Energy outlook for 2020: the need to forge new path
Natural gas and crude oil had a difficult year in 2019, with global oversupplies keeping prices low. Much the same is expected in 2020.
In Europe major changes are afoot with the European Green Deal expected by March, providing the framework for energy developments over the next 30 years, with net-zero emissions by 2050 to be enshrined into law.
In Asia energy supply security concerns and increasing reliance on domestic resources, unleashed by the US-China trade war, will continue to impact LNG export markets, contributing to the global LNG glut and low prices.
The East Med was in a state of turmoil in 2019 due to Turkey’s intimidating and aggressive actions, in support of its determination to pursue unsustainable demands. This is expected to continue into 2020, and unless a solution is found, it could destabilise the region further and risk escalation of disputes.
This will probably be the most important development in Europe’s energy sector in 2020, setting the tone and direction for the next 30 years.
Its main aims include Europe becoming the first climate-neutral continent, enshrining a 2050 climate-neutrality goal into law and setting-up a new carbon reduction target for 2030 to at least 50 per cent. In addition, the European Investment Bank will be turned into the European Climate Bank, ceasing support of fossil fuel projects after 2021.
The Green Deal will be the main flagship of the new European Commission and it is expected to have a tremendous impact on the future of energy, including gas, in Europe.
Opec agreed in December to cut crude oil production and extend cuts to 31 March. Opec expects its own production to decline from 35 million bls/d in 2019 to 32.8 million bls/d in 2024.
US oil production is also expected to decline in 2020 due to lower prices, tighter lending and reduced spending, down to 13.1 million bls/day in comparison to 13.5million bls/day in 2019.
But other oil producing countries such as Brazil, Guyana and Norway are expected to more than make up for it, producing additional volumes that will meet global demand in 2020.
As a result, global oil demand growth is expected to be anemic in 2020, with some forecasts expecting it to be near 1million bls/day, keeping prices down. With Brent crude likely to be nearer the $60/bl range, it will impact oil-linked LNG prices.
As a result of the trade war with the US, China has made energy supply security top priority, favouring domestic energy production, including coal. This will impact LNG imports, limiting growth for the second year running. Japan and South Korea are also expected to see little change in LNG imports during 2020. As a result, Asia- Pacific will remain oversupplied, with diversions of LNG to Europe expected to continue.
But with European gas storages full and a mild winter, the ability of Europe to absorb diverted LNG may be more limited in 2020, which may cause US LNG shut-ins.
In addition, the just-agreed Gazprom-Ukraine deal means that there will be no disruptions in the supply of Russian gas to Europe. Also completion of Nord Stream 2 early in 2020, despite US sanctions, and possibly TurkrStream 2, mean that Gazprom could increase its overall gas supplies to Europe in comparison to 2019.
In the meanwhile, global gas liquefaction capacity is expected to carry on increasing, by about another 30 million tons in 2020, on top of the estimated 40 million tons increase in 2019.
The result of these will be an oversupply of gas and LNG, with prices staying low for another year, likely to average below $4/million btu during summer 2020, both in Europe and Asia.
On the positive side, low LNG prices may stimulate demand, especially in countries that cannot afford high energy prices. This is especially so in South Asia, where infrastructure is improving and could support LNG import growth.
After the failure of COP25 to arrive to a consensus on new, more ambitious, climate targets, COP26 is not expected to fare any better. US resistance and unwillingness by China and India to curb energy demand and increase their commitments will limit achievements. Global energy consumption and carbon emissions will continue to increase, with more extreme climatic events feeding increasingly polarised environmental activism.
Renewables penetration will continue globally at a rapid pace. As a result, the world will continue to experience an energy supply glut, with global energy markets remaining highly competitive and prices persistently low.
In the East Med, Turkey looks set to continue its intimidation and aggressive actions, not heeding widespread condemnation, but a hot incident will be avoided.
The EU will intensify its efforts to normalise relations with Turkey through negotiation.
The signing of the East Med gas pipeline inter-governmental agreement between Greece, Cyprus and Israel will bring the three countries closer together. It will certainly strengthen relations between them at a critical time for the East Med, promoting closer cooperation.
With the cost of gas in Israel, before it enters the pipeline, being more than $4.50/million btu, and the cost of the pipeline estimated between $7-10 billion, the price of gas in Europe will need to exceed $8/million btu – which is not likely – before the EastMed become financially viable. For similar reasons, not even a pipeline to Europe via Turkey is viable.
Despite the undoubted political backing of the pipeline, even from the US, to build it needs to be both financially viable and to secure buyers for the gas it will carry. Both of these are facing major challenges.
Drilling off Cyprus and Lebanon will lead to more gas discoveries in 2020, but the global glut of energy supplies and EGD will prove to be major challenges to the export of East Med gas to international markets.
Egypt, though, will continue with the successful development of its energy sector and Israel will finally export its first gas to Egypt.
Overall, 2020 is expected to be another challenging year for energy, both globally and in the East Med. Hopefully resumption of negotiations to resolve the Cyprus problem, with UN and EU support, will bring hope.
Source: Cyprus Mail