Global LNG market grows despite lower demand and prices
July 07 2020 04:55 PM
Saad al-Kuwari
Saad al-Kuwari

Saad al-Kuwari

* The global LNG market continues to grow by 4% in 2020 despite low demand and price going down
* Oil and gas production companies are pursuing a strategy to define and improve value flows and new, resilient business models for sales and marketing!
* The price of natural gas may reach about $3.25 per million British units by next summer

Analysts in the global markets for liquefied natural gas see that rationing production to match supply in LNG production facilities has become necessary in high-cost gas facilities and that rescheduling annual maintenance programmes for facilities is the only way to help rebalance demand and supply.

This is because gas prices have reached “normal to record lows”, and there is little support on the horizon as the Covid-19 pandemic remains out of control.

Projections indicate that the LNG market will grow by about 19bn cubic meters this year, representing a growth of approximately 4%.

In comparison, last year, demand grew by 47.5bn cubic meters from the year before by 11%.

"The largest percentage of growth will be in Asia, specifically in China, if the closure is completely lifted and consumption returns to levels before the coronavirus pandemic returns."

This decrease in the price of gas is a result of the deterioration of oil prices, as the differences in the indexed long-term LNG contracts and the spot contracts have decreased significantly.

And as a result, LNG producers may face difficulty in benefiting from the long-term contracts with a higher value compared to the spot price prices.

Few among these are the long-term contracts that maintain high returns as they have to re-improve the terms of the sale and purchase contracts.

Since doubts are still looming on the horizon, many gas companies in the world, North America in particular, may rethink their spending on gas projects of billions of dollars and delay final investment decisions for these mega projects next year.

In fact, the impact is considered short-term for the current crisis on the LNG sector in the world, including North America, and may lead to a reduction in LNG production or uncertainties about new investments in the world.

But the long-term impact can be the burden on supply that may make it difficult for producers, especially in North America, to maintain competitive operating and transportation costs compared to low-cost LNG producers.

In recent times, natural gas prices have fallen to new low levels, as they have fallen to less than $1.70 per million British thermal units. This is low in relation to natural gas prices for a quarter of a century and poses a difficult challenge for high-cost gas producers, especially in North America and Australia.

What are the factors that affect the LNG market?

The drop in the price of liquefied natural gas already to less than $1.70/btu at the beginning of 2020, influenced by the excess supply and the surplus and the lack of storage capacity was not a problem confined to the United States alone but to most of the LNG producers in the world.

This is because of the global abundance of LNG due to a wave of additions to production in 2019 from new production lines.

This was the market situation in 2020 but just as the Covid-19 pandemic affected the oil and fuel market, natural gas also entered a state of instability and imbalance, and therefore had a negative impact on the price of LNG.

According to studies, global gas demand is expected to drop 4% this year — the "largest demand drop" in history — according to the International Energy Agency.

LNG buyers in the US are now cancelling shipments and US LNG exports have fallen by more than half compared to pre-coronavirus levels and the presence of LNG surplus in the world before Covid-19 made it worse in terms of demand and price deterioration.

Overseas buyers want to pay the cancellation fee instead of receiving shipments from American exporters, which is a sign of how bad the market is. And in respect of August delivery, between 40 and 45 shipments were cancelled, roughly twice the cancellation rate in June, and this sends negative and discouraging messages in the gas market and future consumption.

As is well known, cheaper gas stimulates demand, especially in the electric power sector, because gas is valuable for mega power plants to generate electricity, but this outlet is not as big as it used to be, at least because the gas has been really cheap for some time.

Consequently, the choice of coal to gas is limited, without an export route, and without greater absorption of facilities, the abundance of gas in the market has deepened.

Analysts believe that the US shutdown of gas production, which we have been discussing as a difficult challenge for this summer and that nearly 2bn cubic feet of shutdown from gas supplies for about two months will avoid storage congestion.

The shutdown process can be considered as the last corrective step for the decline in production in the process of rebalancing the global gas market and the logic goes something like this: The LNG market was oversupplied, Asian LNG prices decreased, and more LNG was directed to Europe, which pushed European gas prices down. This led to closure of the economic window for sending American gas to Asia!

Shale gas production has increased in the supply market over the decade, but gas prices of less than $1.70 per million British thermal units, which represent a break-even point for future natural gas projects and returns on them, may be an impediment to the development of this industry and increasing production, and this could help rebalance the market.

Therefore, the coming years will present a strong challenge for LNG producers, both in terms of cost and sales and marketing strategy for obtaining new markets.

* Saad Abdulla al-Kuwari graduated in Chemical Engineering from Qatar University and obtained an MBA in Oil & Gas from Liverpool University. He was appointed CEO of Tasweeq in 2010. During his career, he has occupied several key positions in refining projects and processing, oil, gas and refined products, storage tanks and export terminals operation. He also has considerable experience in the field of Gas Processing Operations. He was also manager of Gas, Oil Petrochemical Marketing in QP Marketing Directorate for several years.

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