The outbreak of coronavirus has made 2020 an unusual year for the global economy. Many industries are in shock and it is very difficult for them to predict the future. The gas industry is one of those industries. Gas prices have been declining along with the outbreak of the coronavirus and the demand for this fuel has been dropping, and forecasts indicate that investment in the industry is falling. What is the picture of the future of this industry? What is the impact of the Covid-19 pandemic on gas demand? Is there an investment prospect for the LNG sector? What steps can GECF take to strengthen the role of natural gas in the world's energy mix? Is the GECF in competition with other gas exporters such as the United States, Australia and Canada in order to strengthen its role? Given the current situation, may GECF change its policies?
"In 2021, gas demand will grow again, but we will be cautiously optimistic because of the duration and severity of the outbreak," said HE Yury Sentyurin, secretary general of the Gas Exporting Countries Forum. Sentyurin also announced that GECF had recently established the Gas Research Institute in Algeria.
According to our previous interview in Tehran (Iran Oil Show, May2018), you believed that natural gas would play a key role in the future energy mix in the context of sustainable development and climate change agenda. Do you still hold this belief taking into account the recent developments in terms of global economy, technology advancements and environmental considerations?
Natural gas has inherent advantages including its affordability, reliability, low-carbon emissions, and the security of supply even under a severe hit to global markets, such as by the Covid-19 pandemic.
It can replace coal in power generation, especially after the improvement of the switching economics coming from the low natural gas price. The other side is backing up the intermittent renewables. Its diversified nature also makes it ideal in several sectors and development scenarios of the global energy mix, such as hydrogen. As a result, the medium-and long-term outlook for natural gas is very promising.
The GECF forecasts that emissions mitigation potential of gas can be largely increased with a larger deployment of decarburization options, including carbon capture, utilization and storage (CCUS), and hydrogen development.
The technology advancement in the renewable sectors that reduces the cost and improve the efficiency can promote the competitiveness of the renewables in the long-term. However, advancement in technology is also assumed to materialize in the natural gas sector, especially in the field of CO2 and Methane abatement.
The GECF has recently established the Gas Research Institute in Algeria to promote innovation, especially for technologies that reduce the environmental footprint of natural gas. Furthermore, the Forum initiated the environmental knowledge and solutions framework initiative that aims to create a supportive and collaborative platform allowing Member Countries to share best practices to deal with the environmental challenges.
The GECF pursues its effort to promote and assess the balanced ways in which to reduce emissions from energy systems, while simultaneously supporting the economic and social progress of populations. The GECF strongly calls for cooperation with all interested parties involved in the climate dialogue, and the delivered statement at the COP-25 conference in Madrid last December emphasizes this point.
We are also highlighting natural gas’ critical role in the attainment of the UN Sustainable Development Goals (SDGs), in particular Goal 7, as an environmentally friendly, affordable, reliable, accessible and flexible natural resource for ensuring economic development and social progress.
In our view, post-Covid-19 policy measures that aim to extensively push for clean energies, excluding hydrocarbons, will face several challenges. First, it is difficult to add new constraints, such as carbon taxes or imposition of tougher environmental standards on already weakened economies. Second, funding the green stimulus packages remains a key issue since it will amplify the debts risks and the creditworthiness of the economies. Third, the clean energy options, excluding hydrocarbons, are still facing technical and economic barriers for their deployment, which might have an effect on the competitiveness of the energy supply. Even solar and wind, which have observed decreasing costs, continue to face integration challenges and the necessity to provide backup for their intermittency.
Therefore, we believe that natural gas, even if it is a hydrocarbon source, should be considered as a clean energy and be included as a lever for economic restoration in the aftermath of the pandemic. Indeed, natural gas provides a competitive and environmentally friendly source of energy and constitutes the attributes that will allow reaching a balance between the environmental, economic, and social dimensions of sustainable development.
How do you elaborate the impact of the COVID-19 pandemic on gas demand in the short and long terms?
