The aftershock of COVID-19 attack Natural Gas Markets

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As of 26 June 2020, there have been 9,472,473 confirmed cases of COVID-19, including 484,236 deaths, reported to WHO from 216 countries. After social distancing and lockdown efforts, some countries are partially re-opening their economies in attempts to revive the global economy. But, Natural Gas market is under Covid Attack.
Responding to a question on oil price and demand, I said as per my information and data available, that the world is seeing reduction in demand due to the COVID-19 pandemic and lockdown. But, Natural gas demand is less sensitive to COVID-19 in the short-term compared to oil, due to its limited exposure to the transport sector. Although natural gas demand in the power sector is affected, the loss in commercial and industrial electricity demand is in part transferred to residential uses.
Natural gas demand, closely associated to world economic growth, is set to decline by around 3 to 5 percent in 2020, dependent on public health restrictions, economic activity, and the speed of recovery due to crisis created COVID-19 pandemic. Governments may choose to capitalise on abundant and competitive natural gas supplies to place greater emphasis on clean air requirements and inclusive energy transitions in post- pandemic recovery strategies.
European market will also see deep in Natural gas demand but temporarily. After a sharp decline of about 100 billion cubic metres (bcm) in 2011–14, gas demand grew strongly in 2015 (+4 per cent) and in 2016 (+6 per cent). Despite stagnation in electricity demand and a continued increase in the penetration of renewables, the share of natural gas in the power generation mix rose. But post pandemic, it will see the demand decline (-14 percent) in 2020. India’s petroleum product demand to fall 8-to-10 per cent in 2020. The country’s petrol demand is projected to fall by 400-to-420 thousand barrels per day in the second quarter of 2020, primarily due to mobility restrictions.
What we see in current trend in natural gas demand could fall much further as the year progresses to end due to reduced demand in the power and industry sectors. Whereas potential demand will be reliant on how industrial uses of natural gas will be affected, short- and long-term impacts of natural gas sector investment cuts, and the degree to which government policies aimed at hastening clean air and energy transitions will promote fuel switching and encourage investment in energy systems integration.
Implementations of Circular Carbon Economy in the system. Natural gas technologies can accelerate fuel-switching and synergies by incorporating renewables, green gas, hydrogen, and carbon dioxide solutions to achieve the net-zero emissions envisioned by green growth concepts such as the Circular Carbon Economy.
Producers and consumers will have to adjust approaches due to limited obtainable storage and descending convergence among regional gas price indicators. While this may trim down opportunities for international gas trade. The exceptional energy market circumstances created by the COVID-19 pandemic may enable governments to make progress in attracting natural gas market transparency for which government support remains indispensable.

The below points illustrate how COVID-19 may impact natural gas supply-demand fundamentals. I am talking about International shocks. It can be divided into to parts. Shock on demand side and Shock on supply side.

The demand side shock:
1. Natural gas markets are insulated to some extent given that natural gas demand is not driven primarily by transportation as in the case of oil. Natural gas makes up a significant percentage of the power mix in some countries which is relevant for heating homes and powering key industries even during the COVID-19 pandemic. But it all depend on the recovery of the global economy and government policies on how government stimulus packages affect energy policies and the future trajectory of the economy given the strong correlation between GDP growth and natural gas demand.
2. LNG demand will decrease in 2020 compared to its pre-pandemic outlook after growing every year since 2012. Natural gas importing markets in Europe and Asia facing an economic downturn due to COVID-19 will have a direct impact on LNG demand in the short- term. The pandemic has also curtailed LNG demand in China, Japan and India the largest LNG importer and fastest-growing market for LNG.

The supply side shock:
1. Capital intensive business and lack of requirement will lead to fall. Natural gas production will decrease due to the lack of short-term demand and uncertain future. In addition to abundant natural gas supplies, OPEC oil production adjustments that went into effect in May along with shut-ins of non-OPEC oil production will naturally reduce drilling operations globally. As producers shut down oil wells, “associated” gas production will also decline. The decline in associated gas along with potential shut-ins of natural gas production for existing LNG and pipeline gas projects can work to reduce natural gas supply over time.
2. Investments in natural gas and LNG projects will decrease in the short-to medium-term can be seen. Investment decisions for proposed LNG export terminals globally have been delayed or cancelled in recent weeks. COVID-19 outbreaks have also interrupted supply chains and caused work force shortages, delaying construction of approved projects.
3. Natural Gas Storage is filling up fast due to abundant supply and falling demand. It is also creating fluctuation in market. An already oversupplied natural gas market is now facing an unprecedented drop in demand resulting in natural gas storage filling up faster than usual.
Suggestions to come out of this problem are a little dicey. Abundant and more competitively priced gas supplies will provide consumers with an unparalleled opportunity to accelerate recovery based on clean, affordable, and more diverse natural gas supplies. Natural gas is now more competitive creating greater fuel switching opportunities thus maintaining momentum for natural gas demand in energy transitions. Due to social distancing efforts and restrictions on movement, electricity demand is being transferred from businesses and industry to residential use.

Uncertainty forced to see the decades low spot price. The low spot prices and uniformity in regional benchmarks will lead to a revaluation of LNG market strategies, loosening oil price linkages, and more flexible long-term contracts. The emergence of COVID-19 has made spot prices more competitive with oil-indexed term contracts that make up the majority of LNG sales. LNG producers may incorporate a more thorough evaluation of their competitive position versus other producers that will include offering greater contract flexibility and marketing LNG through new technologies and business models. Buyers may explore ways to increase contract flexibility and natural gas storage capacity to lock in low-cost supply for the longer term.

Article written by Dr Ajay Kumar chairman and Managing director of Fox petroleum.

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