All systems stop! [NGW Magazine]
The International Monetary Fund, in its latest World Economic Outlook published April 6, forecast the world economy would contract by 3% this year. This is far worse than the global financial crisis, which saw world GDP shrink by 1.74%, according to World Bank data.
Moreover, forecasts for this year and next could still face further downgrades if lockdowns across the world are extended. It is also possible that there are renewed outbreaks of the coronavirus (Covid-19) as containment measures are eased. The IMF predicts a rebound in 2021, but this is a far from certain prospect.
All this suggests the LNG industry will next year face stunted demand and over-capacity on the supply side. It is a grim outlook. The industry must hammer home the message that the world needs a cheap, low carbon, mass volume, energy commodity on which to base a green recovery.
LNG markets
The numbers for the LNG industry’s key markets make grim reading. China is forecast to stagger through with economic growth of 1.2%, compared to expected expansion at the beginning of the year of around 6.0%. In 2009, during the financial crisis, China’s economy expanded by 9.4%.
Japan’s economy will contract by 5.2%, South Korea by 1.2%, Taiwan by 4.0%, while India is expected to sustain growth of 1.9%. China is a big unknown, its energy demand depending heavily on other countries’ appetite for its products. Wood Mackenzie has forecast that Indian LNG demand will drop this year, following the lockdown extension until May 3, which was announced April 14 after the IMF had made its forecast.
These economies accounted for 61.9% of LNG imports, net of re-exports, last year according to GIIGNL’s 2020 Annual Report (see feature). GIIGNL is the International Group of LNG Importers.
Europe accounted for 24.2% of LNG imports, of which the EU and UK accounted for 22.5%. The IMF forecasts GDP contractions of 7.5% for the eurozone and 6.5% for the UK. This compares with declines of 4.5% and 4.2% respectively in 2009. Moreover, one huge difference between 2009 and 2020 is that, for the power generation sector, there is a lot more must-run renewable energy capacity.
Wind capacity globally stood at 150 GW in 2009, but by end-2018 had reached 564 GW. Similarly, solar capacity has expanded from 22.5 GW to 488 GW.
The amount of electricity generated by these technologies combined has grown almost fivefold in a period in which total generation has risen only 31%. Despite very low energy commodity prices, as electricity demand falls due to economic contraction, it is fossil fuels’ share of generation which is flexible, still most price sensitive and which will be hardest hit.
Capex crunch
Capital spending amongst the oil and gas majors is being rapidly reduced. US ExxonMobil announced in early April a 30% cut in capex for 2020, equivalent to $10bn, and a 15% reduction in cash opex. The largest reduction will be in the Permian basin (see feature), but the company has also deferred a final investment decision on its Rovuma LNG project in Mozambique.
Anglo-Dutch Shell aims to reduce capex this year by $5bn and has withdrawn from the Lake Charles LNG project in the US. It has also suspended its share buyback scheme. The other European majors such as Equinor, BP, Eni and Total and US Chevron have likewise slashed their capex plans for the year and aim to make major reductions in cash operating costs. Other LNG players like Australia’s Woodside have announced delays or deferred investment decisions on LNG and LNG-related projects.
Investment plans have taken a hit as oil and gas majors reassess the revenues available to them as a result of severely depressed commodity prices, their constrained ability to borrow and the prospect of lower demand. The International Energy Agency, in its April Oil Market Report, forecasts that oil demand will fall by an unprecedented 9mn b/d this year and that in April, the worst month, it will be down 29mn b/d year on year.
Recession economics
The hit to oil and gas company revenues will be massive. Already storage is filling up fast and market driven shut-ins may well prove similar in scale to the 9.7mn b/d cut in oil production announced by the Opec+ group.
It is the companies with the deepest pockets which will best weather such an unexpected cataclysmic demand-side event. They should emerge on the other side able to reap the benefits of future energy demand growth. In the broadly free market economies of the West, this means the majors survive while weaker companies downsize, are bought, consolidated or go to the wall.
The other survivors are the state oil companies.
Qatar Petroleum on April 15 announced a start to its drilling campaign for the North Field East Project, designed to increase the country’s liquefaction capacity from 77mn mt/yr to 110mn mt/yr by the mid-2020s. Russia approved plans April 2 to increase its liquefaction targets, raising them from 70-82mn mt/yr by 2035 to 80-140mn mt/yr.
