Covid-19 to have lasting impact on gas
The global gas and LNG market will continue to recover barring a second spike. But the pandemic’s impact will be measured in years
Gas markets have been hit by a combination of demand shocks this year, with one of the warmest winters recorded being followed by the unprecedented fall in economic activity triggered by the Covid-19 pandemic. And the economic recovery after the lifting of lockdown measures has been slow.
The LNG market, which used to grow at double-digit rates, is going through rapid adjustments to adapt to this unprecedented environment, in terms of both volume and flexibility. While LNG trade is expected to keep growing as gas demand gradually returns, the crisis is likely to have long-lasting impacts.
Flexibility trumps growth
Preliminary data suggests global gas consumption fell by a record 4pc year-on-year in the first half of 2020, with declines in most major gas-importing regions. But, despite the sharp fall in demand in the northern hemisphere in the first quarter, LNG trade volumes remained high and grew by 12pc year-on-year.
This growth was supported by Europe and Asia (not including Japan and China), both of which grew by 25pc year-on-year. The implementation of lockdowns in India and several other Asian emerging markets in March and April halted this growth, leaving Europe as the main support for LNG imports.
Global gas demand is expected to recover progressively in 2021, assuming Covid-19 has wrought its worst
Europe then started to weaken towards the end of the second quarter. Global LNG trade was still growing at the end of August and was up by 3pc year-on-year for the first eight months of 2020, although this was far from the double-digit growth seen in recent years.
Faced with such unprecedented market conditions, the whole gas and LNG value chain has had to provide greater flexibility. LNG volumes have been increasingly diverted to Europe as the Asian spot premium vanished and lockdowns impacted demand in emerging markets.
Europe played its role as a balancing market, thanks to spare regasification capacity at terminals with open third-party access, ample underground storage capacity, flexible pipeline supply and liquid trading hubs. As a result, Europe absorbed most of the surplus LNG.
European LNG imports increased by 14pc to account for almost three-quarters of global LNG trade growth during the first seven months of 2020. This was despite falling demand, down by 5pc from the same period in 2019, as pipeline imports were slashed by 17pc owing to buyers exercising short-term contractual flexibility options.
Flexibility is also at work on the LNG supply side as the persistence of strong supply—combined with further declines in European and Asian spot prices—triggered varying degrees of curtailments in a majority of LNG-exporting countries. As a result, global LNG exports decreased by over 6pc year-on-year between June and August. Australia and the US accounted for over two-thirds of the decline.
As things stand in mid-September, global gas demand is expected to recover progressively in 2021, assuming Covid-19 has wrought its worst. But the pandemic will have long-lasting impacts on gas markets, as it creates strong uncertainty around the main medium-term growth drivers.
While LNG remains the main driver of international gas trade expansion, its growth rate is expected to decelerate compared with the double-digit rates of recent years. Asian markets will continue to be key on the demand side, led by China and India and followed by emerging markets in South and Southeast Asia.
But such future growth prospects depend on the pace of economic recovery, continuous policy support in China and India, and price levels in other emerging Asian markets. Most of this additional demand is expected to be met by North American exports, which are expected to almost triple in the next five years.
4pc – Fall in gas consumption H1 2020
This slower demand growth may intersect with more robust expansion in new LNG export capacity, resulting from a massive wave of new investment that reached an annual record of $65bn last year and the approval of over 90bn m³/yr of new export projects. This will likely extend an LNG export overcapacity situation and weigh on average utilisation rates of liquefaction plants, limiting the risk of a return to a tight market before 2025.
That would leave some LNG players with growing open net selling positions and sunk costs. And it would also exacerbate competition among suppliers—both in the context of renewal of expiring contracts and for the development of new markets in emerging regions.
The prospect of a prolonged buyers’ market offers an opportunity to further transform LNG trade towards greater commoditisation—as we saw happen in similar circumstances over the past decade. But it also casts a shadow over future investment, which will be needed in the medium term to ensure the renewal of production sources and global security of supply.
The IEA’s upcoming Global Gas Security Review 2020 will provide a detailed update on the latest market developments and short-term forecasts, including an in-depth analysis of the flexibilities involved.
Jean-Baptiste Dubreuil is a senior gas analyst and Gergely Molnar is a gas analyst at the IEA