Why Countries Are Pouring Billions into Liquefied Natural Gas

Every day, enough natural gas to power all of Germany's 41 million homes came through these pipes. Laying 3,000 feet below the Baltic Sea, a string of 1-inch steel-skinned pipes transported natural gas at 6 miles per hour from the north shore of Russia to the sleepy town of Lubbin, Germany, the European end of the Nord Stream pipeline.

From here, smaller pipes pushed natural gas out to the rest of the country, powering its factories, homes, and power plants, until—

Europe's energy crisis is deepening.

Russia has shut off natural gas flows to Germany, now indefinitely.

The Nord Stream pipeline shut down.

It is day 2 now of the Nord Stream 1 pipeline shutdown.

Practically overnight, this critical flow of natural gas from Russia came to an abrupt halt. The aftermath of this choice is now clear: many countries around the world were left to scramble for an immediate alternative and a long-term solution.

You see, natural gas isn't something we just use to heat our homes, cook food, or boil water. It's much more than that. Its prices can fluctuate wildly based on just one single event. Because natural gas is the primary fuel that generates our electricity, there's a good chance you're watching this on a device powered by natural gas.

In the United States alone, 40% of our electricity comes from burning natural gas. But it wasn't always this way. Let's take a step back. We used to just burn natural gas to get rid of it, literally burn it off as it came out of the ground.

This is called flaring. Because we didn't know what else to do with it. We saw it as a nuisance that tended to show up when oil was being pulled out of the ground. Of course, we knew natural gas was useful.

The question was how to move it from the middle of an oil field to somewhere that could convert it into electricity. Natural gas, which is 100 times less energy-dense than oil, just wants to escape into the breeze. So in order to be usable, we needed to move massive quantities of it through pipes.

However, pipelines are extremely hard to build. They require input from lots of stakeholders, long-term contracts, financing, building expertise, and lots of land. But just after World War II, we got to building, and now there are pipelines that crisscross every continent.

In 2008, U.S. natural gas production increased rapidly by fracking, a process that breaks shale rock deep in the earth and allows pockets of natural gas to escape to the surface. This shale revolution catapulted the U.S. to 4th on list of countries with largest natural gas reserves.

But it could only be used by those who were connected to U.S. pipelines. So with a finite number of bidders and a surplus of natural gas, U.S. prices fell by 80% and stayed there. Household utility bills were relatively cheap.

Americans were getting natural gas at a fraction of the cost of Europe. This was a huge and mostly unacknowledged tailwind for the entire U.S. economy. But where there's a will, there's a way, and the U.S. sought to find a way to open up its supply to overseas neighbors.

But transporting natural gas is more complicated than what it is with crude oil. Remember, natural gas is not energy-dense compared to oil and requires massive amounts to be usable. So for it to be economical to ship, it needs to shrink a lot.

This is done at liquefaction terminals, where the gas is frozen at -260 degrees Fahrenheit to become liquid, or liquefied natural gas. And transported by ships designed specifically to move it, to special terminals called regasification facilities, where the LNG goes through a special set of tanks that can safely re-expand it into gas.

Only then can natural gas be moved inland, through, of course, more pipes. And so in 2016, finally, 8 years into the shale revolution and $18 billion into construction, the first U.S. LNG export terminal came online, the Sabine Pass LNG facility, effectively allowing the U.S.

to enter the global gas market. At first, the amount of gas that could leave the U.S. was tiny. But by 2022, the U.S. grew to be the largest exporter of LNG in the world. The price of natural gas rose in the U.S., along with growing capacity for LNG exports.

But then—

Vladimir Putin announcing late last night that military operations have begun inside of Ukraine.

Supply of natural gas from Russia quickly came into question. Russia announcing it will keep the Nord Stream pipeline shut down. The definitive answer was found a few months later.

Sabotage is thought to be behind three leaks in the Nord Stream natural gas pipelines.

This one moment permanently changed the European energy supply, forcing countries like Italy, Netherlands, and Germany to look elsewhere. Germany specifically did not have a single regasification terminal when this happened. Desperate for options, the German government fast-tracked permitting, and within 18 months, they had built three of these terminals, mainly for importing U.S.

