COVID-19 Will Make Countries Reconsider Their Priorities, says GECF
In a two-part interview with Africa Oil & Power, Secretary General of the GECF H.E. Yury Sentyurin shares how projected demand and marketed production can fuel both an energy transition and a reassessment of gas market structures.
How does the GECF see the supply and demand for natural gas shifting both in and outside of Africa in the short, medium and long-term future?
In the short- to medium-term, the worldwide slowdown in economic activity is reducing the global oil and gas demand significantly and contributes to maintaining a low price environment. This puts considerable pressure on the development of the natural gas supply chain projects, including gas export-oriented projects in Africa. Many oil and gas upstream and midstream companies around the world and in Africa have decided to slash their capital expenditures. Most of Africa’s oil and gas projects were expecting sanctions under an oil price assumption of around $45 per barrel. At the current low price environment, investments for major planned oil and gas projects will be postponed, and delays in African LNG projects could limit liquefaction capacity and reduce production levels over the short- to medium-term.
Over the long-term, our assessment indicates that economic recovery, together with supportive gas policies, will drive the long-term growth of natural gas demand in Africa and support the execution of the announced gas supply chain projects. Africa will pursue its long-term ambitions to develop as a key center for natural gas supply.
At the moment, Africa ranks bottom in the world in terms of natural gas consumption, responsible for just 4% of global volumes. However, the prospects of natural gas utilization in the region are significant given the abundant continental natural gas reserves, growing production and the expansion of gas infrastructure in the domestic markets in Egypt, Algeria as well as in a range of Sub-Saharan African countries, mainly in Nigeria, Angola, Tanzania, Mozambique, and South Africa. Overall economic and population growth, associated with the unprecedented increase in electricity demand and objectives to enhance energy access, will be the main drivers.
According to the GECF Global Gas Outlook (GGO) 2050, we assume a continuous rise in gas demand in the region reaching over 380 bcm by 2050, an increase of almost 150%. Nigeria and Egypt will be the countries where gas makes the most significant in-roads. From a sectoral perspective, the power generation sector will provide the majority of demand growth. The economic and environmental advantages of natural gas are positioning it as the preferred fuel to enable accelerated electrification across the region to meet the substantial power deficit. Simultaneously, the development of natural gas trade within the region via pipeline or LNG (driven by Equatorial Guinea’s LNG2Africa initiative), together with the Power Africa program, will support and facilitate investments in gas-to-power infrastructure in the continent.
Africa currently holds a share of around 6% in global marketed gas production; however, the GGO foresees that this share will rise to more than 10% by 2050. The current short-term shocks like COVID-19 and the low natural gas price environment will not have any considerable impact on the long-term projections. A significant share of the increase in the marketed production will come from Mozambique and Nigeria. However, all other established natural gas producers in Africa, such as Algeria, Egypt, Libya, Angola, and Equatorial Guinea, will contribute positively to the region’s development. Other emerging producers like Tanzania, Cameroon, Mauritania, and Senegal are showing positive steps while facing challenges related to the size of investments and the availability of enabling technologies. Both groups of potential producers and established producers will be impacted by COVID-19 and the low oil price era in short- to medium-term. In the GECF GGO 2050, we forecast around 60 bcm expansion of natural gas production in Africa to reach a value of more than 305 bcm by 2025. However, the current circumstances may cause a delay. Yet, the lack of investments and technologies are the main stumbling blocks in the way of unlocking the natural gas potential of the African nation.
What is the GECF’s approach to alleviating existing pressure from short-term oversupply and low prices in the global gas market?
Before the outbreak of Coronavirus in China and its drastic spread across the world, the global gas market was expected to face a temporary glut especially the LNG market due to the commissioning of new LNG facilities in the U.S., Russia and Australia, as well as the ramp-up of the ones put on stream in the last couple of years. On the other hand, the demand growth was not expected to balance the exponentially growing LNG supplies.
In fact, the outcome of fundamentals including weak demand and excess supply resulted in lower prices for natural gas and LNG cargoes in regional gas markets. However, investments in gas and LNG projects had taken place with a prospective that the oversupply in the LNG market would fade after 2021 and demand growth would exceed incremental supply afterward. Even more than 200 MTPA of new LNG projects were queuing for FID between this year and early next year.
Nonetheless, COVID-19 emerged like a ‘black swan’ in the global economy and created the most intensive crisis of the world community in terms of both public health and the global economy in recent decades. Therefore, the containment of COVID-19 and support of public health have become the highest priorities for countries across the world.
