Liquefied natural gas is the fastest-growing fossil-fuel market – and possibly the last before the world moves to lower carbon emissions. Three major events have thrust the LNG industry from being an oversupplied, sluggish market situation to an industry requiring rapid, if not urgent, change.
The first shock was the abrupt end of the Saudi Arabia-Russia OPEC+1 pact. Despite US President Donald Trump tweeting that the conflict is over, the fallout has already been enormous. Oil prices have recovered from their lows, but uncertainty remains.
Second, a mild winter throughout the markets of Europe and North America kept a lid on demand.
Third, the impact of Covid-19, which has affected the world economy in ways not seen for a century. The effects of the decline in energy demand – as people self-isolate at home and curtail any travel – are only yet beginning.
Not surprisingly, gas prices have plummeted, which will naturally cause some pain for the industry. But key opportunities exist for strategic players, particularly for India and China – the last major frontiers for gas presenting the most opportunity for LNG players.
The beginning of spring sees the industry entering a three-to-five-year period of oversupply. The conventional wisdom was that this would eventually stabilize and the market would “rebalance.” This period was going to be challenging to many as the break-even price for projects has been consistently above market prices in most markets.
This is exemplified by key buyers declaring force majeure around the world, citing fallen demand but also claiming to be unable physically to store the oversupplied gas itself. The LNG industry finds itself in a very different place than it was in 12 or even three months ago. Investors will defer making decisions, developers will cancel projects, and shareholders will drastically rethink marketing strategies. In this new environment, it is worth assessing what this could mean for the LNG industry beyond this short-term period, with a particular focus on Asia, the fastest-growing gas market.
International Energy Agency executive director Fatih Birol recently urged world leaders to use the Covid-19 crisis as an opportunity to accelerate the low-carbon transition by ensuring that “the economy goes up but emissions go down.” We will see if this call is answered. With history as a guide, lower demand tends to disincentive changes in energy systems. While there is no doubt that the decarbonization will eventually regain its momentum, this crisis changes the previous trajectory and path forward.
In India, gas prices are finally truly competitive with coal prices, meaning that not only is there potential for additional coal-to-gas switching but also support for a large number of intermittent renewables being added. Coupled with increased local pressure for more environmentally friendly alternatives, LNG exporters can now work with New Delhi to leverage these conditions to invest aggressively in flexible innovative infrastructure and business models, such as using gas to power industry and even the transport sector in a market that could be as large as 185bcm (billion cubic meters) by 2040, a fourfold increase in 20 years.
In China, Covid-19 has once again placed air pollution at center stage, as medical and scientific consensus links the impact of high rates of lung disease and poor air quality. Socio-economic conditions may encourage Beijing to accelerate the switch away from coal. An “all of the above” solution including shale exploration, which has shown limited success recently despite the initial promise, additional international pipeline connections, more renewables, and nuclear energy will be needed.
In the meantime, it is LNG that presents China the most cost-effective quick fix to meet its massive demands. Strategic commercial partnerships leveraging the planned deregulation of the natural-gas market can unlock demand and secure LNG’s role beyond the challenging short to medium term.
This crisis provides an opportunity to extend the window that was gradually closing on natural gas’ “transition fuel” period in some key markets. Natural gas risks shifting from one of the solutions of a low-carbon transition to just another fossil fuel that is fighting for its position squeezed out by new cleaner renewables and cheaper coal.
A warming global climate could present an important role for gas, but the LNG industry should pounce on all opportunities. It will require creativity, flexibility, and long-term commitments. And perhaps as important, this has to be coupled with updated expectations that not only cement a solid market share in India and China – but also other exciting markets in the South Asian subcontinent, Southeast Asia and some oil-rich Middle Eastern countries.