In 2020, global gas demand could decline by 2-3% in a best-case scenario and up to 5% in the worst-case scenario due to another mild winter season and the Covid-19 pandemic, which is driving the world towards a global recession and cutting gas demand especially in the power and industrial sectors. In 2021, gas demand will rebound, however we adhere to a cautious optimism as the duration of the outbreak and the severity of its impact remain unclear. According to our initial forecast, last year’s level of gas consumption will be reached only by 2022. At the same time, some additional gains could be expected from coal-to-gas switching, helped by current low gas prices and ample supply. These factors are projected to be a driving force in the power sector of Europe and Asia Pacific markets, underpinned by policy-driven conversion. Particularly, a phase-out of coal-fired power generation in Europe will create additional prospects for natural gas in the mid-term.
On the LNG demand side, global LNG trade in 2021 is set to slow down. Compared to a record 11.6% growth in 2019, this year we expect an increase of around 3-3.5% as less LNG projects are commissioned and the risk of the U.S. losing around 5-10 mtpa of LNG productions due to low spot prices globally. However, after recovering to around 7% growth in 2021, in 2022 to 2023 LNG trade growth is projected to decelerate to around 1.5%-2% per year, driven by a slowdown in new LNG capacity, which is expected to support a recovery in global spot and LNG prices and stabilize oversupply situation that we are observing at the moment.
Over the long-term, we consider that natural gas will remain an indispensable fuel accompanying the energy transition and propelled by positive policy support in many countries. Gas demand is projected to reach around 5,850 bcm by 2050, corresponding to almost 50% growth between now and 2050. As mentioned already, the share of natural gas in the global energy mix will increase in parallel from 23% to 27% over the forecast period.
The GECF community is more than confident that the future of gas and LNG demand will be strong in the coming years. In all cases, the GECF Member Countries are reliable partners and are committed to sustain the stability of gas market through resilient supplies to the global market.
Given the decline in natural gas demand, the existence of LNG oversupply and falling prices in the current market conditions, do you think there would be a clear prospect for investing in LNG industry?
2020 has become an extraordinary year for the global economy, with many industries, including the gas industry, experiencing a shock because of the Covid-19 outbreak. We have witnessed the falling gas demand in many regions driven by the imposition of the lockdown measures, which, coupled with LNG oversupply, has led to historically low gas prices.
It is natural that in the context of falling gas prices, many gas operators, including international and national gas companies, have incurred losses in Q1 and Q2 of 2020. In these unfavorable circumstances, market operators have had to cut their expenditures, with capital investment getting the axe first. Gas companies simply do not have sufficient cash flows to keep investment budgets at the same levels as approved before the advent of Covid-19.
All subsectors of the gas industry including upstream, midstream, and downstream, have witnessed a decline in investment flows in 2020. Many projects, with final investment decision (FID) already taken, have had delays in implementation, and are likely to be commissioned later than previously expected. As for new projects, with FID expected to be taken in 2020-2021, several have been put on hold until the market condition improves. For instance, developers of LNG projects have faced a problem with attracting financial resources because of the inability to secure long-term supply contracts.
As a result, investment in the global gas industry might decline by up to 30% in 2020. Investment delays in LNG projects could limit liquefaction capacity and create a significant shortfall in production levels over the medium-term. LNG demand growth outpaces liquefaction capacity, and delays in project sanctioning will affect the development of LNG regasification infrastructure and LNG to power plant projects, especially in Asia. We should clearly understand that a lack of investment today might pose a risk to security of gas supply in the medium-term. Therefore, the plunging investment flows are an important concern not only for the gas suppliers, but also for gas consumers. It is of the mutual interest of the buyers and the sellers to keep investment flows at the minimum required level.
