GLOBAL GAS FACES TURBULENT 2O22
Clara Tan, Singapore; Marc Roussot, Singapore; Emily Meredith, Washington; Dániel Stemler, Madrid; Jaime Concha, Copenhagen; Oliver Klaus, Dubai; Vitaly Sokolov, Moscow; Tom Pepper, London; Philippe Roos, Strasbourg - Jan 5,2021
After a roller-coaster 2021, volatility looks set to remain the watchword for the global natural gas industry this year. Along with continued threats to economic recovery from Covid-19, the biggest short-term risk to gas demand comes from high and volatile prices, particularly in Asia and Europe. Longer term, the accelerating energy transition poses a more existential threat. It is making suppliers reluctant to sanction new LNG projects, as more and more consumer governments pledge to go net zero, piling pressure on producers to meet buyer demand for cleaner fuels, and attracting far more investor scrutiny.
Record-high gas prices and supply shortages have prompted calls from some EU governments for radical changes in climate and energy policies. Brussels has so far held firm, while mulling less-significant plans such as a voluntary gas procurement platform to build emergency reserves. But if the market remains out of control, calls could resurface for more intervention, potentially over the future of Nord Stream 2, gas' role in the energy transition, or mitigating emissions from energy imports. These would add fresh uncertainty to an already-combustible energy mix. In a sign Brussels may give EU members more flexibility in pursuing energy transition paths, it has proposed classing gas and nuclear power as sustainable technologies under its labeling system for green investment.
Low storage and continued delays approving Russia's Nord Stream 2 gas pipe will likely provide price upside into the European gas summer, which begins in April. It will also influence price direction in Asia, with approval of Nord Stream 2 "super-key" for the market, an Asian trader says. EU storage kicked off 2022 just 56% full, versus 73% full 12 months earlier, according to data from Gas Infrastructure Europe. Competition between Europe and Asia for spot volumes this winter will largely hinge on weather. With Asia reportedly amply supplied, flexible LNG cargoes could head for Europe in the first quarter. But traders say Russian piped gas supply will likely dictate European prices.
Gazprom Keeps Market on Toes
Approval of Nord Stream 2 is not expected before the second half. Start-up should boost Russian flows to Europe, which have been restricted as Gazprom limits supply through Ukraine and Poland. Exports this year will depend on whether it maintains this tactic. With prices set to remain high, Gazprom plans record spending, in line with Russia's view that gas will play a bigger role in the energy transition than Europe now envisages. But Russia will also pursue decarbonization strategies, including carbon capture and storage (CCS) and hydrogen, and is preparing to test a carbon trading system on Sakhalin Island. LNG exports should grow modestly, with the imminent launch of Gazprom’s Portovaya LNG and ramp-up of Novatek’s Yamal LNG Train 4. No other capacity additions or final investment decisions are expected this year. Gazprom may lose its monopoly over piped exports as oily counterpart Rosneft looks to win approval of an experiment to sell up to 10 billion cubic meters per year to its own European customers.
More Asian Market Mayhem
Uncertainty will remain a key theme in the world's biggest LNG market in 2022, amid forecasts for another cold winter, the possibility of new Covid-19 variants as the pandemic lingers, and lack of supply, partly because of continued unplanned outages at LNG plants. Meteorologists expect the La Nina phenomenon, which typically brings cooler and wetter weather, to last until March or April, with the lowest temperatures expected in January and February. Demand growth looks set to slow this year in China, which overtook Japan in 2021 to become the world's No. 1 importer, but it will likely continue to sign up for more term contracts if spot prices remain high. Traders hope that could free up more spot supply, helping rebalance the market.
The high Asian spot prices could have wide-ranging implications. Seller defaults on term deliveries are prompting buyers to demand tougher penalties in new contracts, while more questions are being asked about the role of gas as a transition fuel in emerging markets and the pace of the transition itself. Traders are again in the news for defaulting on term commitments to Pakistan. With record-high Dutch TTF prices trading above spot Asian LNG prices last month, traders were tempted to send cargoes to Europe and sell in the more lucrative spot market rather than deliver oil-linked term cargoes, even if they have to offer 100% of the cargo price as compensation. LNG is seen as a viable way of displacing coal in emerging markets with stagnating domestic production, but heavy dependence on expensive LNG could prompt governments to look to renewable electricity instead.
