Did COVID Kill LNG Natural Gas Dreams?

The current minimum amount of positive figures or green shoots are swiftly removed by new depressing figures of crude oil stock volumes in USA or lower estimates of OECD and MENA region GDP figures for 2020. The total impact is still unclear, but one thing has become obvious, energy demand and supply is under pressure, but not yet balancing out the right way.

At present, the main focus when talking about energy demand destruction is on crude oil and its products. Clearly, oil is struggling, but its sister, natural gas is totally on life-support.

The Golden Age of Gas, as presented by the International Energy Agency at the beginning of the 21^st Century, seems to be a very short Age, as we are now entering a possible Ice Age of Gas. Demand worldwide is fledgling, main consumer markets are showing no increased demand figures, while the future demand is in doubt.

With being promoted worldwide as the energy transition fuel, natural gas and LNG have been promoted exponentially. The world’s leading oil and gas companies, such as Shell, ENI, Total, in cooperation with national oils QP, ADNOC, Gazprom and others, all have made the ‘rational’ choice to invest in the natural gas E&P sectors from the end of the 1990s onwards.

Success seemed inevitable, as natural gas or LNG was the preferred fuel of choice.

Nobody expected however a main competitor on the horizon, US shale gas. The latter’s revolutionary capture of the global market destabilized the projected gas market fundamentals and brought price levels down substantially. Demand still grew, as prices were very competitive, but supply continued to outpace it.

Still, investments in on- and offshore gas projects kept pouring in, as seen in East Med, offshore Nile Delta Egypt, Australia and Qatar. The global gas market shook on its fundamentals. The emergence of COVID-19 however could be a major shock to its total future. At present, a long list of gas producers is filing for bankruptcy, such as US company Chesapeake and more than 200 US shale producers, or are considering a total reassessment of ongoing and future investment projects.

The Golden Age of Gas has become an Ice Age of Gas.

The latter is for sure the case for LNG projects worldwide, that are not only confronted by COVID-19 but a total out of touch with the market supply volume the coming years. Without COVID-19 the market already would have been hitting a major slump due to overproduction and sluggish demand growth.

New projected production volumes, especially in East Med, Mozambique, Brazil, Australia and even in the GCC (Qatar, Saudi Arabia, Abu Dhabi), are going to be very hard to sell at commercial price levels. Some even expect that if no real measures are being taken, and production expansion continues, major LNG and gas producers could be facing the same dark scenarios as WTI in April. Negative prices are not out of reach, if the market refuses to go to a restructuring very soon.

Non-American gas producers should understand that with oil prices hovering around $40 per barrel Brent additional shale oil and gas production will come again online. Higher price settings for crude oil and NGLs will boost US shale gas production for sure. Without increased US domestic demand the only way is out, entering the global markets.

Future investment projects in Qatar, Saudi Arabia and East Med, are facing enormous challenges. Qatar’s LNG strategy has been working for decades, proponing the Peninsula into the Ivy League of gas producers, but now could become a boomerang full of pain. The end to the Qatari production moratorium, in principle a wise choice, however has come at the wrong time. Demand for these additional volumes doesn’t exist.

The multibillion investments presented by Doha in E&P and additional LNG carriers could be a major blow to its commercial existence. The same is the case for the high-profile East Med gas adventures of Egypt, Israel and Cyprus. The continuing exploration success stories presented by Italy’s ENI, French major Total and others in Egypt or Cyprus have become a new version of a Pyrrhic victory. Giant reserves are being found, LNG production is available, but customers are hiding or retreating even. Domestic regional demand will not be enough to counter supply, while European customers can receive LNG volumes at lower prices.

This time success or a Golden Age scenario has turned into a major black hole. Investments are made, commitments are there, reserves proven but demand is down, due to a virus. Not even Asia’s gigantic markets are able to take advantage, as their own situation is also dire.

Some analysts warned already in the 1990s that the high profile transition from oil to gas producer, as stated by Shell, BP and others, could backfire. Current financials are not yet showing it in full, but profit margins of the main gas producing oil majors will be lower for a longer time. No option anymore to counter lower gas prices by higher oil margins, as they have lost a pivotal oil market position since years.

National oils, especially QP, ADNOC or its counterparts Gazprom and others, are in the same boat. Gazprom reported, as shown by Russia’s Federal Customs Service (FCS), that it being hit by lower export gas prices and volumes. FCS data show that the company’s gas export revenues in the first five months of the year plunged 52.6% to $9.7 billion, while shipments declined 23% to 73 billion cubic meters (Bcm). May’s export revenues came to $1.1 billion – which is 15% lower than April. Physical exports were down 1.7% m-o-m to 11.9 Bcm. When compared to 2019 figures, Gazprom’s May 2020’s export revenues were 61% lower and volumes were 24% down.

Going for the well-known transition fuel natural gas is currently putting these companies on a rowing boat and not anymore a speedboat. Profitability of the natural gas upstream and downstream sector has always been low, especially when looking at the crude oil hey-days. Investors now also will start to reassess their involvement.

Lower ROIs, a bleaker future than presented and a still continuing immense gas supply glut, is not something investors are happy about. Seems that IOCs and NOCs are now looking at a home-made Sword of Damocles. COVID-19 even can make it worse if major economic policies, such as the EU’s Green Deal, are going to be implemented earlier. Without even the option of being the energy transition’s fuel of choice, natural gas could be put on a slow burner for the next decade. The current bearish gas market, due to prices averaging under $2/MMBtu in 2020, no light is at the end of the tunnel.

LNG’s overall situation is even worrying, as costs are higher than commercials are offering at present.

Worldwide LNG projects are also partly doomed, as LNG price settings are either putting projects on ice or major delays of FID is to expected. Global Energy Monitor reports in its Gas Bubble 2020 report that LNG projects that are still within the pre-construction phase have experienced a “widespread pullback, including the quiet abandonment of a large number of projects.” The same report reiterated that for the period between 2014 and 2020, the failure rate for proposed LNG export terminal projects is 61%.

It also identified 29 LNG export terminal projects that have since 2014 either been delayed, cancelled, abandoned or are facing substantial challenges. The report also states that in total, companies had announced plans to build $758 billion of projects that are as yet in the pre-construction phase. But with 20 projects now in jeopardy, including nine in the United States, that planned capital outlay could be reduced by $292 billion, or 38%, if the delays persist indefinitely.