LNG Producers Must Brace for More Shut-ins: Report
Global gas production capacity will most probably exceed demand next year again, which will mean more shut-in of LNG plants globally, according to a new report by the Oxford Institute of Energy Studies.
This year has seen Europe take less Russian and Norwegian pipeline gas, which was withheld as deliveries of LNG amid the Covid-19 demand slump trashed the hub market price. There have been shut-ins at pretty much all the plants around the world, with the exception of the lowest-cost producer Qatar, the report's author Mike Fulwood told NGW, although not below the offtakers' take-or-pay levels. And even Qatar did some cargo diverting.
But it was those in the US that were most publicised, as the counterparties are mostly private not state companies. The offtakers also have different kinds of contracts from the traditional, having no oil linkage in the price. So the arbitrage opportunities are more transparent.
Mainly as a consequence of the gas demand reduction caused by Covid-19, the year-on-year rise in output from the US was only about half what it could have been. "With global LNG trade up 10bn m³ and US LNG up 20bn m³, other countries went down 10bn m³," Fulwood said in an October 22 interview.
The OIES report, $2 Gas in Europe: Groundhog Day, referring to the 1993 Bill Murray film, asks how long might the time loop last for the European gas market? But it points out the uncertainties too, which are partly weather-related and partly to do with Covid-19 as more or fewer people work from home in Q1 2021.
Other uncertainties include further erosion of coal and lignite demand for power generation as gas becomes more competitive; producers such as Norway and Russia curtailing flows again; and LNG demand in Asia, which is already projected to rise by 30bn m³ in 2021, back to the volume growth seen in 2017 and 2018.
The report is the fourth in the '$2/mn Btu gas in Europe’ series. The first, published a year ago, pondered the possibility of gas falling to a price that "begins with a 2" in 2020, which it did at European gas hubs and US Henry Hub.
The report concludes that although gas demand is expected to rise next year, it might be insufficient to justify the $4-$5/mn Btu market assessments: "In Europe, pipeline imports have taken the bulk of the reduction in demand in 2020, with LNG imports being largely maintained with storage again filling as in 2019. However, our model suggests that pipeline imports will rebound in 2021 and, for prices to rise back as projected, this would imply that LNG supply would again need to be shut in to balance the market at those prices."