It was in February 2014, when most of the key gas pricing agencies reported a record in the spot price (price for immediate delivery) of LNG cargoes in Japan-Korea. Driven by the Fukushima crisis and the impairment of Japan’s nuclear plants gas, LNG has gained significant share in the country’s power generation mix being a relatively environmental-friendly fossil fuel. The sport price in that month? The more than extraordinary $20 per Mmbtu!
That seemed to be the silver bullet for many gas producers and LNG import operators. A commodity that is relatively cheap to buy or produce could be liquefied and sold into distant markets for a price 5 to 6 times more than its cost.
Reports on global LNG supply balances showed a potential supply gap after 2020 and added to the rush to expand LNG liquefaction capacities but also to sanction more gas projects with the potential to build LNG plants linked to them - a rush that resembled the gold rush 1800 century.
Gas was also favorable compared to oil among investors and shareholders. It has lower emissions intensity compared to oil and it would be a good first step among the oil dinosaurs to start their diversification efforts towards a greener resource type.
Everything seemed in line for a gas revolution. Huge projects were sanctioned in Australia (amid equivalent huge project delays and cost overruns). Qatar the world leader in LNG expanded its production capacity and the US started to transform its LNG import terminals to liquefaction/export facilities. And then reality struck…
In 2016, as projects were ramping-up and winter in Asia was milder than expected LNG prices dropped to $6-7 per mmbtu. The market was not able to absorb the gas, and coal was cheaper to burn leading to the price decline.
And that brings us to the new reality of 2020 and the COVID era
Remember that $20 per Mmbtu spot price in 2014? Divide that by 10 and you will get the same price marker for April-May 2020. Of course, the weather in spring-time is milder than February but if we look at the April-May 2016 prices they are still however at the $16-18 range. This signaled a fundamental change in pricing dynamics…
And this becomes more evident if we look at project cancellations and deferrals announced by oil & gas companies. Shell has walked out from Lake Charles LNG project due to weak market conditions. ExxonMobil is deferring its Mozambique LNG project for 2021 and the same stands for the Browse, Scarborough and Pluto-3 LNG projects in Australia.
Many more gas projects linked to LNG plants have also been deferred or cancelled completely. The preference showed by operators in cancelling these types of projects is driven by two factors. Firstly, LNG projects are capital intensive and more prone to overruns and delays since they are more technically complex compared to upstream projects. Secondly, oil remains much more profitable.
In a world were oil companies are looking to save even the last dollar to remain afloat in the COVID flood, it is the gas projects that are offloaded first.
Even the National Oil Companies that were looking to increase their domestic gas capacities and possibly expand into gas exports are having second thoughts amid fiscal budget pressures.
Aramco has delayed its giant Jafurah shale gas development, while ADNOC has cancelled contracts for its sour gas fields. Petronas with SK 408 and many more have done the same.
This article is meant to prove a reminder that any energy transition - even among different fossil fuels - is costly. Gas is cleaner than oil and has the potential to transform economies with its increased efficiency, but oil still remains on top in the oil companies’ agendas.
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