Gas Line, Q1 2020

April 1, 2020

Gas Line is a quarterly publication that looks at major news stories in global gas—ranging from project development to markets and geopolitics. My goal is not to cover every story but to draw connections between stories across time and space in order to shed light on the major themes that will drive global gas markets in the years ahead. Today’s market is largely shaped by the COVID-19 crisis, which I explored in this piece; this update is best read in conjunction with that macro, structural analysis. My main takeaways from this quarter:
 

Gas Had a (Mostly) Good 2019

The bottom line: Gas did well in advanced economies but still needs to prove itself in emerging Asia. In some ways, gas had a great 2019: supply grew, prices were low, and gas proved competitive against coal, especially in the United States and Europe, leading to widespread fuel switching that helped the world avoid an increase in CO₂ emissions despite relatively robust economic growth. Yet the ever-lasting debate of whether gas can compete in emerging markets, especially in Asia, was hardly settled: some markets took in additional gas, but the absorption capacity was limited, and, in the end, the global market balanced by pushing record-level volumes into Europe, both for direct consumption and for storage.

The backstory: In 2019, the main story for global gas was the rapid rise in liquefied natural gas (LNG) supply and the sharp decline in prices across North America, Europe, and Asia. (In Asia, this decline was limited to spot prices, as oil-indexed prices stayed high.) Gas demand was robust. In the United States, electricity generation from gas rose by almost 8 percent in 2019, helping drive a nearly 16 percent decline in coal-fired generation. In Europe, the rise in gas use accounted for roughly half the drop in coal generation, one of the best years for gas in power ever. In Asia, however, gas consumption fell in both Japan and South Korea, largely due to fuel switching, which meant that LNG previously destined for those countries had to be rerouted.

Outside these markets, the news was good and bad. China’s imports grew by 12 percent, far below the boom years of 2016-2018. India’s imports were flat in the first half but then picked up, growing about 6 percent for the year overall. Bangladesh was a pleasant surprise , although it remains to be seen whether it can escape the curse that often befalls new importers— of being unable to keep growing. Per McKinsey’s summary, the growth in LNG imports all across Asia was roughly equal, volumetrically, to the growth of China alone. And the growth from all these markets was insufficient to prevent a big surge of LNG into Europe, which both depressed prices and led to an unusual buildup in storage. While LNG continues to find an outlet in Europe, it is still lagging in capturing the greatest energy prize of all: emerging Asia.
 

India Takes Central Stage

The bottom line: In a short period of time, India went from supporting prices to crashing them. The industry has always seen India as a promising market for LNG, even though its actual demand has tended to disappoint, and its fortunes have lagged behind rival China. Yet in early 2020, it seemed like India was emerging as the center of gravity in an LNG world facing a slowdown in demand coming from China. For a while, India was instrumental in supporting spot prices in Asia. Yet all that changed quickly, largely because the country went into lockdown to deal with COVID-19.

The backstory: In early 2020, there were many bullish signs coming out of India. In January, the federal government authorized $774 million to support a gas pipeline project in the northeast. Large customers, such as Essar Steel, Gujarat State Petroleum Corporation, and Reliance , were seeking near-term supplies. A new terminal was commissioned in February, and another planned import facility, a floating storage unit, received a boost in February, following an agreement between the project developer and the Abu Dhabi National Oil Company. At a time when demand in China was weakening due to COVID-19, there was a real sense that Indian buyers could step up and fill the void.

Soon enough, however, the mood change. In late February, a long-anticipated deal between Petronet and Tellurian fell through, disappointing investors and contributing to Tellurian’s financial strain (discussed below). More importantly, in late March, three Indian buyers issued force majeure while fully-laden tankers were waiting to discharge their cargoes. Spot prices crashed immediately, as the last remaining crutch for LNG supply was removed. Of course, this might turn to be a momentary glitch, although much depends on how a massive country like India will go into lockdown. Either way, these past few months saw India come front and center—first, as a possible savior, then as a disappointment.
 

Investment is Adjusting Rapidly

The bottom line: The recent hit to medium-term supply is likely greater than the hit to medium-term demand, which will help rebalance the market in the mid-2020s. The drop in oil prices and the worsening macroeconomic environment have produced a sharp curtailment in spending plans for 2020 and beyond. Many gas projects are delayed or cancelled outright; others will begin the well-known ritual of going back to contractors and service providers in an effort to lower costs. In the short term, we can expect a slowdown in final investment decisions (FID) for new projects, especially those with high capital requirements. In the medium term, this investment slowdown will help correct what appeared to be a growing imbalance between supply and demand brewing for the mid-2020s.

