Weak economic outlook fuelled by the COVID-19 pandemic has led to LNG exporters revisiting their strategies and capital expenditure (capex) plans for 2020.
According to GlobalData, the fall in oil and gas prices and weakening LNG demand have forced LNG companies to look for short-term contracts, as securing long-term supply deals has become challenging.
As a result, this has impacted project financing and resulted in financial investment delays (FIDs) of several projects. Moreover, the scepticism around the current economic scenario is causing LNG companies to think twice before making investment decisions.
Haseeb Ahmed, GlobalData’s Oil and Gas Analyst, said: “One of the go-to strategies for LNG operators has been downsizing overall capex for 2020. ExxonMobil, Royal Dutch Shell and Chevron Corp have all taken off around a third of their initially planned expenditure for this year.”
Woodside’s decision to downsize its capex spending for 2020 has led to the delay in FID of Pluto LNG Train 2 project in Australia, while Energy Transfer
LP’s Lake Charles project FID has been delayed until 2021. The investment delays may not only hamper the progress of projects, but they could also extend the time taken for companies to break-even.
Ahmed added: “The LNG sector has undergone significant losses in a short span, due to the pandemic, which has threatened the existence of several small to mid-scale LNG companies.
“Measures such as reducing capex or delaying FIDs could only be short-term solutions. To be able to sustain in the long run, LNG companies need to work on strategies to tackle any future challenge.
“Increasing supply chain efficiency and investing in technologies, such as internet of things (IoT) and data analytics, are some strategies that these companies can rely on – apart from leveraging on increasing demand from Asian countries, such as China and India,” he said.
East Med woes
Looking at the Eastern Mediterranean regional, GlobalData said that gas demand had been suppressed and LNG spot prices were crippled by the impacts of COVID-19 in the first half of 2020.
The longer lasting impacts are likely to weaken the demand outlook, which could force reduced gas output from the region until 2023.
Daniel Rogers, GlobalData analyst, said: “Major gas fields including Zohr and Tamar have constrained production in light of diminished domestic demand and an unfavourable LNG market.”
Weak demand and spot prices have curbed LNG exports out of Egypt throughout April, May, and June this year. In addition, the reduced regional demand has constrained gas output and instigated downward revisions of Israel’s forecast gas sales volumes.
Rogers continued: “The 2020 downturn combined with the wider economic impact of COVID-19 have significantly reduced the regional demand growth outlook. With Zohr and Leviathan potentially ramping up to capacity and additional volumes coming from Karish, we could see the region’s gas surplus exceeding export capacity for a number of years.
“This would mean continued production constraints, likely on the major producing fields, though this could be mitigated if partners can agree to re-start the Damietta LNG plant.
“In the short term, the key gas producers in the region - the likes of BP, Eni, Shell, and Delek are facing weakened LNG spot prices and gas production curtailments. While over the longer term, the lack of active LNG export capacity and muted domestic consumption could prove problematic
for recent entrant Chevron and Israeli focused Energean,” he concluded.