The future of global gas demand
The future of global gas demand was the subject of the Global Gas Report 2020 (GGR) published last month by the International Gas Union (IGU), in collaboration with Bloomberg NEF (BNEF) and Italian gas company Snam.
In addition to reviewing 2019 performance, the report assesses the effect of Covid-19 on the gas industry in the first half of 2020 and analyses the drivers for recovery in the next few years. It also includes a special section on the role of hydrogen and the gas industry in the low-carbon transition, particularly on market potential and technological options and costs of hydrogen production, storage and transport.
Its main conclusion is that the disruption caused by Covid-19 is on the way to reduce gas consumption and LNG trade by 4% in 2020. This and abundant supply of gas have kept prices at historic lows.
But on the positive side, GGR points out that “abundant supply and continued cost-competitiveness, aided by a push for cleaner air, can lead to a recovery in demand to pre-Covid-19 levels in the next two years, as the global economy regains momentum.”
This will be critically dependent on continuing gas infrastructure investment, supported by technological innovation to raise efficiency and keep prices low. This includes scaling-up of low-carbon gas technologies, such as biomethane and carbon capture and storage.
Clean air policies provided an impetus for gas consumption in major markets. This will continue in future, particularly in Asia, driven by China and India. Also important is the increasing role of gas-fired power generation as a flexible resource to complement growing renewable generation.
GGR concludes that technological innovation and policy support can help the gas industry to bounce back strongly over the next few years.
Technologies such as biomethane, hydrogen and gas with carbon capture could play an important role, serving to decarbonise sectors of the economy that are currently seen as ‘hard to abate’, thus providing opportunities for long-term growth for the gas industry.
Key to the long-term role of gas and LNG in the global energy sector is cost-competitiveness underpinned by low prices. Abundant gas supplies, including shale gas, have kept gas prices low since 2018 and this is expected to continue well into the future.
In emerging countries, especially in Asia, the challenge for gas-fired generation will be its cost-competitiveness against other technologies. In most places, given the absence of low-cost domestic gas and lack of pricing on emissions or weaker pollution controls, coal-fired generation remains cheaper, especially in India and China. Gas has to compete against that.
The EU Green Deal sets very ambitious targets for the achievement of a carbon-neutral economy by 2050 in Europe. In the medium term, there is some potential for emissions reduction by further coal-to-gas switching. But in the longer-term increasing decarbonisation targets will pose challenges to gas utilisation. Studies by the European Commission show this declining towards 2030 and beyond.
Overall, gas can retain a role in a low-carbon world but it needs to remain cost-competitive.
On 1 September it was announced that Cyprus and Egypt are again intensifying discussions on the gas pipeline aimed to transport Aphrodite gas to the Idku LNG plant for liquefaction and export.
This is encouraging, but on its own it remains a political development. For such a pipeline to be built, first there must be a commercial gas sales agreement in place for the Aphrodite gas. This requires Chevron, Shell and Delek – the consortium developing the Aphrodite gas-field – to find buyers for this gas in Egypt, such as the Idku LNG plant.
On the same day Chevron’s CEO Michael Wirth reaffirmed in a telephone conversation with President Anastasiades the intention of the company to move forward as soon as possible with its plans to exploit the Aphrodite gas-field, despite the delay caused by the Covid-19 pandemic. Wirth said he will visit Cyprus as soon as conditions allow.
The operative words are “as soon as possible”. An encouraging but vague statement as to when exploitation will take place. This will happen only when global gas market and price conditions allow it, something that will take time.
Chevron reported a historic $8.3billion loss in July and announced massive downsizing, with a 30 per cent cut in investment spending along with 15 per cent staff redundancies. It also has huge problems with its Gorgon LNG terminal in Australia which cost $54billion to build and produces 15.5million tonnes of LNG per year. Sorting this out requires massive effort.
The key to Chevron’s strategy is to maintain dividend growth for its investors. Thus, it invests in projects with high returns.
Under the current circumstances, and with the LNG price hovering around $4/mmbtu (per about a thousand cubic feet) in Asia, Aphrodite gas is not commercially viable and will certainly not produce high returns.
Egypt is offering LNG from its Idku terminal at $5/mmbtu and has not found buyers since the beginning of the year. Shell, as the operator of Idku with 35.5 per cent stake, is considering selling its shares because the terminal is not profitable.
Under these circumstances, without a market upturn, conditions do not allow the development of Aphrodite, or the pipeline, no matter how much the Cypriot and Egyptian governments promote it.
This requires an investment from Chevron that will not be made without significant improvements in global LNG markets – that is, the price needs to rise from $4/mmbtu now to over $7/mmbtu. With the very difficult global economic situation due to the Covid-19 pandemic and the crisis engulfing the oil companies, there are no expectations that this will happen in the foreseeable future. As stated earlier, gas prices are expected to stay low for longer.
With the current oversupplied gas markets and the very low price environment, it may take some time before Chevron decides what to do with Aphrodite. Cyprus needs to be patient and willing to give this time.