In this analysis of a recent Wood Mackenzie report, OGJ writes that 2021 will be a defining one for the gas and LNG industry, as decarbonizing natural gas will become a strategic priority for the gas industry
WoodMac Vice-president, Massimo Di Odoardo, has said policy makers will need to provide clarity on decarbonization plans, including how they see the role of natural gas, following pledges to achieve climate neutrality, even as gas players will have to show commitments to decarbonize natural gas, including through carbon capture, utilization, and storage (CCUS) and blue hydrogen, in 2021.
The firm identified five themes set to impact the industry this year to include Asian and European policies, large scale CCUS and blue hydrogen projects, President Joe Biden, 2021 prices and long-term LNG contract.
Asian and European policies will support gas demand in the medium term
Almost 50% of today’s global carbon emissions and 75% of today’s LNG demand are covered by countries with carbon neutral goals. The resilience of gas in the energy mix will depend upon the pathways policy makers adopt to achieve net-zero targets, WoodMac said.
The acceleration in coal-to-gas switching is a theme to watch in Asia as coal accounts for over 50% of the region’s energy mix. In Europe, additional coal plant retirals in Germany and Poland could support more gas utilization in the medium term, such as what is happening in other European countries. Additionally, firm policies in support of CCUS as well as blue hydrogen would support gas demand in hard to decarbonize sectors.
Large-scale CCUS and blue hydrogen projects in Europe could take FID in 2022
Players across the gas value chain have announced proposals for development of large-scale CCUS projects to decarbonize localized industrial clusters and/or to use in combination with steam methane reformers (SMRs) to produce blue hydrogen from natural gas.
New momentum is building up for CCUS for industrial and power plants too, where costs for capturing CO2 could be more than $100/ton CO2. Public support and regulation, as well as new business models have all been key to support recent developments, WoodMac said.
“Companies are forming partnerships to exploit economies of scale, share investment costs across the value chain and monetize by-products. Industrial clusters, which account for 15-20% of global CO2 emissions, are emerging as ‘sweet spots’, combining interests and expertise from industrials, utilities, infrastructure players, and international oil companies,” said Di Odoardo.
“Projects will need to show tangible progress this year. Their success will be crucial to ensure gas remains resilient in the future energy mix as countries sets out plans to achieve net-zero energy systems,” he continued.
President Biden is expected to make net-zero carbon announcements but they’re unlikely to turn into legislation in 2021.
During the presidential campaign, Biden announced an ambitious $2 trillion ‘clean energy revolution’ seeking to accelerate the US energy transition, including setting a net-zero carbon emission target in the power sector by 2035 and stating a US return to the Paris Climate Agreement.
“If implemented, these policies could have long-term effects on the US energy landscape. We anticipate zero-carbon power generation to reach 58% by 2035, supported by strong penetration of wind and solar. But with gas-fired generation increasing to 36%, or 32 bcfd, a significant gap towards the net-zero target would remain,” Di Ordoardo said.
“A change to reach net-zero carbon emissions in the power sector in 2035 would require a dramatic shift from the current environment.”
2021 prices: TTF to average $5.6/MMbtu and Asian LNG spot average $7.6/MMbtu
Global LNG prices have made an impressive climb from the $2.0/MMbtu experienced for most of the summer, with Asian LNG prices trading above $20/MMbtu. Prices will come down in the second quarter, but the current cold spell in the northern hemisphere signal what looked like a finely balanced summer just a month ago, is now looking increasingly tight, WoodMac said.
“Much of the LNG price spike has been driven by cold weather, supply disruption and lack of shipping capacity, and delays at the Panama Canal. Fundamentals have been playing a role too, with Asian LNG demand in 2020 fourth quarter already at pre-coronavirus levels,” said Di Odoardo.
“With the current cold spell expected to continue throughout most of January, Asian LNG demand in 2021 first quarter will remain strong, paving the way for additional demand for LNG stocking in the summer across North Asia. This, in turn, will reduce the pressure on Europe to absorb excess LNG supply in the summer,” he continued.
International gas pipeline
Despite global LNG supply expected to increase by 17 million tons in 2021, mainly because of full utilization of US LNG through the summer, the current cold spell in the northern hemisphere is paving the way for a tighter global gas market throughout the year. Low temperatures mean that storage levels in Europe are already more than 15 billion cu m lower than last year and are now close to the past 5 years’ average. On the other hand, expectations of higher coal and European carbon prices, also partially driven by the current cold spell, provide headroom for higher European summer gas demand.
Di Odoardo said: “Global prices reached record lows in 2020, with TTF averaging $3.2/MMbtu and Asian LNG spot averaging $3.9/MMbtu. 2021 will show a stark difference, we anticipate TTF averaging $5.6/MMbtu and Asian LNG spot averaging $7.6/MMbtu.”
2021 long-term contract signing to hang on Qatar’s resolution to press ahead with North Field East
Following a raft of LNG project cancellations last year, current high prices will have emboldened LNG developers, WoodMac said. However, for new projects to be developed, contract activity will need to pick up. Buyers will be looking to assess their portfolio requirements and just how comfortable they are in committing for new long-term firm LNG vs increasing their spot market exposure.
“Buyers will want to understand just how resilient spot LNG prices will be this summer, following the hype in the winter. And they will want clarity on domestic policy attitudes towards gas, following carbon neutrality pledges in Northeast Asia. Buyers will be confident that a wave of uncontracted LNG will be hitting the market post 2025, including from LNG Canada (14 million tons) and the projects that have taken FID in 2019 (70 million tons). But they might start questioning Qatar’s commitment to quickly move forward with its 32 million tons per annum (MMtpa) North Field East project, following continued delays,” Di Odoardo said.
“The market will need around 85 MMtpa of new LNG supply by 2030. Provided Qatar takes FID early this year, most buyers will be in no rush to secure more long-term supply, despite oil indexation levels being below 11% Brent currently. A buyer’s market remains despite the current winter Asian LNG spot price spike. However, further delays to Qatar’s FID, will push some buyers to look for new long-term commitments,” he said.
Culled from OGJ