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    Editorial: Lock down [LNG Condensed]

Summary

Measures taken to contain the spread of the coronavirus (Covid-19) are hitting the world hard. Energy demand, particularly from transportation, is falling sharply, while the curtailment of industrial activity is widespread and sufficient to send the global economy into recession. [LNG Condensed Volume 2, Issue 3 - March 2020] - Subscribe to NGW Premium or NGW LNG Condensed (complimentary) to read this article.

by: NGW

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Complimentary, Covid-19, Natural Gas & LNG News, World, Liquefied Natural Gas (LNG), LNG Condensed, Editorial, Insights

Editorial: Lock down [LNG Condensed]

Governments around the world are responding with fiscal and monetary stimuli, but they are unlikely to have much impact while countries effectively lock down economic and social activity.

For the oil and gas industry the effects look calamitous. The sharp reduction in demand in a situation in which global oil and gas supply was already in surplus prompted calls for deeper production cuts from the Opec+ group of producers. These failed over a lack of agreement between Russia and Saudi Arabia. The result has been a decision by Riyadh to open the taps and let the market decide where the price of oil should lie. The result has been an unprecedented collapse to less than $25/barrel for US benchmark West Texas Intermediate.

LNG producers and project developers thus face two sudden radical changes to the investment outlook: the impact on global growth of Covid-19 and thus of future demand for gas and LNG; and a new pricing environment in which there is no output restraint to stabilise the price of oil on which the majority of long-term LNG contracts still depend.

The first impact is almost certain to be a sharp curtailment in upstream spending. The North Sea oil and gas industry has already said it expects upstream investment to slump by a third. The short-term effects could also be severe as the nature of rig and supply chain work means staff do not have the home work option. While many observers have focused on the price collapse, Covid-19 restrictions could have an immediate impact on many oil and gas companies’ operational capacities.  

Price collapse

At $25/barrel, almost all US shale drilling is uneconomic as is new investment in the Canadian oil and gas sector. US gas production has proven very resilient to low gas prices in the past, but is inextricably linked to the fortunes of shale oil, which can be expected to see a sharp contraction, if such low oil prices prove prolonged.

This raises a huge level of uncertainty for the next wave of hopeful US LNG developers: will cheap feedstock gas be available and will foreign demand for LNG rebound post-Covid-19?

Three other groups will be assessing the new uncertainties – the big portfolio players, financiers and LNG buyers.

The big portfolio players have shown a willingness to fund LNG plants via their own balance sheets and by taking offtake into their own portfolios. How viable is this strategy now? Buyers will be re-evaluating their long-term LNG requirements and the terms on which they contract supplies. Financiers will be assessing the risks of lending into an already over-supplied market in the light of a sudden and unexpected demand-side shock.

The result is likely to be a phase of paralysis and emergency cutbacks. The oil and gas services sector, will be hit very hard. Few if any new LNG projects are likely to be sanctioned until the dust has settled.

Maybe Saudi Arabia’s aggressive production strategy will eventually force other producers back to the negotiating table and a new agreement on output cuts will be reached. Maybe Covid-19 is contained and economic activity returns to normality.

Right now, it is impossible to know. The oil and gas industry is thus faced with a huge drop in expected revenues which upends all current plans and introduces massive uncertainty into the economic outlook for the next six to 12 months at least. The industry has little choice but to hunker down and ride out the storm: extensive losses can be expected before it is over.