Lower oil and liquefied natural gas (LNG) prices, both off by around 40 percent and 60 percent in the past year respectively, will continue to change the global energy landscape, impacting everything from when and if new energy projects go forward, capex spending decisions at integrated oil majors, and even geopolitics. There is not much consensus around the lower-price environment’s duration or short- to medium-term price trajectory.
Late last week, the International Energy Agency (IEA), the world’s leading energy watchdog, released its annual forecast. In its 2015 Medium-Term Gas Market Report, which gives five-year projections for natural gas demand and supply and trade developments, the Paris-based agency said that lower prices will feed a pick-up in global natural gas demand over the next five years following a marked slowdown in 2013 and 2014. It sees global demand rising by 2 percent per year by the end of the forecast period, compared with 2.3 percent projected in last year’s outlook. The agency said that a significant reason for the downward revision is weaker gas demand in Asia, where persistently high gas prices until very recently caused consumers to switch to other options.
“One of the key – and largely unexpected – developments of 2014 was weak Asian demand,” IEA Executive Director Maria van der Hoeven said. “Indeed, the belief that Asia will take whatever quantity of gas at whatever price is no longer a given. The experience of the past two years has opened the gas industry’s eyes to a harsh reality: in a world of very cheap coal and falling costs for renewables, it was difficult for gas to compete.”
The IEA’s analysis is correct. In the aftermath of the March 2011 Fukushima nuclear disaster in Japan and the subsequent shutdown of the country’s 50 nuclear reactors needed for electrical power generation, the country started to import record amounts of LNG. Correspondingly, LNG prices increased almost two fold as a result, spiking to over $20 per MMBtu early last year for Asian spot market LNG.
However, in the ensuing one and a half years, with two warmer winters in the Northern Hemisphere, and extra supply entering the market from a new project in Papua New Guinea and three projects in Australia, the market has made an abrupt U-turn, shifting from a seller’s market to a buyer’s market. Both Japan, the world’s largest LNG importer, and South Korea, the world’s second largest LNG importer, are still reporting ample LNG inventories.
The IEA said that the current rout in oil prices that began in mid-2014 has spilled over to natural gas markets in Asia and allowed the Asian premium to narrow substantially. However, demand for gas in Asia may not recover as quickly as the drop in prices. The report added that in the short term gas demand will benefit from plunging prices, but that the long-term outlook for gas has become more uncertain – especially in Asia. A few Asian countries have decided to move ahead with plans to expand coal-fired power generation instead of gas-fired generation. “For the fuel to make sustained inroads in the energy mix, confidence in its long-term competitiveness must increase,” the report says.
For the supply side, lower oil prices will have a major impact on upstream gas and infrastructure investment, while companies cut capital expenditures and refocus on core assets with faster returns, which will unavoidably lead to slower production growth over the medium term, the report says. LNG projects, meanwhile, since they are capital intensive and have long lead times, are soft targets for investment reductions and several of them are likely to be delayed or even cancelled. If current low prices persist, says the IEA, LNG markets could start tightening substantially by 2020, with demand gradually absorbing the large supply upswing expected over the next three years.
The IEA’s supply-side analysis echoes several previously published reports by various energy agencies, consultancies, and oil companies, which also mostly forecast an eventual LNG shortage by the start of the next decade. Russia’s Yamal LNG project recently forecast that there could be an LNG shortage as soon as 2018.
However, in the short term gas markets will need to cope with a flood of new LNG supplies. The report projects that global LNG export capacity will increase by more than 40 percent by 2020, with 90 percent of the additions coming from Australia and the US. Lower oil prices pose little risk to the timing of projects already under construction, says the EIA. This is also a view held by many consultants, including Singapore-Enerdata that told Breaking Energy last week that most of Australia’s new LNG projects coming on stream this year and next year have secured long-term contracts, around 70 percent, and are prepared for the low oil price period. However, newer LNG projects, will struggle to get off the ground, while many will likely be postponed or even cancelled in both Australia and the US.
The report also discusses the importance of Europe on LNG supplies, stating that as LNG supplies surge over the next five years, Europe is set to offer an important outlet. The IEA also projects that the region’s LNG imports will roughly double between 2014 and 2020. As far as Russian natural gas supply is concerned, the most geopolitical part of the global natural gas equation, the IEA says that despite the foreseen increase in LNG intakes, the agency doesn’t anticipate a meaningful reduction in European imports from Russia, which will remain locked in a 150-160 bcm range.
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