Banging the drum for gas
The Gas Exporting Countries Forum is backing the fuel to shake off its current malaise and enjoy future growth
Gas and LNG have somewhat lost their ‘golden age’ lustre in the last six months. Record low prices and a global economic contraction that threatens rosy demand projections have dealt body blows to the industry.
Speaking to Gas Exporting Countries Forum (GECF) secretary-general Yury Sentyurin, Petroleum Economist found him in a realistic mood about the challenges facing the fuel. But, perhaps unsurprisingly, he remained bullish for the future.
Does the GECF believe that the current global gas price slump is temporary?
Sentyurin: This year has brought numerous challenges—a ‘perfect storm’, you might say, for the global gas industry. Even before Covid-19, the market environment was not favourable, with LNG oversupply and high European storage inventories putting downward pressure on prices.
Q1 2020 added various demand-side challenges. First, a mild winter impacted demand for heating. Second, the Covid-19 outbreak and resulting lockdowns brought down energy demand globally; natural gas was not immune from this slide. In particular, the power generation and industrial sectors experienced steep contractions. As such, gas demand started lagging behind supply.
It was therefore no wonder that hub-based prices slumped, with indexes such as the TTF, NBP and Henry Hub falling to multi-year lows—to levels unimaginable just one year ago. However, we should clearly understand that the global gas trade is based on different price mechanisms, with hub-based pricing being only one of the mechanisms, representing just 34pc of global trade.
It is true that we have recently witnessed a continuing trend of increasing gas-on-gas pricing more generally, reaching 41pc of global LNG and 62pc of global pipeline gas trade in 2019. But the remainder is based on other price mechanisms, such as oil indexation. Many LNG and pipeline gas exporters continue to sell gas at oil-indexed prices. These contractual prices will be impacted by the low oil prices seen in Q1, but with a lag of several months. A slump of oil-indexed prices will not, though, be as steep as we might have expected back in March, because oil prices have rebounded slightly since then.
"The price environment is likely to improve, from an exporters’ perspective, by the beginning of the fourth quarter, as demand is boosted by the arrival of the northern hemisphere winter and the lifting of lockdown measures"
The pandemic has undermined all forecasts prior to this year. We may previously have expected the market to tighten and prices to rebound as quickly as 2021-23 as new liquefaction commissioning slowed and global demand continued to rise. All forecasts are now subject to systematic revisions, not least due to ongoing tightening and easing of lockdown measures around the world.
In addition to this uncertainty, the way governments and policymakers will react to competition between energy sources and different pathways towards energy transition will impact on the pace of gas demand growth and price recovery in different regions.
But the price environment is likely to improve, from an exporters’ perspective, by the beginning of the fourth quarter, as demand is boosted by the arrival of the northern hemisphere winter and the lifting of lockdown measures. This will be accompanied by shrinking supply due to cancellation of LNG cargoes, primarily from the US.
Some GECF members, such as Egypt, have had to reduce LNG exports in response to Covid-19 demand destruction. How soon does the GECF expect supply conditions to return to normal?
Sentyurin: LNG is a business like any other: it seeks to generate financial benefit to the exporting country. Egypt is very clear on the market and its strategy—it will not export at prices that bring a loss while having substantial domestic demand. Its energy minister, Tarek el-Molla, said earlier this year that Egypt is in discussions over long-term gas sales contracts aimed at securing what it considers a reasonable price, above $4.50/mn Btu.
Meanwhile, the Egyptian government aims to boost domestic demand in two main directions. The first is transportation—President Abdel-Fattah el-Sisi has announced that new cars, including taxi cabs and microbuses, will need to run on natural gas to receive a road licence. The policy is supported by low-interest funds provided by government-run banks to support consumers with gas conversion costs.
The second is households. The Egyptian government has been working to expanding its gas distribution network, with c.1mn households added between September 2019 and June 2020.
LNG supply has exceeded demand in recent months, with a negative price impact in the global markets. Global LNG supply growth will slow down to 3.7-5pc in 2020, assuming a loss of 5-10mn t of LNG supply compared with our pre-Covid forecast.
But we believe cargo cancellations will occur mostly from the US suppliers due to negative forward price spreads between European and Henry Hub prices for summer 2020. The GECF member countries are mostly low-cost gas and LNG producers; therefore, they are more resilient than higher-cost competitors to the current market conditions.
71mn t/yr – New LNG export capacity that took FID in 2019
Global LNG supply could resume 5-7pc growth in 2021, assuming the lost LNG cargoes return to the market next year. But, if oversupply lasts into 2021, we believe that the market will tighten between 2022 and 2024, driven by a supply growth slowdown just as demand returns to expanding at a healthy pace.