The backstory: When oil prices drop, companies adjust their budgets and their expectations, and the COVID-19 crisis was no exception to that rule, except that the change was very dramatic and swift, compressing over a few weeks the types of announcements that usually take months or years to be spelled out.

In the United States, there was a disconnect between regulatory green lights and companies announcing that they are revising plans for developing projects. The Department of Energy issued four export licenses in Q1, while the Federal Energy Regulatory Commission approved one project (Jordan Cove) and issued a final environmental impact statement for another (Alaska LNG).

Alongside these regulatory milestones, two project developers, LNG Unlimited and Tellurian, came under financial strain, the former entering into ongoing discussions to be taken over, the latter undergoing a restructuring to survive the current downturn and extending a key loan through November 2021. Shell announced it would no longer participate with equity in the Lake Charles LNG project. Pembina, the sponsor of Jordan Cove, announced a 40 to 50 percent cut in spending for 2020 but without mentioning Jordan Cove by name.

Some developers, however, announced good news. Sempra Energy reached two milestones for its Port Arthur project: an interim agreement with Saudi Aramco that covers both offtake and equity and one with Bechtel for engineering, procurement, and construction. It is still targeting a Q2 sanction for its Energía Costa Azul project in Mexico. Venture Global entered into a sales and purchase agreement with Électricité de France for LNG from its Plaquemines project. And Annova LNG signed a precedent agreement with Enbridge to secure access to transportation capacity for its LNG project in Brownsville.

Outside the United States, there were reports that ExxonMobil and its partners might delay FID on their project in Mozambique just as attacks in the north of the country continued (for background on the conflict, see this CSIS event from June 2019). In Canada, GNL Quebec reportedly lost a key investor. In Papua New Guinea, most reports suggested a continued inability between the government and the foreign companies to reach an agreement on the terms for an expansion (and partner Oil Search, in its latest guidance, “assumed that activities on LNG expansion are minimal”). Qatar seems to be delaying its expansion plans, and possibly exploring a smaller expansion first. In Australia, Woodside said it was deferring FID on the Pluto expansion, Scarborough, and Browse, while Santos said it would defer FID on the Barossa project, which will backfill production in the Darwin LNG facility.

On the import side, there were a few notable developments. Australia’s market regulator underscored its concerns that Australia’s east and southeast coast markets could face a supply shortage by 2024, and AGL Energy confirmed its intention to bring LNG supply into the market. In Brazil, Golar announced an agreement (“protocol of intentions”) with the state government of Pernambuco to develop an import terminal that will serve the regional market through LNG ISO containers. In Nicaragua, New Fortress announced a 25-year power purchase agreement (PPA) with two electricity distribution companies; the PPA will support the development of an import terminal. In Cote d’ Ivoire, the International Finance Corporation (IFC) said it had signed a financial package to support the development of a 390 megawatt, natural gas-fired power project.
 

The Ever-Changing Southeast Europe and East Med

The bottom line: The geography of gas flows continues to change and create additional question marks for the future—especially around additional exports from Israel and additional infrastructure that might connect Southeast Europe and the Eastern Mediterranean. The Eastern Mediterranean continued to be a flashpoint for global markets as a series of significant commercial and market milestones intersected with ever-changing politics and geopolitics. The rise of Israel as a major regional exporter comes at a time when Egypt is struggling to absorb and offload its own gas supplies and as a layer of political tension continues to underline energy relations in the region. Meanwhile, Southeast Europe is entering a new era, as two pipelines, TurkStream and the Trans Adriatic Pipeline (TAP), start flowing gas, and a third pipeline linking Greece to Bulgaria nears completion.