Nevertheless, we might expect a rebound of gas demand in a few months, driven by the lifting up of lockdown measures in many countries and the approaching winter season. This factor, coupled with a slowdown in LNG supply growth, would entail a slight recovery of gas prices starting from 2021. As a result, the financial situation of many gas operators is expected to improve which will enable them to gradually step up investment flows, put current projects back on track, and start new projects. As for long-term prospects, the global gas industry has excellent potential to attract sufficient investments, since natural gas, which has environmental advantages over other fossil fuels, is anticipated to gain a foothold and increase its share in the global energy mix.
Before the Covid-19 pandemic, almost 200 mtpa of LNG capacity, particularly from the U.S., were targeting FID in 2020. However, the plunge in global oil and gas prices, which was exacerbated by the pandemic, led to the postponement of around 115 Mt of LNG capacity to 2021 and beyond. In addition, the Covid-19 travel restrictions affected the signing of long-term LNG Sales & Purchase Agreements (SPAs) for project finance, which also contributed to the postponement in FIDs. There are still around 71 mtpa of LNG capacity targeted to be sanctioned this year, including the first phase of Qatar’s LNG expansion (33 mtpa) and some projects in Russia and the U.S. The first phase of Qatar’s LNG expansion and one or two projects from the U.S. are most likely to reach FID this year. However, for the other LNG projects in 2020, if oil and gas prices remain low and long-term LNG SPAs are not signed to support financing, some of these projects may be postponed.
What are the most important steps that the GECF is taking to strengthen the role of natural gas in the world's energy mix in competition with other energy sources?
We observe some misunderstanding as regards to the role of natural gas in meeting energy and sustainability challenges in the future. A key driver of this misunderstanding is the idea that future energy systems have to rely solely on non-carbon emitting sources - intermittent renewables in particular - putting aside the role of hydrocarbons. However, the economic and technical specificities of renewables still pose a question to their ability to efficiently meet the massive energy needs of growing economies and population, especially in the developing regions.
We see that natural gas, as the cleanest hydrocarbon source, and renewables can be good partners in bringing an efficient solution for meeting energy and sustainability challenges. Gas allows immediate carbon mitigation through its substitution to carbon-intensive fuels. Also, there are emerging solutions, such as CCUS and blue hydrogen that enable gas to achieve deep decarburization of energy systems.
Most of our work is derived from the Declarations of GECF Summits and our Long-Term Strategy, which assigns us to endeavor to pursue certain strategic goals such as promoting natural gas as the fuel of choice, providing support for Member Countries in assessing and forecasting natural gas market developments, with the objective to become a reference in natural gas outlook, and keep Member Countries informed and prepared to address the challenges and to benefit from the opportunities that may arise in the future; developing a shared understanding of market conditions in order to establish common views and positions on global gas market development and to promote them internationally; and, providing a framework for co-operation amongst GECF Member Countries.
In the area of insights and analysis, the Forum regularly provides granular, scientifically based insights into the state of natural gas based on the diverse variety of the instruments and deliverables such as the GECF Global Gas Model – now with elements of artificial intelligence and digital technologies, Global Gas Outlook 2050, Annual Short-Term Gas Market Report, Special Envoys on Data and Statistics, Data Exchange Mechanism, the Short-, Medium- and Long-Term Gas Market Reviews, Monthly, Quarterly and Annual Statistical Bulletins.
In the area of research activities, the Forum has also initiated the environmental knowledge and solutions framework initiative that aims to create a supportive and collaborative platform allowing Member Countries to share best practices to deal with the environmental challenges. Our expert commentaries are serving an important function in disseminating our latest findings and understanding.
Further, as already mentioned previously, the Gas Research Institute in Algeria will be dedicated to promotion of innovation, especially for technologies that reduce the environmental footprint of natural gas. In fact, to date, the terms of reference of three selected projects from a total of 29 proposed ones have been finalized. These three projects are:
Having noted this, our role in the GECF is to facilitate the dialogue between gas producers and consumers in order to remove these misunderstandings. We want to share views, discuss the challenges with energy actors and policymakers in the consuming countries, and find the solutions that will enable gas to play its role in balancing their environmental commitments with economic and social progress.
