Explosion at Texas terminal injects uncertainty into global energy market

Last week’s explosion at Texas natural gas terminal Freeport LNG has injected further chaos into international energy markets as the U.S. has stepped up to replace Russian gas exports to Europe.  

Experts said Friday that while the facility is offline, it will likely keep about 1.33 billion cubic feet (bcf) of liquefied natural gas (LNG) per day off the market for the next three weeks.  

Before the explosion, it had a daily capacity of about 2 bcf. On Tuesday, the facility lengthened the forecasted shutdown period, saying it was aiming for a partial restart in 90 days, with full-service restoration not expected until late 2022.   

Freeport, which said no one was injured in the incident, has attributed the explosion to a fire caused by the rupture of an over-pressurized pipeline.  

This “will contribute to a possible tightening of the market as it coincides with some Asian and South American buyers coming to market for volumes,” said Eugene Kim, research director for American Gas at the energy consulting firm Wood Mackenzie.  

“Global gas prices, not surprisingly, settled higher Thursday. The disruption could support prices through summer if it continues.”  

The incident, which remains under investigation, comes at a pivotal moment for U.S. natural gas production in the international market.  

The European Union sanctioned Russia’s gas industry in response to the Russian invasion of Ukraine. As a result, European nations have grown increasingly reliant on the U.S. to make up the difference. And the EU’s final agreement on an embargo of Russian oil, reached in early June, is likely to further heighten the need.  

Natural gas prices plummeted Tuesday after the extension of the timeline. American natural gas dropped about 16 percent to $7.22 per million British thermal units. 

Meanwhile, European gas prices increased by about 21 percent.  

Before the invasion, Russia was the number three LNG exporter to Europe, after the U.S. and Qatar. While the U.S. was already the top exporter, the Biden administration in March announced a deal with the EU to step up exports to replace about one-third of those coming from Russia.   

Mike Sommers, president and CEO of the American Petroleum Institute, said on a press call Tuesday that even in the absence of the Freehold terminal, other LNG producers may be able to fill in the gap.  

“In the meantime, there are a lot of other companies that are coming online right now, like Venture Global and a couple of others as well,” Sommers said. “And we’re hopeful that they’ll be able to fill the need for more LNG than Europe is going to require, replace Russian natural gas coming into the country, into the continent of Europe.”  

However, American Petroleum Institute Senior Vice President of Policy, Economics and Regulatory Affairs Frank Macchiarola added that Freeport is “a significant location” for LNG production.  

“It’s about 17 to 18 percent of our current capacity, so that certainty is important in the tight market that we face right now,” he said.  

In a commentary after the explosion, energy analysis firm Rystad Energy noted that LNG exports from the Freeport facility were already down from 2 to 1.35 bcf by Friday morning, even before the shutdown impacted the numbers.  

Rystad analysts added that the explosion and resultant shutdown indicate the risk factors and unpredictability of the market.  

“Although Rystad Energy expects utilization rates in the US to stay close to 100%, any weather driven event or prolonged periods of maintenance always pose a risk that could cause plant downtime,” the commentary stated.  

“The explosion at Freeport LNG is one such example of unexpected events that could potentially cause reduced production and a loss in shipments in an already strapped market.”  

In a statement to The Hill, a Department of Energy spokesperson said the department is “monitoring the situation and we are grateful that there were no injuries or fatalities from this incident.”

“As one of many LNG exporters, we hope that Freeport can safely return to service as quickly as possible once the relevant safety agencies are satisfied,” the spokesperson added. “We expect all other U.S. LNG projects to continue to safely export close to their operational capacities for the remainder of the year and note that additional U.S. export capacity continues to come online as planned, including from the Calcasieu Pass project that began in March and is expected to be fully online later this year.”

Freeport sent about 85 of its total delivered volumes to Europe in April and 78 percent in May, a major increase from historical levels, according to Rystad. However, even when imports increased, the plant was only sending about 10 percent of Europe’s total imports, Rystad experts said.  

“Europe will feel the effects but should be able to offset the lost volumes with increases from other facilities in the US and other countries,” Emily McClain, Rystad’s vice president for North American Gas Markets, told The Hill in an email. “It is unlikely the plant will fully shut down, as this can have further negative impacts on the facility. This small volume is likely being circulated to maintain operations and can be sent to storage if necessary.”  

In the meantime, however, the loss of output from Freeport is likely to further constrain supply in a market where demand is already high from the Ukrainian conflict. American LNG exports have surged since 2016, a period when they went from nearly nonexistent to the U.S leading in exports.   

“The United States is exporting every molecule of natural gas we possibly can,” Samantha Gross, director of the Brookings Institution’s Energy Security and Climate Initiative, told The Hill in April. Demand was already high enough before the invasion of Ukraine that U.S. LNG production was nearly maxed out.  

“There’s not a ton of extra LNG capacity just sitting there waiting to supply Europe,” she said.   

–Updated on June 15 at 9:27 a.m.