LNG, a significant portion of which came from here, Freeport Gulf Coast in Texas. And the price of U.S. natural gas exploded, and U.S. energy bills went with it. I want to emphasize here that if the U.S. had zero ability to get LNG to Europe via ship, the price of U.S.

natural gas wouldn't have budged. And nothing can highlight this better than yet another explosion.

That LNG export facility we were just talking about, Freeport Gulf Coast, it exploded. That is video of it going up in flames. This wreaked havoc on the natural gas market practically overnight. See, this line is the price of European natural gas, and this line is the price of U.S.

natural gas, both before the Freeport LNG plant exploded. This spot is where Russia invaded Ukraine, causing a huge spike in the price of European natural gas. But also notice how U.S. natural gas begins a steady march higher with it.

European countries started buying whatever LNG cargoes they could from the United States to help their situation, continuously pushing the price up, untilright here, on the exact day when the Freeport LNG plant in Texas exploded. 20% of U.S. natural gas export capacity was destroyed in that explosion.

What Europe thought it could emergency import from the U.S. before the winter heating season went up in smoke, leaving Europe to fight over what was left on their continent. And their gas prices shot up tenfold. This drop in capacity might not seem like it should affect price that much, but when a company builds one of these terminals, they try to sell as much gas upfront as possible, using 20 years, sometimes even 40-year contracts.

So only what is left over after contracts are filled is what is available in real time. We call this real-time market the spot market. This Freeport Russia situation told us a lot about what to expect from U.S. natural gas in the future.

Once connected to the global market, U.S. natural gas prices are exposed to all the wild price fluctuations and events that happen around the world. Now imagine you're a country that has a natural gas pipeline coming in from Iran.

You look at what happened to Germany and you're like, "Oh, that could happen to me." It became more clear to countries everywhere that relying on pipelines to transport natural gas from other countries didn't guarantee energy security. And countries quickly settled on new priorities.

One, broaden options should something happen to their current natural gas supplies. Two, gain access to cheaper gas markets. Two of the countries best suited to help with these priorities were the United States and Australia, two island nations. So the order book for regasification terminals and LNG tankers boomed.

To put that in perspective, in 2017, there were 450 LNG tankers. By 2027, that number will double. Just in the next two years, 200 new LNG tankers will come online. The U.S. federal government appears to have noticed all of this activity and has realized just how tied the U.S.

is about to become to global gas prices, all of which are much higher than the U.S. In March of 2024, the president abruptly stopped giving out new permits for exporting LNG. The top-level reason cited was environmental, but items two and three are what most energy analysts believe to be the real reason: U.S.

prices and national security. In other words, more LNG exports might not be good for U.S. citizens, but new permits would just be the cherry on top of an already baked cake.

With permits that have already been issued, U.S. LNG export capacity is set to triple over the next three years. Seriously, triple. There are three downstream effects from this. One, all of this LNG export capacity encourages energy companies to develop natural gas fields in the U.S., providing true energy security for the country.

The U.S. does not need to worry about natural gas anymore. Two, U.S. natural gas prices, given where they currently are, are more likely to rise than to continue falling. They will at least become more volatile,right at a time when the amount of electricity we're expected to consume will go up.

Electric vehicles and now generative AI are big additions to electricity consumption. Three, governments around the world will have more options for securing natural gas supplies. The increased number of ships, liquefaction capacity, and regasification terminals mean there should be fewer instances where a country is full-out scrambling for gas before winter, or beholden to one country.

We haven't touched on renewables at all yet. And while they are becoming more prevalent, the issues around them are also becoming more well-known. Wind has to blow, sun has to shine. There's no real solution for storing excess solar or wind in large battery systems yet.

This could change in May, but in the intermediate term of, let's call it 10 years, natural gas power plants are here to stay. You can even see this in the U.S., where there are 48 new natural gas power plants proposed.

These are big investments that should be taken seriously. It's people deep inside the energy industry saying we're going to need natural gas for a long time. There are a few moments in history where you can say that changed everything.

But the Nord Stream explosion did just that. The industry that heats our homes and gives us electricity is, for better or worse, forever changed and won't go back.