Four years ago, Russia’s invasion of Ukraine proved a driving factor in the ongoing massive expansion of US LNG infrastructure, as international buyers of LNG came to appreciate the value – both economic and geopolitical – of US gas supply.

The latest war in Iran, which started at the end of February, and Iran’s closure of the Strait of Hormuz may further strengthen the case for investing in US LNG, sector professionals say, while at the same time boosting the case for geographical diversification. While US domestic politics may frustrate some investors and LNG buyers, the conflict has brought new appreciation to a US gas supply with some resistance to geopolitical volatility.

“Everyone has heard about the concept of affordable, reliable, and secure,” Daniel Kalma, Chief Operating Officer at Woodside Energy, said last month during a panel at the CERAWeek by S&P Global event in Houston. “I think it underlines the third point.”

The impact will be determined in part by when the war concludes, whether a nascent ceasefire holds, and how durable a post-conflict peace or ceasefire appears. But barring an outcome in which investors emerge from the conflict confident of the strait’s long-term security – unlikely as of press time – the case for US LNG will be stronger than it was two months ago.

“It’s a new world,” said one investor. “A molecule coming out of Qatar, now it’s a second-tier molecule versus the US or Canada. US and Canadian gas is now on a tier up because you are not constrained by that 20-mileish region where either country can shoot at it.”

Advantage America

The US is not the only LNG exporter that may see more interest than it did on 27 February.

“The conflict may play into the hands of new supplier markets, particularly if buyers start looking for geographical diversification. Immediately coming to my mind is the planned LNG liquefaction projects in South America and east Africa,” Alex Kerr, a partner at Baker Botts, tells this publication. “For example, the projects in Argentina may be well-positioned, especially given they’re relatively advanced and are moving quite fast.”

Mozambique, Tanzania, Argentina, and Canada will also draw more interest, especially among buyers weary of American domestic political inconsistency, several sector professionals indicated.

But when it comes to immunity to geopolitical shocks, the US is in some ways in a league of its own.

“I am shocked, as everybody is, that Qatar is offline,” Freeport LNG Chairman and CEO Michael Smith said at CERAWeek. “This is not something that could happen around the United States ports with the United States military.”

In 2022, it was Europe that was left scrambling following the Russian invasion. The current conflict has had a greater impact on Asian markets, S&P Global’s Shankari Srinivasan said during CERAWeek.
“The mood in Asia, the mood across the Indo-Pacific, is: ‘Diversify your supply,’” Steven Kobos, president and CEO of Excelerate Energy, said on the same panel. “Everyone is thinking about US LNG. It was somewhat difficult to make that case for us before.”

“A key lesson that the industry can learn from [the conflict] is that geographical diversification is paramount, particularly for downstream markets reliant on imports,” Kerr adds. “There can be a temptation for people to think they can see around the corner and predict the future, and recent major events, including this conflict, show that the market needs to plan for the unexpected, and geographical diversification should be part of that.”

Project impacts

So far, there are few signs that the conflict will spark a wave of new LNG projects, or that paused projects like Energy Transfer’s Lake Charles LNG will restart due to the war. But for projects approaching final investment decision (FID) – projects like Commonwealth LNG, Delfin LNG, and Texas LNG – as well as the next wave after that, the situation will put wind in their sails.

“Before this happening, there was a lot of talk about how we are entering a period of supply glut,” said one banker active in the LNG space. “I don’t know that that’s completely thrown out the window, but it’s somewhat thrown out the window.”

The disruption also reminds both buyers and sellers of LNG of the need for redundancy given the threat of disruption, he adds.

The US and Qatar were previously seen as two legs of a three-legged stool, with the third being Australia, Brian Cain, chief corporate affairs officer for Caturus, the developer of the Commonwealth LNG project backed by Kimmeridge and Mubadala Energy, said at CERAWeek. With Qatar offline and Australia facing higher production costs, the US has emerged as a “one-legged stool,” according to Cain.

“For those of us who are pre-FID, we are definitely seeing renewed and intensified focus from offtakers and financers,” Cain says.

One project potentially poised to benefit from Asia’s increasing focus on diversification is Glenfarne Group’s Alaska LNG, an LNG liquefaction facility in Nikiski connected to an 807-mile pipeline that will process, store, and transport up to 20 million tons of LNG per year, according to Glenfarne CEO Brendan Duval.

“When we bought into the project a year ago, we took a view on what it was going to cost, and that’s panned out well within the economics,” Duval said at CERAWeek. “It just happens to be lucky—lucky for the project, not lucky for the world—that there’s the disruption of supply.”

“There’s nowhere else in the world that has US LNG that’s got a straight shot [to Asia], that’s not through any canal,” he added.

The focus on diversification may abate somewhat if the conflict ends, the strait is re-opened, and Qatari LNG is brought back online. Still, the threat of future conflict or another round of fighting will remain, with the industry now keenly aware of the risk of depending on molecules passing through the narrow strait in a volatile region.

Ignoring the risks?

Outside of LNG, the impacts of the war seem not to be top of mind in the infrastructure and energy space.

“It’s not a topic of discussion in any of the deals we’re working on,” said one energy-focused investor. “I would draw a contrast with that to the tariffs,” which dominated deal conversations for a period.

Another investor noted that a long-term capital cycle plays out over years, while the market views the Iran conflict, at least for now, as a short-term disruption.

“We’re paying attention to it but there’s been limited impact to date. The biggest impact is on the capital markets and on liquidity in the markets,” says a third investor, focused on digital infrastructure. “It’s leading to some instability in the market, as sponsors ask: ‘Will banks lend?’ They’re aware and cognizant of it but, if they don’t invest in that region’s infrastructure directly, they’re not overly affected.”

Is the market unduly sanguine? One renewables investor said he believes too many in his sector appear “blissfully unaware” of the impact elevated oil and gas prices would have on project costs. He posits that if the price of oil continues to surge towards USD 200 a barrel, it could lead to a 15-20% jump in EPC costs.

“I don’t think people realize how much oil is imbedded into the price of their good that they are selling,” he said, speaking before the two-week ceasefire announced 7 April.

This makes signing PPAs a risky proposition, since a protracted conflict could upend a project’s economics and cut significantly into returns.

On the other hand, geopolitical uncertainty also boosts the case for renewables, since, once built, renewable generation assets are self-sufficient.

“If you have an abundant renewable resource, and you have the ability to lean into that a little bit, it would make sense, from an energy security standpoint, that you would want to develop more,” Rebecca Sherlock, portfolio manager, global listed infrastructure at First Sentier Investors, tells this publication. “There has definitely been a greater focus on energy security, and countries wanting to be less reliant on third parties for the energy coming into their countries.”

Baker Botts’ Kerr also highlighted the prospect of renewed global interest in nuclear power as a result of the crisis, particularly in importing countries with high exposure to imported fossil fuels. Once nuclear plants are constructed and operating, they can provide a relatively secure and low-carbon baseload option, he says, pointing to how nuclear fuel can be secured and stockpiled far more easily than gas. “I think nuclear could do very well as a result of this, as importing countries look for ways to mitigate exposure to global fuel markets and shipping chokepoints,” he said.