What forces will shape global gas markets over the next two decades?
Massimo Di Odoardo
Vice President, Gas and LNG Research
This article draws on data from our recently launched Global Gas Model Next Generation (GGM NG), with analysis from Kristy Kramer, Director, Global Gas Research; Stephen O'Rourke, Research Director, Global Gas Supply; Murray Douglas, Research Director, Europe Gas and Lucy Cullen, Principal Analyst, Asia Pacific Gas and LNG.
Even before the coronavirus pandemic and the oil price crash, 2020 was shaping up to be a year of oversupply for global gas markets. A record of almost 40 Mt of supply was added in 2019 – and that was poised to put prices under pressure. And in the early part of this year, widespread coronavirus restrictions had an immediate impact on gas demand.
However, as lockdowns are gradually lifted, demand is already showing signs of recovery. How resilient will that recovery be? And what forces will shape global gas and LNG markets over the next two decades?
Much depends on the global economy
We predict a rebound in GDP growth in 2021, provided there is no widespread second wave of coronavirus. However, economic growth is unlikely to recover to pre-crisis levels. Output will still be subject to scarring for several years to come: we’ve cut our GDP forecast for 2025 by 3.5%.
Gas demand has already proven resilient despite coronavirus restrictions. It should continue to recover alongside the economy.
The coronavirus has shaken-up our LNG supply outlook, both in the short- and longer-term.
There are reasons to be equally positive about medium-term LNG demand growth. The supply dynamics, however, are more challenging.
LNG projects currently under construction are suffering from lengthy coronavirus-related delays. That will only serve to exacerbate an existing slowdown in supply growth because of a lack of FIDs leading up to 2019.
As the market slows down, will investors cool?
Investment discipline is a theme we see across the board. As the market recovers, corporate producers will exercise caution by spending less, even when presented with the same economic incentives.
As the energy transition takes hold, developers and financiers will increasingly factor in climate change risk to their LNG projects. That will make it more difficult for the Majors and IOCs to sanction those projects as they are stress-tested against lower long-term oil prices and rising CO2 price assumptions.
This changing investment climate coupled with a slowdown in LNG contracting means the appetite for LNG investment will slow over the next two to three years. As demand recovers and continues to grow, the market space for new supply begins to open up again in the late 2020s, when new supply investment is needed.
How will the energy transition affect demand growth in the longer term?
Gas demand will slow as the energy transition progresses. But the impact will vary according to geography.
- In Europe, the Green Deal is pushing the bar higher: Progress has been made to reduce CO2 production targets, mostly in the power sector. Europe will need to look beyond that if it is to achieve net zero by 2050, and the threat to gas is significant. The residential sector faces added risk from increased electrification. As green hydrogen develops, other demand sectors will come under threat.
- Higher Henry Hub prices in North America, driven by the near-term stall in associated gas growth, will set the stage for more renewable development in the power sector. Domestic gas demand will peak in 2036. After that, gas in the power sector will be rapidly displaced by renewables.
- We are optimistic about the upside for gas in Asian markets, where the energy mix, especially emerging markets, is still dominated by coal. However, further adoption of hydrogen, carbon capture and storage technology and electrification could slow down demand.
What poses the biggest risk to our base case, and how are we adapting our models to reflect that? Fill in the form on the top of this page to find out.