The European Union had proposed labeling natural gas as a ‘green energy’ source, therefore, trends in the sale of the commodity are critical. These are the six things to watch out for in the global gas and LNG market for 2022.
Prices to fall if Nord Stream 2 is commissioned
The winter weather changes and the timing of Nord Stream 2 start-up are the two key components that will outline prices in 2022, even as global Liquefied Natural Gas (LNG) prices continue to trade at record highs.
According to Wood Mackenzie’s analysis, prices will gradually fall once the winter is over, but the need to refill storage facilities will be significant, about 20 – 25 billion cubic metres (m3) more than last year.
If Russia maintains current export levels and under normal weather conditions, European storage inventories will fall below 15 billion m3 by the end of March, according to Wood Mackenzie analysis
Massimo Di Odoardo, Vice President, Gas, and LNG Research, Wood Mackenzie, said that weather patterns in Asia will determine whether the recent surge of US LNG imports to Europe will continue into January, restricting storage withdrawals and assisting in market rebalancing.
“A harsh winter in Europe might result in an increase in gas consumption of up to 10 billion m3, bringing storage stockpiles close to zero by the end of March.
“And, as the German government has warned, the commissioning of Nord Stream 2 could be halted entirely if tensions between Russia and Ukraine worsen,” he said.
Di Odoardo, also said that although demand for storage (and high carbon pricing) will keep prices over $15 per million British thermal units (Btu), normal winter weather, notably in Asia, and visibility on Nord Stream 2 commissioning will push prices down.
Oil-indexation levels to rise to 12 per cent on a weighted average basis
According to Wood Mackenzie, oil indexation in long-term LNG contracts has been dropping for the previous ten years as a result of greater availability of uncontracted supply, most recently from Qatar, and decreased interest for long-term contracts in favour of more spot exposure.
However, 2022 will be a turning point for LNG oil-indexes contracts, with the indexation level on the rise.
Valery Chow, Vice President, Head of APAC Gas & LNG Research said: “2021 saw the return of contracting activity to its highest levels over the last five years with Asia accounting for 85 per cent of global contracts signed and China leading the pack.”
FIDs are unlikely to come from majors’ sponsored projects in 2022
Over 79 million tonnes per year (tpy) of additional LNG is expected to take final investment decisions (FID) over the next two years, the report submitted.
However, it appears doubtful that a major will sponsor one of its equity initiatives in 2022 as priority shifts from offsetting CO2 emissions to material carbon reduction
In 2021, carbon offset LNG thrived, with 28 cargoes announced, a five-fold increase over 2020.
However, the enthusiasm, according to Wood Mackenzie, is waning, partially due to high LNG prices, but also as a result of rising criticism of what had begun to be perceived as a “greenwashing” approach due to the low quality and pricing of the offsets.
“This will force the LNG industry to focus on CO2 reduction across the value chain, which must be the ultimate goal, with offsets used only where emissions are unavoidable.”
Meanwhile, some companies have already been moving in that direction, but the focus has so far been on the low-hanging fruit.
However, more capital-intensive projects, including the use of low-carbon power and/or carbon capture and storage (CCS), remain at an evaluation stage.
In the short term, global gas demand will remain resilient, but the role of gas in the energy transition will be strained as prices continue high.
Despite Europe’s robust economic development, gas demand in industry and power has decreased by 4 per cent since the summer, compared to the previous five years; there have been little signs of demand destruction.
Meanwhile, in Asia, LNG demand has increased as most supply is priced at legacy oil-indexed contracts, which are currently at half the value of Asian LNG spot prices.
Di Odoardo said: “Eventually, though, higher prices will put pressure on demand. In Asia, the rationale to switch from coal to gas will diminish, as higher spot LNG prices will translate into higher oil-indexed contract prices.
“Meanwhile, investment in renewables and batteries will increase, limiting the headroom for gas demand to grow. And in Europe, where the move towards renewables is already underway, policymakers will look to accelerate the shift away from natural gas, as the recent EU proposal to support biomethane and hydrogen suggest.”
Gas to be considered as a transitional investment in EU taxonomy
The European Union (EU) member States will be debating the taxonomy for sustainable investments after the European Commission released its latest version, classifying efficient unabated gas-fired power plants as transitional investments.
On the face of it, whether unabated gas-fired plants will be defined as transitional investments’ in the EU taxonomy could be a moment of truth for the global gas industry, Wood Mackenzie states.
According to Di Odoardo, the EU’s recognition of gas power plants as a transitional investment is no solution for the gas industry.
“Gas prices will need to come down to accommodate increased investments in gas use.
“And the proposed CO2 emission cap of 270 g/KWh, alongside the commitment to use at least 30 per cent of renewable or low carbon gas by 2026 and 100 per cent by 2035, means that the use of conventional natural gas would need to reduce overtime if a gas-fired power plant has to be classified as ‘transitional’,” he said.