The consultancy claims that, in the short-term, the biggest downside risk from the oil price crash to gas supply is associated with gas production, largely from unconventionals in the US. Nonetheless, it is not an immediate effect, as Wood Mackenzie claims prices are still generally above variable wellhead operating costs.
As companies cut back on oil drilling, associated gas production growth, especially in the Permian, will begin to slow down. Wood Mackenzie’s Genscape estimates that, by the end of 2020, US gas production would be 0.9 billion ft3/d lower than pre-crash estimates. This could be exacerbated through 2021, with greater flexibility in drilling reductions. Genscape also estimates that end of 2021 production could be 3.1 billion ft3/d, which would be lower than pre-crash forecasts of 90.5 billion ft3/d.
In the statement, Wood Mackenzie points out that the majority of global LNG projects are supplied mainly from non-associated gas, and so little direct impact on LNG supply in the short to medium-term is expected.
Research director Giles Farrer said: “The greater risk to supply is pre-FID investments. Record LNG supply investments last year and plunging LNG spot prices this year were already testing the appetite of LNG project developers to sanction new LNG projects in 2020. But the drop in oil price will make these decisions more complicated.
“Lower oil prices will have several consequences for the sector. These include restricted capital investment budgets, reduced appetite for financing LNG projects with exposure to oil prices. US LNG projects selling on a Henry Hub-plus basis will also be perceived as less competitive than oil-indexed LNG.
“As a result, there will be fewer LNG projects taking FID in 2020 and 2021. Projects in Mozambique, Mauritania/Senegal and Australasia will come under pressure. This is likely to translate into lower global supply between 2024 and 2027.
“However, we expect that Qatar, which has low fiscal breakevens and an ambition to grow LNG market share long-term, will continue to push forwards with its North Field expansion plans.”
In Asia, meanwhile, Wood Mackenzie argues that the fall in oil prices will begin to impact the pricing of gas under long-term contracts from late 2020. This could begin to have a major effect on the competitiveness of gas in major Asian markets, such as Japan and South Korea. Sustained lower oil price will substantially lower the price of gas for consumers, which have been at a premium to hub-priced gas in recent times. According to the statement, this could make gas competitive with coal in Japan and South Korea, and encourage the power sector to switch from coal to gas.
Senior manager Miaoru Huang said: “For China, at an oil price of US$35/bbl, contracted LNG arrives at a cost lower than domestic wholesale price benchmarks.
“While there is strong incentive for NOCs to retain the benefits to compensate for years of import losses, the import cost reduction will be partially passed through to downstream and will allow the government to push through its policy of lowering gas prices to end users. This will help coronavirus-affected businesses to resume operations but stimulating new coal-to-gas switching will require further policy support even under a low oil price environment.”
In other markets, however, Wood Mackenzie claims gas demand will come under pressure from oil as a competing fuel. In India, a lower oil price could slow the shift from oil to gas in the industrial sector, as both long and spot LNG prices will compete with fuels, such as heating oil, LPG and naphtha.
The consultancy adds that European gas demand and flows will face little impact from even a sustained oil price collapse. Oil-indexed Russian pipeline contracts now account for less than 25% of Gazprom’s portfolio and, regardless, the current market share strategy is not likely to change.
Algerian pipeline contracts into Spain are still fully oil-indexed, and have been sitting at take-or-pay levels. If the price of oil continues to be low, Spanish buyers would take more Algerian piped volumes. Wood Mackenzie claims this would not become possible until October this year due to the lag on the contract. However, in 2021, it would reduce the space for LNG into Spain by 2 billion m3, placing even greater pressure on the oversupplied LNG market.
Read the article online at: https://www.lngindustry.com/liquid-natural-gas/12032020/wood-mackenzie-oil-market-rout-could-boost-asias-gas-demand/