Liquefied Natural Gas (LNG) has been a hot commodity in recent years, since many countries are looking to natural gas as a bridge towards a greener energy mix. However, the LNG market has been facing a supply glut as a result of increasing liquefaction capacity in North America and Australia, which results in low LNG prices. Moreover, Covid-19 pandemic and the recent oil price crash exacerbates this issue by lowering demand and price even more. Looking at these issues that hit the LNG market at the same time, what’s next for LNG after these turbulent times?
After setting a record year for LNG liquefaction projects FID in 2019, the growth of LNG supply capacity is looking to be dampened for the near future. Currently, some at-risk LNG export projects have already been delayed or even canceled due to doubt on the project economics. In fact, no new LNG projects are expected to announce its FID this year, the first time in over 20 years. Australia, the current largest LNG exporter, is already seeing up to $80 billion LNG investment delayed, while Exxon is delaying FID for its Rovuma project in Mozambique.
According to the International Gas Union (IGU), global LNG demand in 2020 is set to decline by around 4% compared to its 2019 level. This decline is primarily caused by lockdown in various countries over the Covid-19 pandemic, which resulted in reduced economic activities, particularly in the manufacturing sector.
However, a bounce back to the pre-pandemic demand level still could happen in the near future, driven by the major LNG importer in the Asian market. These markets may see the current low-price LNG environment as an opportunity for accelerating coal-to-gas fuel switch in their country, as for a long time, coal has the cost advantage over gas, which is reflected in their energy mix. In addition, given that almost 80% of LNG contracts in Asia are priced on an oil-linked basis, it would be a reasonable idea to start importing more LNG in the current low oil-price environment.
Two such examples of markets that will drive LNG demand resurrection in the near future are China and India. China was the first country to be hit by the pandemic, and it’s already recovering from its effects. In fact, the country’s natural gas consumption is even expected to grow by 4 – 6 percent this year, driven particularly by its industrial sector. Meanwhile, India is using the opportunity of low LNG prices to accelerate its coal-to-gas switch, particularly in the power generation sector. This is in line with their quest to increase the portion of natural gas in the energy mix from 7% in the current year to 15% by 2030. Looking at these facts, LNG demand may even catch up with the liquefaction capacity sooner than we expected.
On the other hand, more than 20 MTPA of new liquefaction plants have started their commercial operation this year. Furthermore, LNG projects FID from North America, Africa, and Middle East are expected to pour in when demand starts to normalize in the next year or two. North America has been the fastest-growing LNG exporting region in recent years, and more than 60 MTPA of LNG liquefaction projects can still be expected from the US and Canada. Meanwhile, Qatar is eager to reclaim the throne of the largest LNG exporter, with plan for the North Field development expected to complete in 2025 that will increase its LNG liquefaction capacity by more than 30 MTPA. As for Africa, the continent was in preparation for LNG development before the pandemic hit, particularly in Mozambique, Tanzania, and Senegal. Normalization of demand will bring these delayed projects to continue towards completion. As such, even though LNG demand may quickly catch up with the liquefaction capacity in the near future, shortage may be unlikely as more untapped projects are ready to go into further development as soon as demand starts to normalize.
In conclusion, further growth in the LNG market can still be expected in the future despite the major setbacks that the market faced recently. Some delay and cancellation of liquefaction projects, as well as normalizing industrial activities and increasing interest in LNG due to the low-price environment, may even cause the LNG demand to catch up with the liquefaction capacity sooner than we expected. However, LNG supply shortage may be unlikely as project developers may resume developing new liquefaction projects in various regions at first sight of normalizing demand. For these reasons, natural gas/LNG may become the fuel of choice to shift into a greener future after this pandemic ends.
Sources:
GIIGNL. (2020). 2020 GIIGNL Annual Report; International Gas Union. (2020). Global Gas Report 2020; International Gas Union. (2020). 2020 World LNG Report; International Gas Union. (2020). Wholesale Gas Price Survey 2020 Edition; India’s target of raising natural gas share in energy mix to 15 percent too ambitious? Retrieved from ET EnergyWorld: https://energy.economictimes.indiatimes.com/news/oil-and-gas/indias-target-of-raising-natural-gas-share-in-energy-mix-to-15-per-cent-too-ambitious/68599034; LNG investments vanish in 2020 as coronavirus slashes oil and gas prices. Retrieved from Reuters: https://uk.reuters.com/article/us-lng-exports-investment-analysis/lng-investments-vanish-in-2020-as-coronavirus-slashes-oil-and-gas-prices-idUSKBN2602PY; Australia’s booming LNG industry stalls after fall in oil prices amid coronavirus. Retrieved from The Guardian: https://www.theguardian.com/environment/2020/apr/13/australias-booming-lng-industry-stalls-after-fall-in-oil-prices-amid-coronavirus; Qatari expansion: Build it and they will come? Retrieved from Petroleum Economist: https://www.petroleum-economist.com/articles/midstream-downstream/lng/2020/qatari-expansion-build-it-and-they-will-come; Pandemic to trim China’s 2020 gas demand growth to 4.2%: government report. Retrieved from Reuters: https://in.reuters.com/article/us-china-energy-naturalgas/pandemic-to-trim-chinas-2020-gas-demand-growth-to-4-2-government-report-idUKKBN2690V6; Exclusive: Coronavirus, gas slump put brakes on Exxon’s giant Mozambique LNG plan. Retrieved from Reuters: https://www.reuters.com/article/us-health-coronavirus-exxon-mobil-mozamb/exclusive-coronavirus-gas-slump-put-brakes-on-exxons-giant-mozambique-lng-plan-idUSKBN2173P8