The backstory: At the start of 2019, the East Med was shaped by two major developments: the signing of an intergovernmental agreement between Greece, Cyprus, and Israel for the East Med pipeline and first gas from the Leviathan field in Israel. As exports from Israel started, the Parliament of Jordan, once again, expressed its displeasure with the arrangements, passing a draft law to ban imports from Israel. In Egypt, the pipeline carrying gas from Israel was attacked, reminiscent of the troubles that plagued the trade almost one decade ago (although flows were reportedly not disrupted). At the same time, the impetus for coal-to-gas switching continued in Israel, with a government panel approving a proposal to build two gas plants that will allow the country to get closer to eliminating its dependence on coal by 2025. Even so, the quest for export markets continued, with Delek, one of the partners in Leviathan, saying that floating liquefaction was back on the table as an option to enable the expansion of the Leviathan project. And drilling started in Lebanon, where any discoveries would add another dimension to an already complex regional picture.

In Egypt, the country’s gas position continued to improve in 2019. Exports more than doubled in 2019, although low prices are leading the country to offer less gas for export. Just as global prices are coming under pressure, the partners in the Damietta facility, the other export project that has yet to restart production, reached an agreement that will allow exports to resume this summer. In short, the country finds itself in a position where its exports and its imports are both rising, even if low global prices might undermine the country’s ability to sell its relatively expensive gas overseas.

These developments coincided with a rapidly changing picture in Southeast Europe as well. First and foremost, this quarter saw the inauguration of the TurkStream pipeline in early January, which will reroute regional flows. Meanwhile, TAP continued to progress; by the end of February it was 93.5 percent complete and already introducing gas into the Greek portion of the system. Greece saw two more milestones: the pipes for the Interconnector Greece Bulgaria arrived at the port of Alexandroupolis while the proposed floating storage and regasification unit in Alexandroupolis underwent a successful market test.
 

The Battle Over Methane Continues

The bottom line: Several studies and announcements this quarter helped advance the conversation on methane emissions—although, once again, together providing little long-term clarity on how exactly we ought to think about the role of gas as a fuel compatible with a transition to low-carbon energy. And so, it seems gas is caught in a forever tango, oscillating between good news and bad, between the promise of playing a constructive role in the energy transition and accusations that gas is never quite as good as advertised.

The backstory: Ryan Sitton, of the Texas Railroad Commission, published a long-awaited report on gas flaring and venting in the state. The report collected and presented that which has been harder to decipher, and so it was useful in that regard. But its overall message—that Texas might be flaring a lot but looks good relative to other jurisdictions because its flaring intensity is low—did little to assuage critics and continues to leave the industry vulnerable to what has become a major challenge going forward.

Industry made news, too. ExxonMobil released a “Model Regulatory Framework” on how regulators should look at methane emissions, an initiative that comes at a time when the Trump administration is trying to relax regulations on methane emissions. Gazprom also shared some of its own numbers, following from earlier disclosures: in an investor presentation in February, it put its own emissions at “nearly zero;” although, once again, these numbers suffer from the same corroboration challenges that affect other estimates. And these moves came just as the European Commission was scaling up its search for a methane policy to regulate gas coming into the European market.

Two journal articles made news this quarter. The first looked at preindustrial concentrations of methane and was widely interpreted in the news as arguing that “industry’s record on methane is far worse than we thought, even though the article did no such thing” (for a good dissection, see this Twitter thread). Another piece looked at the role of coal mines and the possibility that they account for more emissions than previously estimated. Both studies, and the discussions around them, underscore the continuous evolution in our understanding of methane concentrations in the atmosphere—and the role that fossil fuels play in those totals.

Finally, a study by the International Council on Clean Transportation challenged the idea that LNG as a marine fuel was a climate-friendly solution for shipping—marine shipping being one of the few areas where there is general consensus that widespread gas use could deliver benefits on both local air pollution and climate change. The study, as expected, triggered a response from industry groups, extending the debate over gas’ climate credentials to a sector that was hitherto largely spared from such scrutiny.
 

Some Further Reading

•  Gillian Boccara, Mateusz Czajkowski, and Neil Hamzaoui, “Reflecting on 2019 LNG flows,” McKinsey and Company, March 2, 2020.


•  Shell, LNG Outlook, February 2020.


•  Mike Fulwood, “$2 gas in Europe is here: who will blink first? ,” Oxford Institute for Energy Studies, March 2020.


•  International Energy Agency, “Global methane emissions from oil and gas,” March 31, 2020.


•  Kira Savcenko and Gary Hornby, “The future of European gas after Groningen,” Platts Special Report, February 2020.

Nikos Tsafos is a senior fellow with the Energy and National Security Program at the Center for Strategic and International Studies in Washington, D.C.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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