Oil was not the first commodity to hit negative pricing in the current crisis. Gas in Texas went negative in January, and the global gas market was oversupplied even last year. Yet, perhaps, the long-term picture looks better for gas than oil.
For gas suppliers 2019 was a tough year. A wave of new production came online, particularly liquefied natural gas (LNG) from the US, Australia and Russia, setting a record for annual increase in capacity: 38.8 million tonnes per year, in a global market of about 437 million tonnes. Another 70.4 million tonnes made final investment decisions last year, promising a further surge in supply.
Demand growth in China, the world’s second-largest LNG importer and biggest gas importer overall, rose strongly but more slowly than in 2018. Demand in Japan, the leading LNG importer, fell. Surplus cargoes had to be dumped in Europe, where winter disruptions were feared over deadlocked negotiations between Russia and Ukraine concerning gas transit. But on the last day of the year, a five-year deal was reached, warding off any interruptions.
The European winter was the hottest ever recorded, reducing gas demand for heating. Storage entered the winter almost 100 per cent full, and was still 60 per cent full by March, when companies generally begin stocking up again. By then, the coronavirus pandemic was gathering speed, and electricity demand dropping. New York’s demand is down 10 per cent, the UK’s by 15-19 per cent.
From early March, following the collapse of the Opec+ deal, oil prices plunged, dragging down the price of LNG in many contracts in Asia, which are typically specified in relation to oil. On Thursday, the Japan-Korea market (JKM), the leading Asian benchmark, fell to a record low $1.938 per million British thermal units, equivalent to about $11 per barrel of oil.
As US oil production drops under the stress of low prices, associated gas output is also falling. After a decade of ultra-cheap gas, American prices are now slightly higher than those in both Asia and Europe. The gas glut and virus crisis together have brought about a remarkable convergence of global gas prices, which previously traded at very different levels.
This undermines the economics of the new US LNG export plants. There is little point in paying to liquefy gas and ship it thousands of kilometres, to receive a lower price. Some cargoes have been cancelled, but because of contractual commitments and the cost of restarting a halted LNG plant, many exports will likely continue.
Such prices are far too low for most new LNG projects to progress. The next wave of US facilities was already struggling to secure financing. Projects in Australia and Mozambique have been stricken by the coronavirus, halting progress, while travel restrictions will hamper new construction. Proponents there and in Canada, Australia, Russia and several African countries are betting that the market will have tightened again by around 2025 when plants commencing production today would be expected to come into service.
This market situation is very painful for current exporters. But it carries the seeds of revival. Even while spot LNG prices had fallen, oil-linked prices remained high, preventing the fuel from making inroads against coal in key growth markets such as India. It makes no sense any more to index gas against a completely different fuel.
Now the main existing regional benchmarks are aligned, the LNG market could become more flexible, liquid and with only small price differentials between regions. China and the Middle East need their own tradable gas hubs to help them align several different sources of supply with uncertain demand.
The prospects for demand revival are better than for oil – lockdowns halt planes and cars, but gas and electricity are still needed for factories, heating, Zoom and Netflix. If much cleaner-burning gas can consistently be sold at a moderate premium to coal, it can drive this dirty fuel out of the energy mix, as it has already done in the US and UK. That would be good news for the climate and for the smoky skies of India and China.
Plans for recovery from the crisis call for a European Green Deal and, if the Democrats win the presidency in November, a Green New Deal. Renewable energy, electric vehicles and other low-carbon technologies will be a major part of stimulus packages. A big push on climate can be favourable for gas in coal-heavy Asian and eastern European countries.
In western Europe and North America, gas has to re-establish its environmental credentials against environmentalist hostility. It can do this by leveraging recovery funding to build future industries. These include carbon capture and storage (CCS), to make gas a near-zero emissions fuel. CCS is widely recognised as an essential part of the climate toolkit, but current projects need to scale up by some 15 times over this decade.
Germany, Japan and Australia are among countries looking to create a market for hydrogen, a clean energy carrier, that can substitute for gas in heating networks, or be used as a fuel for ships and planes. The cheapest way of making low-carbon hydrogen is from natural gas with CCS.
The current situation is pretty grim for gas. But it may be further through its slump than oil, since it was already in the downturn last year, before the coronavirus showed up. With some smart and bold investments, it still can emerge from this crisis as the major future hydrocarbon.
Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis
