export capacity later this decade to meet the expected demand growth.
Waiting in the wings
Shell's forecast bodes well for companies developing LNG projects. Two notable LNG project developers seeking to capitalize on the growing need for LNG are Tellurian(NYSEMKT: TELL) and Energy Transfer(NYSE: ET).
Tellurian is currently working on Driftwood LNG. The first phase would have two liquefaction plants capable of producing 11 million tonnes of LNG per year. Tellurian has already started construction on the project.
However, it faces a huge obstacle. The small company doesn't have the funding it needs to develop Driftwood's estimated $14.5 billion price tag. It's currently seeking partners willing to fund at least half of the equity investment required to complete the project. It's also working to secure buyers for the LNG Driftwood would produce. Ideally, it would like a strategic partner to be an investor and customer of the LNG facility.
Energy Transfer has been working to convert a former LNG import facility to export for over a decade. Its Lake Charles LNG project would export 16.5 million metric tons of LNG per year. It's also seeking equity partners to help fund the development. It's reportedly in talks to bring Australia's Woodside Energy on board as an equity partner and customer. Unlike Tellurian's Driftwood LNG, Energy Transfer has already secured several customers for Lake Charles, including Shell.
However, while it's further along in the commercialization of the project, it has a major obstacle to overcome. The Department of Energy denied approval for an extension of its export license. That forced the company to start from scratch by seeking a new approval, which is now on pause because of the Biden administration's temporary suspension of new LNG project approvals.
The good news is that both companies have time to get the approvals and partners they need to build their projects since the global economy won't require more capacity until later this decade. However, they also need to continue making progress so that a rival project doesn't beat them to the finish line.
LNG demand continues to grow
Shell believes LNG demand will grow by more than 50% over the next two decades, which will outstrip current supply and capacity under development by the end of this decade. That suggests the energy industry will need to build more LNG export projects in the coming years, which bodes well for Tellurian and Energy Transfer. If they can overcome their current obstacles and develop their projects, it could give them lots of fuel to grow shareholder value in the coming years.
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Matt DiLallo has positions in Energy Transfer and Woodside Energy Group. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