In the area of fostering dialogue, the GECF increasingly engages with UN agencies, the G20 Ministerial Meeting on Energy Transitions and Global Environment for Sustainable growth, ASEAN, EEC, OPEC, OAPEC, APPO, IEF, IEA, IRENA, OLADE, IGU, other peers, and regional entities, as well as maintains strategic multifaceted dialogue amongst natural gas producers and consumers.
How do you assess the GECF status in the current situation of the gas market and its role to meet the energy requirements of the world by 2050? Does GECF has and plan to compete with other gas exporters, such as the United States, Australia, and Canada in order to enhance its role in the global gas market?
The question related to competition and LNG supply has been posed to the GECF on several occasions. The GECF reiterates its position that it has no intention to collectively reduce supply or act as a swing producer to balance the market, which in turn will support the recovery in prices. It should be noted that although the GECF is an intergovernmental organization similar to the OPEC, the mission and vision of both organizations are different. As such, the GECF continues to clarify any misunderstanding about being considered the “OPEC of gas” by many commentators in the energy industry.
To expand this point, the GECF, provides the framework for exchanging experience and information among its Member Countries, builds a mechanism for dialogue between gas producers and consumers for the stability and security of supply and demand in gas markets, promotes gas as a fuel of choice to achieve the UN SDGs and the Paris Agreement goals, while respecting the sovereign rights of its Member Countries over the use of their gas resources.
The bulk of LNG supply for exports from the GECF Member Countries (MCs) are tied to long-term contracts with buyers, which ensures the security of gas supply. The GECF remains committed to fulfilling its contractual obligations for the supply of gas with flexibility, especially during exceptional circumstances, such as Covid-19. Such flexibility from the GECF Member Countries includes the postponement of delivery on some LNG cargoes to the second half of the year due to Covid-19. In contrast, the U.S., which recently became a significant LNG player globally, has been acting as a swing producer. However, this is based on pure economics since the short-run marginal costs of U.S. LNG rose above European gas prices forcing some LNG off-takers to cancel LNG cargoes for loading in Q2 and Q3 of 2020. These cancellations have not come without financial implications since off-takers are obligated to pay the liquefaction cost whether or not the LNG cargo is lifted.
It should be noted that gas market is cyclical and experiences periods of high and low spot prices mainly due to the lack of stable investment in gas export projects. Historically, gas market has always been able to balance itself, at lower spot prices, during periods of oversupply without any need to curb production. However, we are facing exceptional circumstances, which have forced high-cost gas and LNG producers and exporters without a firm hold in market to lower their production. The GECF MCs are among the lowest cost producers globally and are able to weather this storm, particularly through their LNG supply, since most of the operational LNG projects in the GECF Member Countries have recouped their initial investment.
The current year has brought multiple challenges for the GECF members. We have witnessed plummeting gas demand across the world because of the lockdown measures as well as the global LNG oversupply and spot gas prices at record lows. These unfavourable trends have affected the business of gas industry.
May GECF, as an intergovernmental organization, change its policies?
The GECF continues to uphold its founding principles. In accordance with the GECF Statute and Long-Term Strategy, the GECF is devoted to represent the framework for sharing experience, views, and information among its Member Countries as well as to support the sovereign rights of its Member Countries over their respective natural gas resources. The GECF is committed to contribute to the global security of gas supply.
All GECF Member Countries have replied to the current unfavourable conditions by implementing their own corrective measures. For instance, various national oil and gas companies have announced a reduction in their investment budgets while others have decreased gas supply to the regional and global markets. And this has been done independently by Member Countries as a normal reaction to the market dynamics.
We believe that in the current unfavourable conditions, there will be emergence of new opportunities for the global gas industry in general and for the GECF Member Countries in particular. That is why we consider it important to step up the promotion of natural gas as a destination fuel and a fuel of choice as well as to support our Member Countries in evaluating and foreseeing developments on gas markets up to 2050 and beyond.
Courtesy of Shana