Low Oil Prices May Boost Asian Gas Demand: WoodMac
Sustained lower oil prices will substantially lower the price of gas for consumers, which have been at a premium to hub-priced gas in recent times. This could make gas competitive with coal in Japan and South Korea and encourage coal-to-gas switching in the power sector, Wood Mackenzie said in a note published March 11.
“In Asia, the fall in oil prices will start to affect the pricing of gas under long-term contracts from late 2020. This could start to have a major impact on the competitiveness of gas in major Asian markets like Japan and South Korea,” it said.
Oil prices have seen a sharp fall in recent days following Saudi Arabia's decision to slash prices to refiners and go for market share. Talks between Saudi Arabia, Russia and other producers in the Opec+ alliance on agreeing a co-ordinated response to the coronavirus (Covid-19) crisis broke down on March 6. Oil prices lost more than a quarter of their value on March 9, marking the biggest single-day loss since the 1991 Gulf War. Saudi Arabia's national oil company Saudi Aramco announced on March 11 it would ramp up oil production to 13mn barrels/day after the Opec+ pact expires at the end of this month. Brent was down 3.2% at $36.01 after the Saudi announcement, while US West Texas Intermediate dropped 3.2% to $33.24.
Wood Mackenzie’s senior manager Miaoru Huang said that for China, at an oil price of $35/b, contracted LNG arrives at a cost lower than domestic wholesale price benchmarks.
"While there is a strong incentive for NOCs to retain the benefits to compensate for years of import losses, the import cost reduction will be partially passed through to downstream and will allow the government to push through its policy of lowering gas prices to end-users. This will help coronavirus-affected businesses to resume operations but stimulating new coal-to-gas switching will require further policy support even under a low oil price environment," Huang said.
But in other markets, gas demand will come under pressure from oil as a competing fuel. Notably in India, a lower oil price could slow the shift from oil to gas in the industrial sector, as both long and spot LNG prices will compete with fuels like heating oil, LPG and naphtha, Wood Mackenzie said.
European gas demand and flows will face little impact from even a sustained oil price collapse. According to Wood Mackenzie, oil-indexed Russian pipeline contracts now account for less than 25% of Gazprom's portfolio and, regardless, the current market share strategy is unlikely to change.
Algerian pipeline contracts into Spain remain fully oil-indexed and have been sitting at take-or-pay levels. “If oil prices remain low, Spanish buyers would take more Algerian piped volumes. This would not become a possibility until October 2020 due to the lag on the contract, but in 2021 it would reduce the space for LNG into Spain by 2bn m3, placing even more pressure on the oversupplied LNG market,” it said.