Wood Mackenzie vice president Massimo Di Odoardo said:
“Policy makers will need to provide clarity on decarbonisation plans, including how they see the role of natural gas, following pledges to achieve climate neutrality. Gas players will have to show commitments to decarbonise natural gas, including through carbon capture, utilisation and storage (CCUS) and blue hydrogen. Decarbonising natural gas will become a strategic priority for the gas industry.”
In the outlook report, Wood Mackenzie identified five themes that would impact the industry this year.
1. Asian and European policies to support gas demand in the medium term
Almost 50% of today’s global carbon emissions and 75% of today’s LNG demand are covered by countries with carbon neutral goals. The resilience of gas in the energy mix will depend upon the pathways policy makers adopt to achieve net-zero targets.
The acceleration in coal-to-gas switching is a key theme to watch in Asia as coal accounts for over 50% of the region’s energy mix. In Europe, additional coal plant retirals in Germany and Poland could support more gas utilisation in the medium term, similar to what is happening in other European countries. Additionally, firm policies in support of CCUS as well as blue hydrogen, would support gas demand in hard to decarbonise sectors.
2. Large-scale CCUS and blue hydrogen projects in Europe could take FID in 2022
Players across the gas value chain have announced proposals for the development of large-scale CCUS projects to decarbonise localised industrial clusters and/or to use in combination with steam methane reformers (SMRs) to produce blue hydrogen from natural gas.
New momentum is building up for CCUS for industrial and power plants too, where costs for capturing CO2 could be in excess of US$100 per tonne CO2. Public support and regulation, as well as new business models have all been key to support recent developments.
Di Odoardo said:
“Companies are forming partnerships to exploit economies of scale, share investment costs across the value chain and monetise by-products. Industrial clusters, which account for 15-20% of global CO2 emissions, are emerging as ‘sweet spots’, combining interests and expertise from industrials, utilities, infrastructure players and international oil companies. Projects will need to show tangible progress this year. Their success will be crucial to ensure gas remains resilient in the future energy mix as countries sets out plans to achieve net-zero energy systems.”
3. Expect Biden to make net-zero carbon announcements but unlikely to turn into legislation in 2021
During the presidential campaign, Biden announced an ambitious US$2 trillion ‘clean energy revolution’ seeking to accelerate the US energy transition, including setting a net-zero carbon emission target in the power sector by 2035 and stating a US return to the Paris Climate Agreement.
Di Ordoardo said:
“If implemented, these policies could have long-term effects on the US energy landscape. We anticipate zero-carbon power generation to reach 58% by 2035, supported by strong penetration of wind and solar. But with gas-fired generation increasing to 36%, or 32 billion cubic feet per day, a significant gap towards the net-zero target would remain. A change to reach net-zero carbon emissions in the power sector in 2035 would require a dramatic shift from the current environment.”
4. 2021 prices: TTF to average US$5.6/mmbtu and Asian LNG spot average US$7.6/mmbtu
Global LNG prices have made an impressive climb from the US$2.0 per million British thermal units (mmbtu) experienced for most of the summer, with Asian LNG prices trading above US$20/mmbtu. Prices will come down in Q2, but the current cold spell in the northern hemisphere signal what looked like a finely balanced summer just a month ago, is now looking increasingly tight.
Di Odoardo said:
“Much of the LNG price spike has been driven by cold weather, supply disruption and lack of shipping capacity, and delays at the Panama Canal. Fundamentals have been playing a role too, with Asian LNG demand in Q4 2020 already at pre-coronavirus levels. With the current cold spell expected to continue throughout most of January, Asian LNG demand in Q1 2021 will remain strong, paving the way for additional demand for LNG stocking in the summer across North Asia. This, in turn, will reduce the pressure on Europe to absorb excess LNG supply in the summer.”
Despite global LNG supply expected to increase by 17 million tonnes (Mt) in 2021, mainly as a consequence of full utilisation of US LNG through the summer, the current cold spell in the northern hemisphere is paving the way for a tighter global gas market throughout the year. Low temperatures mean that storage levels in Europe are already more than 15 billion cubic metres lower than last year and are now close to the past five years’ average. On the other hand, expectations of higher coal and European carbon prices, also partially driven by the current cold spell, provide headroom for higher European summer gas demand.
Di Odoardo said:
“Global prices reached record lows in 2020, with TTF averaging US$3.2/mmbtu and Asian LNG spot averaging US$3.9/mmbtu. 2021 will show a stark difference, we anticipate TTF averaging US$5.6/mmbtu and Asian LNG spot averaging US$7.6/mmbtu.”
5. 2021 long-term contract signing to hang on Qatar’s resolution to press ahead with North Field East
Following a raft of LNG project cancellations last year, current high prices will have emboldened LNG developers. However, for new projects to be developed, contract activity will need to pick up. Buyers will be looking to assess their portfolio requirements and just how comfortable they are in committing for new long-term firm LNG vs increasing their spot market exposure.
Di Odoardo said:
“Buyers will want to understand just how resilient spot LNG prices will be this summer, following the hype in the winter. And they will want clarity on domestic policy attitudes towards gas, following carbon neutrality pledges in Northeast Asia. Buyers will be confident that a wave of uncontracted LNG will be hitting the market post 2025, including from LNG Canada (14 Mt) and the projects that have taken FID in 2019 (70 Mt). But they might start questioning Qatar’s commitment to quickly move forward with its 32 million tonnes per annum (mmtpa) North Field East project, following continued delays.
“The market will need around 85 mmtpa of new LNG supply by 2030. Provided Qatar takes FID early this year, most buyers will be in no rush to secure more long-term supply, despite oil indexation levels being below 11% Brent currently. A buyer’s market remains despite the current winter Asian LNG spot price spike. However, further delays to Qatar’s FID, will push some buyers to look for new long-term commitments.”
