15 August 2020

Saturday, 02:34

CURRENCY

HOPING FOR TOMORROW

Low gas prices amid growing demand, or what’s ahead of the global gas market

Author:

15.06.2020

The world markets are experiencing, perhaps, the worst period in history in recent months due to the coronavirus pandemic. World gas prices also began to fall sharply as a result of a decline in industrial production due to the introduction of quarantine measures and falling prices for raw materials, primarily for fuel.

In fact, the downward trend in gas prices, primarily for liquefied natural gas (LNG), has been observed since last year. So, it would not be entirely correct to directly link the current market situation with the pandemic.

LNG is used to generate electricity at thermal power plants, especially during periods of high demand for heating and cooling, i.e. in the winter and summer months. At the same time, even before the pandemic, due to the prevalence of supply over demand, the gas market was shaking. This can be explained, in particular, by the unprecedentedly warm winters of 2018 and 2019 in Europe, Japan and China - the main consumers of LNG in the world. That’s why the volume of fuel reserves did not significantly decrease in the gas storages of these countries by the end of the heating season.

On the other hand, along with demand decreasing, LNG supply was growing significantly, with the US entering the market recently. This, obviously, lowered the prices for natural gas at a global scale. The COVID-19 pandemic only worsened the trend, pushing the LNG demand down more. Fully loaded American LNG tankers bound for Europe and Asia had to stay at the ports. Buyers cancelled previous orders.

The actions of direct competitors of the United States, in particular Australia and Qatar, did not improve the situation, especially when the oversupply of gas last year reached an unprecedented level after Australia flooded the market with its gas, becoming the largest LNG exporter in the world (c. 77.5 million tons).

Unlike the oil market, the world's leading gas exporters are free to produce as much natural gas as they can. Operations are not coordinated jointly, and production is not organised efficiently in accordance with global demand and supply. Gas Exporting Countries Forum (GECF) created in 2001 does not provide for the stability of the gas market.

However, members of the forum control more than 70% of the global natural gas reserves, 46% of market production, 55% of pipelines and 61% of LNG exports in the world. This makes it a powerful tool for regulating the gas market in the future. Therefore, many experts already predict its transformation into the future OPEC-type platform for natural gas.

Speaking of more distant prospects, many experts are more optimistic in their forecasts. After all, given the ongoing restructuring of the fuel market and the abandoning by consumers of ‘dirty’ technologies in the production of electric power and coal, the share of natural gas in energy consumption will only grow.

 

Gas is the future anyway

According to experts, in the next three decades, gas will become the main fossil fuel in the world. Indeed, gas is becoming one of the most effective raw energy products due to its relative cleanness. Unlike coal and oil, it has the lowest CO2 emission rate, provides the cleanest combustion, and complements the energy of the wind and the sun. In addition, a significant part of innovations aimed at increasing profitability in the production of electricity is also associated with developments based on natural gas.

At the same time, in the coming decades there will be a more intensive growth in electricity production with a large share of renewable energy sources. Therefore, in percentage terms, the share of gas in electricity production as a whole can be reduced. At the same time, the industrial demand for gas will grow. We can also assume a sharp increase in the use of gas in the transport sector. This is quite possible due to the increasing number of vehicles operating on natural gas, and as a result of the production of hydrogen for vehicles.

Currently, only 40% of gas consumption is used to generate electricity. The remaining 60% goes to households for heating and cooking. Industrially, it is used primarily as a raw material or for processing heat. In addition, these figures vary greatly by region. Outside the OECD countries, 80% of gas is consumed in industry or energy production. Gas plays an instrumental role in meeting domestic needs only in a few places around the world, including China, the post-Soviet states and some countries of Latin America and South Asia. In OECD countries, household consumption accounts for only 28% of gas demand, with Europe being the most dependent on gas, and Asia and Oceania to a lesser extent.

In proportional terms, the existing situation will not change significantly in the near future.

 

Azerbaijan's gas strategy

The current difficulties in gas markets will not create any particular problems in the coming months for Azerbaijan, as the main deliveries of Azerbaijani gas to Europe will begin only after the final construction of the Trans-Adriatic Gas Pipeline (TAP). According to the latest data, the construction of the TAP is completed by 94.1%. Thus, it is expected that the pipeline will be finally commissioned either at the end of this year or at the beginning of next year. By that time, it is quite likely that prices largely stabilise. In addition, in previous years, Azerbaijan concluded deals with various consumers on the supply of specific volumes of gas to Europe. Starting from 2021, these contracts will be implemented in strict accordance with previous commitments.

In addition, in 2021, the Absheron field is expected to deliver its first gas. The field is located 100 km from Baku at a depth of 500 m. The field’s reserves are estimated at 350 billion cubic meters of gas and 45 million tons of condensate. This will further strengthen the resource base for supplies from Azerbaijan. IMF predicts that this year Azerbaijan will increase daily gas exports by 15% to 176.6 million cubic meters. According to estimates, in 2021 daily gas exports could reach 19.9 million cubic meters.

In the longer term, Baku’s efforts to create a stable infrastructure in the region make it possible for the Azerbaijani gas to feel confident in Europe.

Klaus-Dieter Borchardt, Deputy Director-General of EC responsible for the coordination of energy policy, the Energy Union and external policy, recently announced that Europe is considering to double the purchase of natural gas from Azerbaijan, 20 billion cubic meters annualy, pending the development of new potential gas fields. This may indicate the strong political will of Azerbaijan’s EU partners to continue long-term cooperation.

According to estimates, the largest gas field of Azerbaijan, Shah Deniz, has 1 trillion cubic meters of gas reserves. The commissioning of the Absheron field in the mid-2021, with its reserves exceeding 300 billion cubic meters, will make Azerbaijan a promising player in the global gas market for the long term. In addition to stable deliveries from Shah Deniz (15-16 billion cubic meters), another 5 billion cubic meters of gas from Absheron make it possible to deliver through the Southern Gas Corridor at least 20-21 billion cubic meters of gas annually.

At the same time, Azerbaijan sees further gas prospects at the Umid and Babek fields operated solely by SOCAR.

In the current situation, when the European gas market grows steadily and deliveries from Azerbaijan are guaranteed, one cannot remain sceptic about the future of Azerbaijan's gas strategy, even with the current market volatility.



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