Global gas demand may fall by 2-5% in 2020: GECF

Dr. Yury Sentyurin, the Secretary-General of Gas Exporting Countries Forum (GECF), has said that as most economies around the world are easing their COVID-19 measures and reopening production facilities, the fall in global demand for gas is forecast to be only by 2 per cent this year. And in the worst case scenario if the lockdowns linger for six months, the demand may witness a fall of up to 5 per cent.

In an exclusive interview to The Peninsula, the Secretary-General of the Doha-based gas Forum, noted that the whole year 2020, expects a loss of between 5 and 10Mt in LNG supply, mainly from the US, which is expected to come to the market in 2021.

As such, GECF forecasts a recovery in global LNG supply growth of 5-7 per cent next year. This fall in gas demand will be the first drop since 2009 which is mainly driven by lower consumption in the power and industrial sectors significantly affected by the lockdown measures.

“In 2020, GECF estimates that global gas demand will decline by 2 per cent to 5 percent under two scenarios. In the first scenario, we’ve assumed COVID-19 lockdown measures will last for three months and gas demand will drop by 2-3 per cent. Meanwhile, in the second scenario, gas demand could drop by 4-5 per cent in 2020 if lockdown measures are extended beyond three months and recovery in demand is slow,” said the Secretary-General.

He said that at a regional level, gas demand is expected to be mainly impacted in Asia, Europe and North America.

Further into 2021, GECF forecasts a recovery in gas demand to above pre-COVID levels, driven by a return to normal weather conditions and a rebound in electricity demand and industrial activity.

Following the strong 12 per cent growth in LNG supply recorded in 2019, the pace of growth is forecast to ease significantly to around 3.5-5 per cent in 2020. GECF had revised downwards its pre-COVID-19 forecast for LNG supply growth of 6.5 per cent in 2020. This was due to the erosion of LNG demand globally, due to COVID-19, which led to a plunge in global prices with spot gas and LNG prices converging below $2/MMBtu.

Over the past two months, the US HH (Henry Hub) spot gas prices have been trading below European gas and spot LNG prices with the forward prices exhibiting a similar trend until September 2020.

Although Europe has been acting as a sink for the global LNG market amidst the oversupply, some US LNG off-takers have cancelled several cargos (30-40 per month for loading in June and July) since the shortrun marginal costs for US LNG fell below European gas prices. Additional cargos are expected to be cancelled in August and September due to weak forward prices.

Commenting on global spot gas and LNG prices, he said that spot gas prices are expected to be significantly lower this year, compared to 2019 due to lower demand, oversupply and high gas storage levels across all major markets. Spot gas market, which has now become the preferred choices of many gas importers instead of buying gas under long-term agreement, are cause of concern for gas producers, especially for those with high cost of production such as shale gas producers compared to conventional ones.

“The bearish trend in prices this year is driven by lower gas demand, an oversupplied LNG market and high gas storage levels across all major markets. The oversupply in the LNG market is forecast to be extended into 2021, which could lead to spot prices in Asia and Europe remaining depressed in the short-term or could improve slightly next year. However, the expected tightening of the spot LNG market between 2022 and 2024, due to a slowdown in global LNG supply growth, could support a recovery in global gas and LNG spot prices,” noted Sentyurin.

Commenting on the challenges and opportunities the pandemic has created for the gas exporting countries, he said that the COVID-19 outbreak has caused a global economic crisis and created various challenges for the natural gas industry.

It has led to a drop in gas demand globally, with power generation and industrial sectors’ demand decreasing as a result of the imposed lockdown measures. For instance, in the first five months of 2020, gas demand in France dropped by 13 percent y-o-y; in Italy – by 11 per cent; in the UK – by 10 percent; in Germany – by 5 per cent. In light of these conditions, gas exports of various GECF member countries have been declining.

“Shrinking gas demand, coupled with the global LNG oversupply, has huge downward pressure on prices. Today, spot gas prices have dropped to the record low levels all around the world. Gas prices under longterm contracts are also going to decline, with a six month lag, because of the fall of oil prices in March 2020. It is obvious that the entire gas business environment is challenged by such unprecedented low gas prices on regional markets.

“Such a situation has resulted in pressure on gas producers from buyers, who insist on changing price formulas in long-term contracts, referring to a great spread between the prices under longterm contracts and spot prices. However, let us not forget that just several years ago the situation was very different with spot prices being higher than the prices under long-term contracts, in addition to the stability guaranteed under long-term contracts.

“Besides, it is obvious that falling revenues have put many gas companies in a difficult financial situation, with many of them having to reduce their investment budgets and cutting jobs, and in the case of the US some companies, especially shale gas players, declaring bankruptcy.”

As for new opportunities, GECF Member Countries remain highly competitive in the current low price environment, with low cost of production, amortized infrastructure, suitable geographic location close to the major gas consumer markets, and a solid partnership going back decades.

SOURCE: ThePeninsula