Further forward, the bulk of new LNG supply from facilities that took FID in 2018-19 are expected to come to market from 2025. This could result in another supply glut if demand does not increase sufficiently to absorb these new volumes.
Is there a risk that planned expansions to global LNG supply will be postponed or cancelled due to current tough market conditions?
Sentyurin: While acknowledging demand uncertainty, we believe most of any changes will be in the form of delays and postponement. All of our studies suggest that LNG demand growth will materialise to a significant extent for a variety of reasons, not least the benefits to the climate of a cleaner fuel.
Around 71mn t/yr of new LNG export capacity took FID last year—far surpassing 2005’s previous record of c.45mn t/yr of capacity reaching that milestone. Although energy prices declined in 2019, the number and size of new projects reaching FID increased.
We also witnessed a shift in the project model, with more developers taking FID without long-term contracts. An equity offtake model, backed by strong industry players, supported project developments.
Before Covid-19, almost 200mn t/yr of new liquefaction capacity, particularly in the US, was targeting FID in 2020. Around 115mn t/yr of this has now been postponed to 2021 or beyond.
In addition to the pandemic’s demand and price hit, travel restrictions impacted the signing of the long-term LNG SPAs needed for project finance, further contributing to postponements. But there is still c.71mn t/yr of LNG capacity targeted for sanction this year, including the first phase of Qatar’s LNG expansion (33mn t/yr) and projects in Russia and the US.
The Qatari expansion and one or two US projects are most likely to reach FID this year. For other LNG projects still targeting 2020, continuing low oil and gas prices and lack of sealed long-term SPAs mean some of these projects may also be postponed.
How does the GECF view the development of the traded LNG market? Have oil-linked contracts had their day?
Sentyurin: While the share of shorter and gas-linked contracts in global LNG trade is clearly continuing to grow, GECF member countries have always strived for long-term partnerships with their buyers. They continue to see the value of long-term contracts as a commitment to reliability and security of supply, as well as to secure investment in potential projects.
"Global LNG supply could resume 5-7pc growth in 2021, assuming the lost LNG cargoes return to the market next year"
We do recognise that the market is moving away from traditional long-term contracts with durations of 20+ years to more modern long-term contracts of 10-15 years. But the GECF continues to support oil-indexed contracts as they will be valuable in sustaining the upstream investments required to develop our natural gas resources.
In addition, oil-indexed contracts can guard against the volatility of spot oil and gas prices due to the three or six-month lags that the pricing formula usually incorporates. This also helps to ensure stable revenue streams to producers.
The Declaration of Malabo, at the fifth GECF summit of heads of state and government in November, formalised the organisation’s long-held view. It supports a fundamental role for long-term gas contracts and for gas pricing based on oil indexation.
Is the future still bright for gas and LNG demand?
Sentyurin: In 2020, global gas demand could decline by a best-case 2-3pc and up to 5pc in the worst-case scenario. While 2021 demand will rebound, we adhere to a cautious optimism—our initial forecast sees a return to 2019 demand levels only by 2022.
On the other hand, some additional gains could be seen from coal-to-gas switching, driven both by lower gas prices and policy support in Europe and Asia-Pacific, helped by current low gas prices and ample supply. And a phase-out of European coal-fired power generation will create additional gas demand in the mid-term.
Global LNG trade growth will be slower for some years to come. Compared to record 11.6pc growth in 2019, we expect an increase of c.3-3.5pc, quickening to 7pc in 2021. But 2022-23 trade growth is projected to decelerate sharply to c1.5-2pc, driven by less new liquefaction capacity coming onstream.
Longer-term, gas demand is projected to reach c.5.85tn m³/yr by 2050, representing almost 50pc growth compared to today. Gas’ share in the global energy mix will increase in parallel, from 23pc to 27pc over the same period.
5pc – Worst-case drop in gas demand in 2020
We expect global gas traded volumes to more than double and reach c.2.5tn m³/yr in 2050. And the future for LNG looks particularly bright. By our projections, LNG overtakes pipeline to secure more than 55pc of global gas trade in 2050.
There are two main drivers behind this shift. Firstly, LNG infrastructure will see a much faster build-up than pipelines as it requires far fewer intergovernmental negotiations and is much less affected by geopolitical tensions.
Secondly, technological and financial innovations are making LNG more accessible to a new generation of importers. For example, small-scale LNG is growing in remote areas that are not connected to pipelines or where the transmission network cannot support larger offtakers.
Where in the world will LNG demand growth be strongest?
Sentyurin: According to our estimates, demand will grow from 355mn t last year to c.650mn t in 2030 and hit 1bn t in 2050. While 42 countries currently import LNG, this could increase to more than 60 by 2050.
Asia-Pacific LNG consumers—the destination of 70pc of global imports at present—will remain the largest market and absorb c.700mn t in 2050. We project China will be the world’s first LNG importer to surpass 130mn t. India, with huge investment in infrastructure and the expansion of city gas network, will, at c.80mn t, become the second-largest LNG importer by 2050.
Japan—whose latest energy plan foresees a 27pc gas share in the power generation mix—and South Korea—with a government target of 40mn t of LNG demand by 2031—will continue to be very attractive markets. And new players such as Pakistan, Bangladesh, Thailand and Vietnam are expected to see their LNG imports growing.
Will gas be a bridge fuel or a destination fuel for the energy transition? And will this vary in different parts of the world?
Sentyurin: If ‘gas as a bridge fuel’ implies the end of natural gas, this is not our view. We believe gas will continue to play a critical, and even a growing, role in the long-term global energy configuration. As well as gas’ attraction as an abundant, affordable and clean energy source, other benefits—including the energy performance of gas-based technologies, complementarity between gas and intermittent renewables, and the emergence of LNG; including the small-scale LNG—all reinforce gas’ role in improving energy access and security.
Additionally, there are new emerging options and technologies including ‘blue’ hydrogen and carbon capture, utilisation and storage (CCUS) that allow for decarbonisation of gas and further strengthen its environmental credentials over the long-term.
Nevertheless, gas’ prospects will vary in different parts of the world. The potential is greater in developing and emerging regions that are set to observe a huge growth of their energy demand, offering large opportunities for gas expansion.
The non-OECD Asian region will be home to the majority of gas trade growth, especially given the potential to achieve material coal-to-gas switching to reduce pollution and support countries’ climate commitments. We see also a potential in Latin America and Africa, with gas playing a role in improving access to energy in these regions and reducing the reliance on biomass and hydropower.
In the developed regions, where primary energy growth will be more modest than in emerging regions, gas is set to play a considerable role in their long-term energy mix, particularly as a substitute for coal, a clean transport fuel and as a source of flexibility for power systems accommodating large shares of intermittent renewables. We see natural gas and renewables as valuable and reliable long-term partners in the sustainable energy transition.
How important to gas and LNG’s long-term future is the development of CCUS and blue hydrogen?
Sentyurin: Technology as a whole is an essential issue in the future of gas and LNG. But these two technologies will play a crucial role, although you could say they are not two different technologies. Blue hydrogen by definition is the employment of CCUS technology in the production of hydrogen through gas reforming.
The sustainability impact of these technologies, if economically viable at scale, is vast and promising. We know that renewables alone have a potential limited by factors such as their intermittency and constraints like land availability.
And electricity produced from renewables cannot be used for the decarbonisation of sectors like high-temperature industries and the road trucking, marine and aviation sectors. Blue hydrogen can play a decarbonisation role there.
1bn t – LNG demand in 2050
CCUS can resolve the only real drawback of natural gas—that is, its emissions. But please allow me to point out here that gas is the least carbon-intensive hydrocarbon.
Even unabated, its penetration against more polluting fuels like coal offers large opportunities for energy system decarbonisation at efficient cost. For instance, if we replace all the coal consumed today by unabated gas, we will save around 6Gt of CO2, which is almost equivalent to the energy-related carbon emissions of the EU and India combined.
But, while there is a long way to go in advancing the technologies and bringing costs down, we can still agree that the deployment of blue hydrogen and CCUS will ultimately bring even more value for gas in dealing with climate-change concerns.
We observe significant interest in developing large-scale CCUS projects, including in the GECF member and observer countries. Projects have been developed or are under development in Algeria, Qatar and Norway.
We also see blue hydrogen as a promising route for decarbonisation, since gas offers the most efficient and competitive option to produce hydrogen. Today, ‘grey’ hydrogen is largely produced from gas to procure feedstock for several industries, including refineries, petrochemicals and steel. This offers a ready-made opportunity and future synergies for blue hydrogen. Furthermore, the existence of largescale gas networks and infrastructure can be a basis for transporting greater volumes of hydrogen, especially through gas blending.
Several countries—including Japan, South Korea and Germany—have announced hydrogen-supportive policies, reinforcing our view is that hydrogen can be a serious option for future decarbonisation.