Saudi Aramco, Saudi Arabia’s state oil and gas company, has announced a drop in planned capex for next year of around $10bn, but also given the green light to development of the huge 200 trillion ft3 onshore, wet gas Jafurah field. This will support its policy of gas for oil switching in the power generation sector, but also its ambition to become a gas exporter by 2030.
The capex crunch will be felt most in the US, and the Permian basin in particular, where the lack of demand has seen well head prices collapse. US shale companies were already highly leveraged before the pandemic and the sector looks even more fragile now.
The amount of oil products supplied to the US market has dropped by an astounding 8mn b/d, according to the US Energy Information Administration. Oil production will have to fall and this means US associated gas output will drop as well.
US expansion on hold?
The US is home of the latest huge expansion in liquefaction capacity. In February, the US Energy Information Administration forecast that domestic natural gas production would reach a record 94.16bn ft3/d this year, up from 74.1bn ft3 in 2015, with the surplus over domestic demand heading to Canada, Mexico and as LNG on to world markets.
The build-up of US LNG capacity, coming after Australia’s major expansion and other new supply-side increases, for example in Russia, was already – pre-Covid-19 – pushing prices down and the expected rebalancing of demand with supply further back in time into the late 2020s.
The question now is in what form the US gas and LNG sectors, both up and downstream, emerge from the pandemic. In many cases capital commitments have been made which cannot now be reversed. The US was formerly on course to become the world’s largest LNG exporter in 2024, with exports of the fuel having jumped 60% in 2019.
With gas demand plummeting because of recession, something has to give and it is most likely to be spot-market orientated LNG production in the US, with capacity shuttered or commissioned but not brought into commercial production. As a result, the LNG industry will enter 2021 with a demand-side deficit and spare capacity.
Social and political unknowns
Amidst the rash of capital expenditure cuts, the majors have taken a fairly consistent view, arguing that this is a temporary one-off event. Longer term, their assumptions remained unchanged – populations will continue to grow as will demand for energy.
In this, they are probably correct – up to a point. But is it realistic to argue that Covid-19 will not change the world in some potentially fundamental ways?
These in turn could have major impacts on how people live and work. This could well affect both the nature and composition of long-term energy supply and demand.
Social media abounds with stories of environmental good news – from Indians in the northern Punjab being able to see the Himalayas for the first time in 30 years, as a result of reduced air pollution, to seals sunbathing on the UK’s southern shores, owing to reduced marine traffic and deserted beaches, to the sound of birdsong in Wuhan, where the factories are only just beginning to re-open.
Millions of people have taken to home working, making use of the internet – another fundamental change from 2009, in that it all works a lot better now. There is a real prospect not just of a temporary loss of transport demand but permanent demand destruction as people and companies re-evaluate their habitual working practices and social interactions.
Environmental concern, reflected by the adoption of net zero carbon targets by 2050 by an increasing number of countries, is at an all-time high. Fears of food and other product shortages, combined with the global nature of a pandemic, could well produce a backlash against economic globalisation, which was already stuttering as a result primarily of US trade policy.
Equally, it could produce a new level of international co-operation – this is a globally-shared event which has no peacetime parallel.
Nonetheless, an after-effect of the pandemic may be a renewed focus on localisation, food security and the circular economy being promoted by the EU under its European Green Deal. People may preserve cash, offsetting the impact of government stimulus measures. The rate of urbanisation, a key driver of long-term energy demand, may soften as home-working increases and people shun centres of dense population – where viruses are transmitted most quickly – as places to live.
Modern consumerism, already challenged by the green transition’s focus on less and more efficient resource use, could take a further knock as people appreciate the environmental benefits of reduced economic activity.
Somethings will not change. There will be a return to ‘normality’. But gas and LNG will remain on a knife edge of environmental acceptability as a fossil fuel, although one supported by its manifest benefits over coal, and as the potential bedrock of a hydrogen economy via carbon capture and storage.
The pandemic, which has still to run its course, will leave a lasting impact on the world, even if the nature of those impacts remains speculative. But, in any scenario, the gas industry needs to drive home time and again the necessity of a cheap, mass volume, low carbon fuel to replace its higher carbon alternatives, one on which a green, post-pandemic recovery can be based.