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The Edge

Global gas and LNG’s biggest challenges

The industry must act to secure gas’s role in the future energy mix

4 minute read

The global gas and LNG industry meets in Milan next week for Gastech. With gas at the epicentre of the energy crisis, this major annual conference could not be more timely. Wood Mackenzie is honoured to be Knowledge Partner at Gastech and our experts will lead a number of the strategic sessions. Massimo Di Odoardo, Head of Gas and LNG Research, and the team helped me frame the biggest challenges the industry faces.      

Getting through winter

Europe’s energy market is out of control. The gas crisis is feeding directly into power through the wholesale pricing mechanism, exacerbating major supply constraints that continue to dog power markets across the continent. Current stratospheric prices for gas (TTF hit record highs last week) and power pose risks to economies and households – much of Europe’s population will fall into fuel poverty in coming months. Minimising collateral damage to economies – not to mention, saving lives – depends on the energy industry, governments and consumers themselves all doing the right things.

The gas market will be tight through this winter come what may, with the weaponisation of Nord Stream just one of the innumerable variables in play. Despite constraints on Nord Stream capacity, European storage levels are already 80% full and ahead of schedule. Weather is another variable. Assuming Nord Stream flows remain at current (low) levels, a warm northern hemisphere winter could limit the pain for consumers. Sentiment, a key driver of current price volatility, might shift. A warm winter could lead to a sharp sell-off if traders start to think the worst is over.

In contrast, a further reduction in Russian flows or a cold winter – or both – will test the energy system’s flexibility and resilience to the absolute limits and push prices higher still. Every lever is having to be pulled to draw gas into the system at whatever the cost. Power systems will have to bring on rarely used coal and oil plants held as strategic reserves, regardless of carbon intensity. Even then, governments may have to ration gas and power selectively to dampen demand.

Sourcing new gas supply

High gas prices are all the incentive producers need to eke out and sell any incremental, uncommitted molecules from existing facilities. Realistically, though, it won’t be much – existing sources of pipe gas and LNG are already maxed out.

The big investment opportunity the crisis presents is for developers that can fill the supply gap in the next few years. There’s a narrow field of contestants – Qatar and US projects will account for seven out of every ten new LNG cargoes by 2030 on our estimates. Buyers may welcome the additional volumes but are right to be uneasy about the concentration of new supply in just two countries.

Most other potential suppliers can’t deliver new volumes as swiftly or as competitively on cost. JV participation in Qatar’s new megaprojects aside, IOCs are still averse to developing typically capital-intensive and long-payback conventional pre-FID greenfield LNG projects. That will rankle with host governments eager to seize the moment and commercialise undeveloped gas resources.

Risks to future demand and a (possible) supply glut

High prices and extreme price volatility are bad news for longer term demand. LNG demand in parts of Asia has already been depressed by high prices. In Europe, the invasion of Ukraine sparked a reassessment of energy security. Europe is now seeking to move away from gas as soon as is practicably feasible. Instead, it’s doubling down on renewables and emerging low-carbon options, including hydrogen and, in France and perhaps the UK, new nuclear plants.

Undaunted, a variety of players are rushing to secure new, low-cost Henry-Hub-indexed US LNG supplies to replace Russian volumes lost to the market. As much as 200 mmtpa of new LNG capacity is under consideration for FID globally in the next two years, double the 103 mmtpa of additional supply required to meet demand by 2030. That’s a top-of-the-range outcome that assumes Europe replaces all Russian imports with LNG from the end of 2023. The low-end figure could be as little as 50 mmtpa by 2030 if Europe pivots away from LNG to achieve the low-carbon pledges under REPowerEU. There is a growing risk of an LNG glut and a price crash after 2026 as new volumes hit the market.

How strongly Asian LNG demand bounces back will be a big factor in balancing the market. The current preference for cheap domestic coal in major Asian markets such as China and India can only be a short-term measure if net zero goals are to be achieved. Nor can renewables do it all, whether in Asia or indeed Europe. We continue to believe gas displacement of coal in the power sector must be central to decarbonisation goals, more so in developing economies, Asia in particular. We keep raising our forecasts for renewable capacity, but buoyant demand for gas turbines suggests the Asian power sector is still bullish on gas-fired generation.

Gas prices should fall as new supply comes onstream. But nothing can be taken for granted if gas is to reaffirm its central role in the energy transition. The industry needs to do its bit to ensure the product meets buyers’ future needs. That’s about relentlessly driving down costs, finding competitive contractual solutions and delivering the lowest carbon product possible.

We look forward to discussing these and more at Gastech with industry leaders next week. If you would like to meet the WoodMac team in Milan contact andrew.pearson@woodmac.com