Japanese economists consider global LNG options for market challenges Featured

Wednesday, 01 April 2020
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Japanese economists have looked closely at the challenges now facing the pipeline natural gas and liquefied natural gas markets and have come up with various possible outcomes for the rest of 2020 and beyond, including forecasts on supply and demand and energy security.

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“The magnitude and duration of the fall in demand will greatly influence the supply-demand balance in global energy markets and also crude oil and LNG prices, severely affecting global energy industries, the economies of oil and gas producing countries and the economies of consumer countries,” said the report from Institute for Energy Economic in Japan.

The report was written by the leading IEEJ analysts Ken Koyama and Shigeru Suehiro and first examined the impacts on overall natural gas demand.

“Under the baseline scenario without Covid-19, global natural gas demand in 2020 was projected to expand to 4,053 billion cubic metres, achieving the growth of 84 Bcm (2.1 percent) from the previous year,” said the report.

“As natural gas is considered a relatively clean energy option, demand for natural gas has increased steadily throughout the world in recent years, and the baseline scenario anticipated that this trend would continue,” it added.

The IEEJ said that under the early coronavirus stabilization scenario (ESS), demand in 2020 is projected to be greater than in the previous year, but by only 35 Bcm, which is less than half of the increase forecast under the baseline scenario.

Worst case

Under the protracted pandemic scenario (PPS), the demand in 2020 is projected to be 60 Bcm less than the previous year.

“If global natural gas demand decreases from the previous year, it would be the first time in 11 years since 2009 when demand was hit by the Lehman (banking) shock,” said the report.

“By sector, the fall in demand for natural gas for power generation is projected to be significant: 10 Bcm (0.8 percent) down under the ESS and 54 Bcm (3.9 percent) down under the PPS,” it added.

“This would occur not only because power demand would decrease due to the reduction of economic activity, but also because some developing countries would choose more affordable energy options as their economies slow down, causing a relative decrease in the demand for natural gas,” explained the IEEJ.

Although the forecast for LNG is similar to that for natural gas, the fall in demand could be more striking for LNG for certain reasons.

The report noted that the global LNG demand (import volume) has increased far more strongly than natural gas demand in recent years, with a year-on-year growth rate of 9.6 percent in 2018 and 11.6 percent in 2019, for example.

Factors

“The major factors were expanding LNG demand in China and other emerging countries in Asia and strong LNG demand in Europe,” stated the report.

“Under the baseline scenario, growth of demand in 2020 was projected to be at 4.4 percent, milder than during the last two years, but still, the annual demand was forecast to be as large as 368 million tons,” it said.

“However, under the ESS, demand is projected to grow more slowly to 362MT, while under the PPS, demand in 2020 is expected to be 349MT, which is 5MT down from the previous year,” added the report.

“That is, global LNG demand, which has grown by around 10 percent in recent years, may plunge due to the impacts from COVID-19. This may happen as LNG demand decreases significantly as the worldwide natural gas trade volume diminishes due to the stagnating demand for natural gas,” explained the IEEJ.

The report expects that demand for natural gas will also fall due to competition with other energy options (like coal) as well as for LNG due to competition with not only other energy options but also with pipeline gas.

Conclusion

In conclusion, the report said that although the extent of demand falls would be chiefly determined by the degree of economic slowdown, the demand for oil products will be influenced also by various secondary factors such as the fall in demand for transportation services, the competitive position in relation to other energy options, and whether or not a given region is a major consumer of a given product.

“Particularly under the Protracted Pandemic Scenario, the forecast fall in demand is extremely large for every energy commodity,” stated the report.

“If the scenario materializes, it will lead to a significant oversupply in global markets, causing the prices of given products to collapse. The falling prices and shrinking demand will suppress the profits of global energy industries, and severely impact the economies of oil and gas producing countries,” said the IEEJ.

“Although the fall in prices of oil and gas commodities is favorable for net-import and consuming countries, it is not entirely good news since the root cause of the fall is a global economic depression,” it added.

“Furthermore, the situation may lead to instability in oil and gas producing countries which are important for the global energy supply security-stability, and such instability and uncertainty could later cause insufficient investment in the global energy resources supply chain which is essential for energy security,” stated the report.

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