8 March 2021
The second article in our “The Energy Transition – Post-COVID 19” series focuses on the impacts of COVID-19 on the LNG sector and the trends going forward. Although LNG is not technically a renewable source of energy, it is the “cleanest” fossil fuel, and also has the advantage of not being subject to intermittence, making it suitable as baseload. LNG is therefore complementary to renewables as an intermediary for the transition away from traditional fossil fuels.
Prior to COVID-19, against a backdrop of increased LNG supply from US shale gas, parts of north-east Asia experienced an uncommonly warm winter at the end of 2019, which depressed LNG demand and drove down LNG prices significantly. This coincided with the coming online of significant LNG train capacity, exacerbating the problem of oversupply.
When the COVID-19 pandemic hit, curtailed energy demand due to the lockdowns, social distancing measures, and slower economic activity, added to the disparity between LNG supply and demand. The oil price war between Saudi Arabia and Russia in March and a subsequent oversupply then caused crude prices to plummet (to negative for several days) to record lows in April 2020, which also dragged correlated LNG spot prices down.
The second half of 2020 however, saw LNG prices mount a volatile recovery – hitting a seven-year high by December. This was attributed to demand boosts from falling temperatures during winter, and tightened LNG supply due to production outages at major LNG export projects in Australia, Qatar and Malaysia, and congestion at main LNG shipping routes along the Panama Canal.
Demand outlook
The beginning of 2021 saw reports of plans to use LNG to cool warehouses used to bulk-store COVID-19 vaccines, with many governments foreseeing conventional cold distribution chains being stretched. This novel use of LNG appears indicative of the expanding applications of LNG beyond that of the power sector, particularly in the transportation, industrial and petrochemical industries.
De-regulation of energy markets across Asia would also play a large role in expanding LNG demand in 2021. Countries like China, South Korea, Singapore, Thailand, Malaysia and Pakistan, some of which are the biggest consumers of LNG globally, have already announced or implemented plans to allow private sector access to their gas and power markets.
It is likely, as reported by S&P Global Platts, that global demand for LNG will be led by Asia, with a sharp rebound into 2021 largely dependent on how the large emerging markets in China and India perform.
Supply outlook
The US Energy Information Administration predicts a fall in US shale gas output in 2021. It is also expected that LNG exporters in Asia, like Indonesia and Malaysia, and producers like Myanmar and Thailand, will continue to deal with declines in production. Notwithstanding this, major traders such as Trafigura and Vitol still expect marginal oversupply in 2021, with large players like Qatar – which controls about 21% of global LNG supply – not likely seeking to cut supply to raise prices, as a balanced market may encourage more import projects in North America to make their final investment decision.
In the current environment, LNG sellers are likely to face pressure over contracts, as buyers increasingly favour spot contracts amidst falling prices. However, lower LNG prices on a whole, may accelerate the shift away from traditionally cheap fossil fuels like coal and, along with stringent enforcement of IMO 2020 rules, drive LNG bunkering, which is in line with overall trend towards cleaner energy across all sectors.
Although certain quarters take the view that the long-term transition will be towards large scale use of hydrogen, as will be discussed in the following articles in our series, hydrogen fuel cell technology for mass transportation is still many years away from commercial viability. As the cleanest hydrocarbon and with increasing capacity for regasification for its use as a fuel, LNG is poised to be an optimal go-between for a phased transition from fossil fuels to renewables. This can be clearly witnessed from the many large investments that continue to be made in LNG infrastructure and upstream assets when investments in many other industries remain weak during the COVID-19 pandemic.
For further information, please contact:
Justin Tan, Partner, Clyde & Co
justin.tan@clydeco.com
