By Scott DiSavino and Curtis Williams

NEW YORK/HOUSTON (Reuters) – Demand for U.S. natural gas to produce liquefied natural gas (LNG) for export this year is heading for its first decline since the country began exporting the super-chilled fuel from the lower 48 states eight years ago.

The U.S. is the world's largest exporter of super-chilled gas and a key provider of gas to Europe following Russia's invasion of Ukraine. Natural gas prices remain relatively high in Europe, as the anticipated growth in U.S. output for 2024 has not occurred, leaving the continent preparing for another gas price shock due to colder winter weather depleting stocks.

Natural gas drillers have benefited from strong demand from LNG export plants, especially since sanctions on Russian gas have elevated European demand for U.S. LNG. Producers have linked some output to global LNG prices, meaning that a slowdown in gas flows to LNG export plants reduces their incentive to increase output.

Since 2016, when Cheniere Energy's Sabine Pass export plant in Louisiana shipped its first cargo, feedgas to the plants has increased every year, even during the 2020 lockdowns due to the COVID-19 pandemic.

LNG plant outages and delays in the construction of new plants have contributed to reduced demand this year, according to LSEG data.

With just 11 days left in 2024, gas flowing to the eight major U.S. LNG export plants decreased to an average of 13.0 billion cubic feet per day (bcfd) from an average of 13.1 bcfd in 2023. One billion cubic feet of gas can supply about 5 million U.S. homes for a day.

The annual decline in demand is projected despite the start of production at the first new LNG export facility since 2022, Venture Global LNG's 2.6-bcfd Plaquemines export plant in Louisiana, over the past week.

However, the industry anticipates this year's decline to be temporary, with U.S. LNG capacity expected to more than double over the next four years. New plants are expected to increase capacity from approximately 13.8 bcfd now to 17.8 bcfd next year, 20.3 bcfd in 2026, 22.0 bcfd in 2027, and 24.2 bcfd in 2028.

PLANT OUTAGES

Key factors in this year's decline in LNG feedgas demand include several outages at Freeport LNG's 2.1-bcfd plant in Texas. At least one of the plant's three liquefaction trains has shut down every month in 2024, except for October, with some outages lasting several weeks, according to LSEG data.

Freeport LNG is the second-largest U.S. LNG producer, but Venture Global's Plaquemines is projected to take second place once it is fully operational.

Numerous large LNG projects on the U.S. Gulf Coast have also encountered cost overruns due to labor shortages and supply chain challenges.

Venture Global's Plaquemines is over budget by $2.3 billion, although it remains on schedule. The 2.4-bcfd Golden Pass plant in Texas, co-owned by Exxon Mobil and QatarEnergy, is over budget by more than $2 billion and behind schedule.

Golden Pass was initially expected to begin producing its first LNG in 2024, but has been delayed until late 2025 following the bankruptcy of its main contractor, Zachry Holdings.

Forecasts predict feedgas supplies to U.S. export facilities will increase by an average of around 2 bcfd next year, suggesting a significant rebound, according to Alex Munton, director of global gas and LNG research at Rapidan Energy Group.

"We see only limited downside given tight global market conditions, with performance issues at Freeport being the primary risk," Munton stated.

The decline is primarily attributed to the U.S. being in a transitional phase between two generations of LNG build-out, commented Ira Joseph, an LNG market expert at Columbia University's Center on Global Energy Policy.

"We are optimistic about U.S. LNG and anticipate natural gas demand growth with significant increases expected over the next five years," Joseph added.

Despite the decline in LNG feedgas supplies, U.S. LNG exports are expected to rise slightly this year compared to 2023 due to enhanced efficiencies. Exports are projected to increase by 1% in 2024 after a 12% rise in 2023 and an average of 43% annually from 2018 to 2022, according to the U.S. Energy Information Administration's (EIA) latest Short Term Energy Outlook.

Faster growth is expected to resume next year as new projects commence, with projected gains of around 14% to an estimated 13.7 bcfd in 2025, according to EIA.