LNG

UK energy consultant Wood Mackenzie has issued a watch list for pipeline natural gas and LNG markets in 2022 and warning of uncertainty around pipeline imports and low gas inventories.

The report said these issues along with uncertain weather forecasts have set the scene across Europe for another volatile year ahead, with the potential for gas prices to soar further and energy shortages to bite.

“The continent has been at the centre of a supply and demand crisis since last year, placing the security and flexibility of gas supply as well as its role in the energy transition top of the European Union agenda,” explained Wood Mackenzie, a unit of the US Verisk business, which is listed on the Nasdaq global exchange

Wood Mackenzie gave a list of five things to look out for in 2022 which it said would “shape the European and global gas markets for decades” to come.

First on the list is the dispute over the Nord Stream II Gazprom-operated pipeline from Russia to Germany.

“Prices will fall from Spring if more Russian gas is available, but get ready for another unsettling year. The start-up of the controversial Nord Stream II pipeline might now go past the first quarter of 2022, meaning limited additional Russian supplies through the winter period,” said the report.

“Without additional Russian imports, the ability to refill depleted storage and to avoid a repeat of last year’s crisis will be limited,” it warned.

EU storage

Secondly, there is the issue of natural gas storage in Europe and while an EU strategic storage policy will support progress, it may take several years to implement.

“Over the last two years the importance of gas storage in Europe has been demonstrated to the full. In 2020, storage was able to absorb a large excess in supply whereas in 2021, extremely high gas pricing discouraged the injection of gas through summer leaving the region with historically low inventories for the winter,” said the report.

“Exceptionally cold weather in the Northern Hemisphere could again leave Europe with a supply deficit. Questions are being raised about the importance of having gas storage in the overall mix of sources, and how storage operators and owners should be rewarded in the future,” it added.

Thirdly, Wood Mackenzie believes natural gas supply contracts need to be long term to deliver energy security.

“In the last decade, Europe has been moving away from long-term oil-linked contracts towards hub pricing and spot market. But the current crisis has shown that this path can have drawbacks - security and affordability of supply foremost among those which could impact the region,” explained the firm’s analysts.

About 49 billion cubic metres of import contracts into Europe will expire this year.

Russian contracts

Out of these, 21 Bcm will be Russian pipeline contracts. Some of these will not be extended such as Poland Oil and Gas Company’s 10 Bcm contract with Gazprom as Poland moves away from Russian gas.

“Potential concerns over the long-term exposure to Russia, coupled with the crisis-driven worries over supply security and diversification, may push more players towards LNG contracting,” said the report.

“Both oil-indexed and Henry Hub plus long-term LNG contracts will be at a considerable discount to local spot prices through to 2025-2026, making them an attractive option for European players,” it stated.

Fourthly, there is expected to be an increase in locally produced supply with record high gas prices supporting strong production and new investments.

The energy crisis has drawn attention to the importance of domestic production and the prospect of Europe requiring gas for decades to come.

Record prices pushed gas producers to prioritise gas developments that can provide immediate flexibility, and the prospect of tight gas market in the coming years may revive investments into new gas supply options.

“Some operators may see this time as ‘now or never’ for their projects, particularly inspired by the possibility of high prices,” said the report.

“Temporary tax packages offered in Norway last year will encourage more FIDs including King Lear, Asterix, Dvalin North and Linnorm,” it added.

Gas-fired power

Fifth and last, gas-fired power generation is to be considered as a transitional investment in the EU economy, though some limitations on future natural gas use will remain.

“At the end of last year, the European Commission published a new EU taxonomy proposal classifying efficient unabated gas-fired power plants as transitional investments, which could be a moment of truth for the global gas industry. Expert advisers have until 21st January, 2022, to provide feedback which may result in changes to the proposed text,” said the report.

“As it stands, financial and non-financial investors will be able to increase their corporate ‘green scoring’ by investing in gas, including outside Europe. Disclosure will be key,” it stated.

Higher global prices indicate improving netbacks for buyers of US LNG in European and Asian winter season markets with shipments rising as the industry fulfils its role as an outlet for domestic natural gas amid falling consumption and production.

The increased prices come amid expectations of natural gas demand recovery and potential LNG supply reductions because of maintenance at overseas plants, according to the short-term energy outlook of the US Energy Information Administration.

The EIA forecasts that US LNG exports will average more than 9.0 billion cubic feet per day from December 2020 through February 2021.

The report said that the cargo shipments, mostly from the Gulf Coast, averaged 4.9 Bcf per day in September, an increase of 1.2 Bcf per day from August.

Consumption of domestic natural gas is expected to decline slightly and will average 83.7 Bcf per day in 2020, down 1.8 percent from 2019.

“The decline in total US consumption reflects less heating demand in early 2020, contributing to residential and commercial demand in 2020 averaging 13.1 Bcf per day (down 0.7 Bcf per day from 2019) and 8.7 Bcf per day (down 0.9 Bcf per day from 2019), respectively,” said the report.

It forecasts industrial consumption will average 22.3 Bcf per day in 2020, down 0.8 Bcf per day from 2019 as a result of reduced manufacturing activity.

“EIA expects total US natural gas consumption will average 78.7 Bcf per day in 2021, a 5.9 percent decline from 2020,” said the report.

“The expected decline in 2021 is the result of rising natural gas prices that will reduce demand for natural gas in the electric power sectors,” it added.

Dry natural gas production will average 90.6 Bcf percent in 2020, down from an average of 93.1 Bcf per day in 2019.

In the forecast, monthly average production falls from a record 97.0 Bcf per day in December 2019 to 85.9 Bcf per day in May 2021, before increasing slightly.

“Natural gas production declines the most in the Permian region, where EIA expects low crude oil prices will reduce associated natural gas output from oil-directed rigs,” said the report.

Dry natural gas production in the US is expected to average 86.8 Bcf per day in 2021.

On the storage front, the EIA estimated that total working natural gas in storage at the end of September was at more than 3.8 trillion cubic feet, 12 percent more than the five-year (2015-2019) average.

In the forecast, EIA expects inventories to be more than 4.0 Tcf on October 31, which would be a record high.

“However, because expected natural gas production will be lower this winter than last winter, EIA forecasts inventory draws will outpace the five-year average during the heating season and end March 2021 at 1.7 Tcf, which would be 6 percent lower than the 2016-2020 average,” it added.

As regards energy-related carbon dioxide (CO2) emissions, after falling by 2.6 percent in 2019 from the previous year’s level, the emissions will decrease by 10 percent (536 million metric tons) in 2020 as a result of reduced consumption of all fossil fuels.