US Rules Supreme
The US looks set to become the world's top LNG exporter in 2022, overtaking Qatar and Australia, as new projects start up. But higher and more volatile prices in a market not normally known for volatility could prompt more calls from lawmakers to take another look at limiting energy exports. Politicians are already making noises that LNG developments hurt US consumers by diverting cheap gas elsewhere, although any robust attempt to restrict exports looks unlikely. In other parts of the political arena, expect another hard turn toward regulatory and executive action after 2021’s legislative push ended without a deal on a potentially transformative climate spending package. Topping the list will be finalization of methane regulations. If the Environmental Protection Agency’s work on vehicle fuel economy is any guide, the administration could finalize tighter controls than initially proposed.
US developers signed a slew of long-term contracts in the second half of 2021, providing a shot in the arm to other US projects stalled by lack of commercial interest amid cutthroat competition from Qatar. But not all will benefit, as greenfield developers lack immediate volumes to sell. Cheniere expects to sanction Corpus Christi Stage 3 in mid-2022, while Venture Global's Plaquemines looks well placed, and the company is eyeing a fourth scheme. Japan’s Jera has made an equity investment in Freeport LNG, bolstering plans for a fourth train. Last year, projects sanctioned were Qatar's four-train North Field East project and Russian Gazprom's Ust-Luga (formerly Baltic LNG). Australia's Woodside OK'd Scarborough-Pluto Train 2, and Santos approved its Barossa field to backfill Darwin LNG.
Mideast Pushes Gas
Regional players are doubling down on gas developments in 2022. Saudi Arabia's $110 billion Jafurah unconventional gas scheme, revived last year as a result of Saudi Aramco's improved financial position, will help reduce the kingdom’s reliance on crude oil for power generation, and support efforts to produce blue hydrogen, both in line with net zero by 2060 ambitions. Abu Dhabi will move ahead with both unconventional and sour gas developments as part of plans to make the United Arab Emirates self-sufficient in gas by 2030. The UAE's 2050 net-zero target means CCS and the electrification of oil and gas operations will accelerate. Neighboring Qatar is finally expected to announce the partners in its giant LNG expansion, while the megadeal awarded to TotalEnergies in Iraq could serve as a blueprint for similar integrated gas and solar schemes elsewhere in the region.
The year could open with another confirmed gas discovery in the East Mediterranean, which has attracted US and European majors. Exxon Mobil and QatarEnergy should be able to confirm reserves in their estimated 5 trillion cubic foot-8 Tcf (141 Bcm-227 Bcm) Glaucus find off Cyprus in the first quarter. Chevron, which holds key Israeli and Cypriot assets, is set to decide on a second-phase monetization that could lead to LNG exports. In another landmark regional gas deal, Egyptian gas should start flowing to Lebanon in the first half. Israel is already supplying Egypt and Jordan. Growing cooperation between members of the East Mediterranean Gas Forum may yield further projects and gas sales agreements between neighbors. As EU relations with Russia deteriorate, the East Med could potentially become an alternative supplier to Europe, but competition for the gas is mounting from regional buyers, with Egypt at the center.
ESG Pressure Increases
As investors advance their own carbon-neutrality strategies, they will press all oil and gas producers in their portfolio to implement credible net-zero plans. That could result in a selective divestment of higher-carbon assets, as was seen in recent decisions by two large mainstream asset owners, Dutch pension fund ABP and Norway’s oil fund. Engagement will increasingly entail aggressive voting strategies, including threat to remove board members if lagging companies do not act more decisively. Demands for cuts in Scope 3 emissions from products sold will grow louder and, in some cases, could translate into requests to reduce — rather than just decarbonize — oil and gas production. US and European companies may be treated somewhat differently, but investors will still demand evidence of serious action on low-carbon adaptation.
Energy Intelligence journalists contributing to this article were Jane Collin (London), Jaime Concha (Copenhagen), Oliver Klaus (Dubai), Emily Meredith (Washington), Tom Pepper (London), Philippe Roos (Strasbourg), Marc Roussot (Singapore), Vitaly Sokolov (Moscow), Dániel Stemler (Madrid) and Clara Tan (Singapore)