LNG sector needs to focus on emissions and supply [Gas in Transition]
Heading into winter the European gas supply situation looked dire. Russian gas imports had been heavily truncated, France’s nuclear fleet was running well below par and hydro reservoir levels were low. A severe winter would have been catastrophic.
In the event, a steady supply of LNG and a combination of mild weather and price-driven demand destruction and conservation have kept European gas inventories at relatively high levels. There is enough gas in storage to last the winter, even with cold snaps, and Europe should emerge into summer 2023 with less work to do refilling storage ahead of winter 2023/24.
The flexible supply of LNG has been critical to this endeavour.
Price relief … of a sort
Moreover, by early January, prices had finally fallen back, although the effects for consumers will, as usual, take time to feed through.
However, whether this really constitutes price relief depends on the comparative marker used. Spot LNG prices were already high before Russia’s invasion of Ukraine and they look set to remain high throughout 2023. It is only in comparison with 2022 that they look low.
In 2022, the JKM averaged about $34/MMBtu, more than double the $15/MMBtu recorded in 2021.
For 2023, Citi Research, for example, forecasts an average price for the Japan-Korea Marker (JKM) of $36/MMBtu. By historical standards, this is still exceptionally high. The level of uncertainty they assume is also large; $24/MMBtu in the low-price scenario and a $60/MMBtu average in the high-price scenario. Even the low-price estimate indicates a completely new price range for spot LNG.
Spot LNG represents only a portion of the market, although an important one, particularly for Europe, where securing sufficient supplies will again in 2023 almost certainly mean importing significantly more LNG than is secured through long-term contracts.
However, most LNG, particularly in Asian markets, is still benchmarked against Brent crude oil. Spot LNG has been above Brent parity since the second half of 2021. This means buyers will continue to prioritise and maximise shipments under long-term contract. In the current environment, spot prices remain sufficiently high for long-term contract buyers to spin cargoes back into the spot market rather than take them into their own gas systems.
Forecasts suggest the oil price (Brent crude) will be lower in 2023 than in 2022. Against an average of $99/b in 2022, estimates for this year suggest just over $89/b. Oil analysts are forecasting a year of two halves. The first is dominated by recession, rising interest rates, inflation and a weak Chinese economy struggling to contain the outbreaks of Covid-19 unleashed by its retreat from zero-Covid policies.
In the second half, the Chinese economy is expected to recover, inflation moderate and with it the monetary tightening of the worlds’ central banks. This is expected to result in a recovery in world oil demand and prices in the second half of the year. Almost across the board, the impact of Western oil sanctions on Russian oil exports is expected to be largely symbolic.
So, if LNG spot prices will be lower, but still high, so too will oil-priced LNG, and it will probably remain cheaper than spot LNG.
Russian import scenarios
The key factor underlying the LNG price scenarios is low Russian imports of gas to Europe, gas which can find no other route to market. In any scenario regarding the war in Ukraine, no resumption of gas imports via Nord Stream I, nor any via Nord Stream II, are possible because of the huge holes blown in the pipelines by persons unknown.
However, in late December, Russian deputy prime minister Alexander Novak told the state TASS news agency that Russia was ready to resume pipeline exports via the Yamal pipeline, which runs through Poland. This appears to be a significant change of strategy, suggesting Russia is not prepared to ‘weaponize’ gas exports further, although this could change.
Instead, it suggests a Russian effort at normalisation, while it still maintains control of some areas of Ukraine. However, a resumption of gas exports via Yamal is unlikely to be greeted warmly in Warsaw or the EU more broadly. This leaves only residual, although not insignificant, transits via Ukraine, and Turkstream. Moscow appears keen to maximise exports through the latter.
Thanks, but no thanks
Even if Moscow starts to offer more exports, Europe’s willingness and ability to say “thanks, but no thanks” is key to the future trajectory of the LNG market.
While Russian gas exports remain locked in, there is every reason to fast-track new liquefaction capacity both to capture a larger share of the gas market and to bring prices down to more affordable levels for less-developed economies. These either depend on LNG to meet existing gas deficits or wish to enter the market or increase their presence in order to reduce the use of coal.
This remains a priority.
For all the growth in renewable energy, global coal demand is expected to have reached record levels in 2022. According to the International Energy Agency (IEA), global coal use was up 1.2% last year, surpassing 8 billion tons in a single year for the first time, higher than the previous record set in 2013. The IEA expects the increase in coal demand to prove temporary in Europe, but it warns that coal demand in emerging Asia will remain robust and that “coal will continue to be the global energy system’s largest single source of carbon dioxide emissions by far.”
Getting affordable, and as-low-emissions-as-possible LNG, to Asian markets remains critical for the global energy transition, and most particularly for overcoming the disruption caused by Russia’s unprovoked invasion of Ukraine.
Prices to remain high
The problem is that, in 2023, and most likely through to at least 2025/26, LNG prices seem certain to remain strong, creating a major disincentive for emerging economies to opt for or increase coal-to-gas switching. Not so advantageous features of the LNG industry are the lack of spare capacity, long development times and the lumpiness of the investment cycle.
High gas prices should encourage alternatives, such as renewables and energy conservation, but the new record in coal consumption shows that the world is not yet at the stage when the growth of non-fossil fuel energy is sufficient both to meet new energy demand growth and decarbonisation requirements.
The LNG industry has performed extremely well in addressing Europe’s energy crisis. Less than a year after the start of the war, it has gained the world’s fourth largest economy, Germany, as a new market. However, to consolidate its position it must continue to work on a number of fronts to justify its flexibility as an energy source and its role in the energy transition.
To this end, there are two priorities: increasing supply by ensuring adequate investment is funnelled into new liquefaction capacity; and actively reducing greenhouse gas emissions not just from new state-of-the-art developments but from existing production capacity, with a particular focus on methane emissions.