Global natural gas sector faces an unpredictable year with potential for U.S. LNG shut-ins, historically low prices in Asia and Europe, as well as a boost in coal-to-gas shift in Asia, Wood Mackenzie said on Wednesday.
“While the collapse of LNG prices towards U.S. production break-evens was foreseeable, the narrative for the rest of 2020 could not be more unpredictable,” said research director Robert Sims.
The sector is weighing the triple whammy of the coronavirus pandemic, the oil price crash and the LNG oversupply. Industry estimates will need constant revision as economics around the world “feel the force of the growing pandemic,” Kallanish Energy learns.
For now, Sims forecast that global LNG demand will grow by 6% year-on-year to 371 million tonnes (Mt) in 2020. In China, LNG demand is expected to reach 65 Mt this year, up 6.6% y-o-y, he said.
The impact of Covid-19 on gas consumption in China was “severe” due to robust containment measures though January and February. This wiped out between 6 and 14 billion cubic meter (Bcm) of gas demand in the country this year, according to Wood Mackenzie’s estimates.
In Europe, low gas prices continue to support gas-fired generation, but future coronavirus containment measures and threats to an economic downturn pose a risk. The growing number of countries applying lockdown measures is set to impact gas demand in the region, also posing a severe disruption risk to global supply chains.
Should low oil prices be sustained, there could be a boost in coal-to-gas shifting in Japan and South Korea, Sims said. That’s because the two countries have their LNG contracts indexed to oil prices and, thus, gas prices would become cheaper.
Sims estimates that Japan’s LNG demand will grow 5.1% to 81 Mt in 2020, and South Korea’s LNG demand will increase 7.7% to 42 Mt – driven by higher gas demand in the power sector.
However, low oil prices are set to hurt U.S. LNG producers, due to the potential loss of associated gas supply. The impact is likely to be felt through 2021 due to the delayed nature of drilling reductions, Sims explained.
“At a lower $35 per barrel oil price, we could expect about 2 billion cubic feet per day (Bcf/d) of U.S. gas production to be impacted by middle of next year,” he said.
LNG prices in Asia have recently plunged as low as $2.75 per million British thermal units (MmBtu), while the European TTF benchmark fell as low as $2.98/MmBtu.
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