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Global gas markets to remain 'amply supplied' to mid-2020s: IEA

Highlights

To maintain 'downward' pressure on spot prices

Buyers to seek concessions in new contract talks

IEA points to 'sensitive' global LNG balance

London — Global gas markets are expected to remain amply supplied until the mid-2020s under the International Energy Agency's central Stated Policies Scenario (STEPS), which is set to maintain downward pressure on spot prices, the agency said in its latest World Energy Outlook.

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In the outlook published Oct. 13, the agency said it expected global gas buyers to look for "significant concessions" on pricing and volumes in new contracts as legacy contracts expire.

Buyers that source gas under long-term, oil-indexed contracts have not been able to make the most of low spot prices in the recent past, it said.

"Around half of all gas traded over long distances remains priced in relation to oil, with gas importers tied to long-term purchase obligations that prevent them from fully taking advantage of loose market conditions," it said.

This particularly affects buyers in Asia who have paid, on average, two-thirds more for their gas supplies in 2020 than spot prices would indicate, or around $20 billion extra.

"In Europe, by contrast, a larger proportion of gas is imported on spot pricing terms in a more competitive market, meaning buyers and end-users have been able to realize a larger proportion of the possible savings," the IEA said.

It said that as oil prices recover to $70/b by 2025 in the STEPS, an average gap of $1.30/MMBtu remains between gas priced on an oil-indexed basis and spot prices, "reflecting continuing loose gas market conditions."

"This implies an additional average cost of more than $8 billion each year for growing import markets such as China if oil indexation is maintained as the dominant method of pricing," the agency said.

However, it cautioned that spot pricing implied greater exposure to market volatility and does not guarantee lower prices "since market fundamentals could in the future push spot prices above oil-indexed reference values."

The IEA said that with around 150 Bcm of LNG contracts worldwide due to expire in the next five years amid a global gas glut, buyers are likely to be looking for concessions as they negotiate new agreements.

"Sellers, however, may only be able to meet buyers halfway, and in any case are likely to struggle to offer long-term supply at anything near the spot prices seen in 2020," the agency said.

With the exception of Qatar and some low cost brownfield developments in Russia, new gas export projects need to sell gas at a delivered cost of $6-$8/MMBtu to break even, it said.

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'Sensitive' LNG balance

The IEA also warned that the global LNG balance was "sensitive" and could be upset on both the producer and consumer sides.

"Achieving a smooth balancing between LNG supply and demand over the coming years is by no means a given," it said.

Until recently, LNG had stood out within the oil and gas industry for its ability to attract financing for capital-intensive projects with long lead times.

But in the absence of committed buyers, the market has increasingly been relying on the balance sheets of oil and gas majors or on equity participation models to move LNG projects ahead.

"However, lower capital spending and leaner upstream portfolios in the wake of the pandemic means this approach now looks more challenging," it said.

Low spot LNG prices have also raised concern among banks and other financial players about the long-term viability of new LNG projects, the agency said.

On the demand side, the shape of the macroeconomic recovery is the immediate uncertainty, the IEA said.

While some emerging and developing economies have responded to low spot prices by ramping up LNG imports -- such as India -- there are contractual and infrastructural constraints in some countries that prevent them from benefitting from the global LNG surplus.

A delayed recovery from the pandemic might also reduce importing country infrastructure budgets, making it more difficult for largely state-owned utilities and operators to develop regasification projects, it said.

Different scenarios

The IEA said that each of the scenarios explored in its latest outlook revealed "very different" outcomes for the LNG industry.

While all scenarios show an amply supplied LNG market in the first years following the onset of COVID-19, the picture starts to diverge by 2025.

"In the STEPS, a supply gap begins to emerge in the late-2020s and an additional 50 Bcm of as-yet unsanctioned LNG projects are required by 2030," it said.

But if recovery were to be delayed because of extended outbreaks of COVID-19 and a deeper economic slump as in the Delayed Recovery Scenario, the liquefaction capacity existing or under construction today would largely suffice through to the end of the decade.

In a Sustainable Development Scenario -- which sees a near-term surge of investment in clean energy technologies over the next ten years -- LNG demand growth begins to slow from the mid-2020s.

By 2040 LNG requirements are materially lower –- by 15-25% -– than in the less carbon-constrained scenarios, it said.