Global natural gas demand is forecast to fall by 3 per cent year-on-year, or 120 billion cubic metres (bcm), this year, according to a new report by the International Energy Agency (IEA). The agency said the estimated demand shock in the global natural gas markets in 2020 caused by a combination of factors, including the COVID-19 pandemic, is the largest in recorded history.
The new IEA's Global Gas Security Review 2020, released on Monday, shows that since the global markets faced a historic fall in gas demand in the first half of the year, liquefied natural gas (LNG) has been playing a central role in balancing global gas markets, ensuring flexibility and security of supply. Producers and exporters have been adjusting supply through various means, including production shut-ins and reduction in LNG and pipeline gas volumes through contractual flexibility mechanisms.
IEA said amid the drop in global gas demand, monthly global LNG exports decreased by 17 per cent between January and July 2020. The report said LNG contracting activity collapsed from the peak of 95 bcm signed in 2018 to about 35 bcm in the nine months ending in September 2020.
Without the flexibility of global LNG supply, the Paris-based agency said the adjustment to this year's demand shock would have been less orderly, and could potentially have had a damaging effect on the commercial and contractual structures underpinning global gas trade.
IEA said while Covid-19 is a major cause of the historic demand shock, an exceptionally mild winter in the northern hemisphere contributed significantly as global gas demand dropped by 4 per cent in H1 2020. The mature markets across Europe, North America and Asia are also expected to account for over 80 per cent of the forecast drop in global natural gas demand for 2020.
The new report, which provides detailed analysis of recent LNG contracting developments and assesses the role of flexibility in gas supply adjustments, said the United States played a huge role in the market balancing as it accounted for the biggest share of the downward adjustment in global LNG supply in the first half of the year.
The report also highlighted the strong gains in gas prices in the third quarter of this year, following the supply adjustments and recovering demand. Natural gas spot prices had plummeted to their lowest levels in at least a decade in Q2 2020.
Low LNG contracting activity is expected to persist over the next five years as about one-third (about 190 bcm) of active contracts are due to expire between 2020 and 2025. In the same period, global export capacity is set to expand by 20 per cent. This period coincides with when the construction of the Nigeria Liquefied Natural Gas (NLNG) Train 7 project is expected to be completed. The NLNG signed the Engineering, Procurement and Construction (EPC) contracts for the additional liquefaction train in May of this year, and the project is expected to be completed in 2025.
The IEA report forecasts natural gas demand to increase by 3 per cent, or about 130 bcm, in 2021. The demand recovery next year is likely to be supported by fast-growing markets in Asia, Africa and the Middle East, with some of the more mature markets seeing gradual recoveries. However, there are uncertainties over the outlook due to the second wave of Covid-19 and the prospect of a prolonged pandemic.
“Global gas demand has been progressively recovering since June, driven mainly by emerging markets,” said Fatih Birol, IEA’s Executive Director. “However, this does not mean a return to business as usual, as the current crisis could have long-lasting repercussions.”