Government policy key to investors’ gas concerns
Slumping prices and imminent capacity expansion have dented investor confidence despite bullish long-term demand forecasts
Deregulation and government support are required to convince investors of the role for gas and LNG in the transition to a low-carbon economy, according to a panel at the Gastech Virtual Summit.
“We are of the view of that there are bespoke solutions… [and] we will continue to see that globally,” says Anatol Feygin, chief commercial officer at Houston-based independent Cheniere, citing the US utility market in which 50 state regulators operate independently and each utility has its own regulatory arrangements. “There will not be a one-size-fits-all solution in either regulation or contract strategy.”
November’s US presidential election will be pivotal as to whether Washington takes climate change seriously. Democratic candidate Joe Biden in July unveiled a four-year, $2tn spending plan as part of a pledge to make the US power emissions free by 2035.
2/3 – Proportion of global new LNG demand by 2030 from China, India, Pakistan and Bangladesh
“As we live [through] the energy transition in California, we can see the natural symbiosis between natural gas and renewable energy,” says Faisel Khan, chief financial officer at US-focused Sempra LNG.
“If you are going to add 50GW of renewable energy, you might need up to 10-20mn t of LNG capacity to be able to back up that renewable energy generation when the wind does not blow and the sun does not shine.”
East and south Asia remain the big hope for LNG, with two-thirds of new global demand over the next decade to come from China, India, Pakistan and Bangladesh, according to Wood Mackenzie. Cheniere forecasts LNG demand will grow at a CAGR of 3.4pc from 2019 to 2040.
“Having a centralised function to deliver [on] that demand to market will be tough,” says Khan. “Price transparency and liquidity in the market continues to be better, which [prompts] buyers to look to the market to satisfy that demand growth.”
As Asian economies expand, governments in the region will face a tricky task in transitioning away from coal while still maintaining sufficient electricity supply.
“That is where gas comes into play, so I see some of those central governments playing a role in managing the type of energy that is consumed in those countries,” says Khan. “That is the most critical aspect. It can determine the pace at which [gas] demand [grows] in those countries.”
In India, where natural gas has a c.6pc share of the energy mix, according to the IEA, there is sufficient private capital and borrowing capacity to fund an $8bn expansion of its natural gas pipeline grid, says Prabhat Singh, chairman & managing director at New Delhi-based Petronet LNG. He says that would roughly double the network to around 32,000km, with $4bn remaining to substantially bolster the country’s LNG regasification facilities.
But investors are wary of committing their money because capacity utilisation would be deferred for three-to-five years, Singh warns. In response, New Delhi has pledged to provide so-called viability gap funding in some regions. The government scheme supports public-private partnership projects that would not otherwise be financially viable.
“They are funding the capex part, but we are saying ‘do not do that’—do the underwriting of the capacity for the first three-to-four years so that profitability or breakeven happens,” says Singh.
Japan has unbundled gas generation, distribution and transmission and retail sales, giving consumers more choice. China, where 26 cities have been instructed to replace coal with natural gas for heating, will do similar, Khan says.
“We are seeing the government initiate policies that will enable the greater penetration of natural gas into the economy,” says Khan. “That is something we have seen across Asia and the entire world. The playbook is ‘how do you get better price transparency? How do you get better elasticity to price and demand into the markets?’ The way you do that is through fully unbundling some of those services, and the infrastructure space.”
“There will not be a one-size-fits-all solution in either regulation or contract strategy” Feygin, Cheniere
Before the coronavirus pandemic, thermal coal demand was increasing in China, India, South Korea and Japan while LNG and natural gas imports were decreasing, according to risk consultancy Eurasia Group. Yet, this year gas has suffered a smaller decline in demand than coal. Why? Because miners cut coal production rather than prices, while gas prices have extended longer-term declines during the pandemic.
“We are quite optimistic on growth and need for LNG across the world for some time to come, especially in Asia,” adds Khan. “We see it competing with coal on a long-term basis from a social cost perspective, in terms of greenhouse gas emissions, and even on a price basis. Regulation will play a big part in how this transition happens, and how quickly it happens.”