Indeed, the outbreak of the Coronavirus has imposed an unexpected shock to global economy and energy markets. In addition, a disagreement to deepen production cuts by the OPEC+ group in early March has worsened the situation, but hopefully the most recent decision of OPEC+ on April 12 to cut oil production by 9.7 millions bpd starting from May 1 brought back some hope to the market.
While how and when the outbreak of the virus will be contained is yet to be projected, demand for energy in general and demand for natural gas in particular will shrink in 2020. Natural gas demand in transportation, power generation, domestic sector as well as industry will decline due to disruptions caused by containment measures and economic lockdowns. This will put more pressure on the level of gas and LNG prices and negatively affect gas and LNG supply, as well as economics of projects in the short-term.
Amid this unstable situation, the GECF member countries endeavor to preserve the security of supply for their consumers through sustainable production of natural gas and LNG. In our view, gas markets are always subject to volatility in the short-term; however, our goal is maintaining balance between supply and demand in the long-term.
How might COVID-19 facilitate the energy transition to cleaner fossil fuels?
The spread of the virus has caused both supply-side shock and demand-side shock of energy markets, such as natural gas, oil, and renewables. However, the demand-side shocks are more severe. Therefore, the widening imbalance in the energy markets and particularly in natural gas markets has resulted in a price slump. We believe the low level of energy and natural gas prices is, in some aspects, a good opportunity for countries to materialize their energy transition goals.
First, it is expected that the lower prices of energy due to COVID-19 and excess supply in the markets will provide an excellent opportunity for countries to reform their energy sectors and eliminate subsidies from high emission energy sources, such as coal. Secondly, the affordable price of natural gas is an excellent opportunity for countries to increase the share of natural gas as a reliable source of energy in the energy mix. Particularly in regions with severe energy poverty, such as sub-Saharan Africa, with hundreds of millions of population without access to electricity, the affordability of energy is critical.
Meanwhile, the spread of the Coronavirus could negatively affect the energy transition in countries, if policymakers do not take the necessary measures. For instance, coal-to-gas switching policies could be affected by the ramifications of COVID-19. It is expected that countries will continue their energy substitution policies in 2020, however, at a much slower pace. The pandemic could also slow down investment in energy infrastructure and delay energy projects. This could slow down the energy transition for the post-COVID period and recovery phase of economies. The GECF believes that this is the time to increase the share of cleaner sources of energy such as natural gas, and that the cost implications of COVID-19 may make countries reconsider their priorities.
How will COVID-19 necessitate a reassessment of the structures that the gas industry has implemented to ensure its stability?
Prior to COVID-19, buyers were facing a dilemma in which a spot LNG cargo was readily available at almost half the price of the same LNG cargo under their long-term contracts. This led to buyers exercising three main options: renegotiation, arbitration and invocation of their downward quantity tolerance. Buyers were calling for more flexibility and lower oil-indexed slopes. Sellers were dealing with the low price environment through cost optimization along the gas value chain and continuous dialogue with their customers, reiterating that the security of supply offered by long-term oil indexed contracts does not compare with cheap spot cargoes.
Fast-forwarding to a few months later, global gas demand has dramatically declined due to a slowdown in economic and industrial activity. This major reduction in demand, combined with the oversupplied gas market, has heavily weighed on gas and LNG prices. In addition, oil price disputes led to oil prices dropping to all-time lows. However, we expect a recovery in oil prices in the short-term. It should be noted that low oil prices will have a 3 – 6 month lagged effect on gas prices. Persistently low oil prices may have encouraged buyers to opt for oil-indexed contracts, however, with prices set to recover, buyers may choose to purchase some LNG cargoes on the spot market.
Another contractual clause that market participants will pay closer attention to is the force majeure clause. In early March, China National Offshore Oil Corporation had suspended contracts with at least three major suppliers claiming force majeure due to COVID-19. Some suppliers rejected it. Since then, many buyers have issued force majeure claims to their suppliers as they simply cannot take the gas, and this effect goes all the way up the chain. Following India’s 21-day lockdown, state-owned gas company GAIL has received force majeure claims from city gas distributors, factories, power producers and fertilizer manufacturers. We expect this trend to continue once lockdown measures remain in place. However, the outcome of these claims are yet to be determined as it would need to be assessed on a case-by-case basis and will vary for each contract.
Company Description: The Gas Exporting Countries Forum (GECF) is an intergovernmental organization made up of 12 of the world’s leading natural gas producers, six of which are located on the African continent. The GECF is actively monitoring the COVID-19 situation and sharing its analyses with the public through a series of articles on the impact of the virus on the global economy and gas market, which are available on the GECF website.
The Gas Exporting Countries Forum (GECF) is an intergovernmental organization made up of 12 of the world’s leading natural gas producers, six of which are located on the African continent. The GECF is actively monitoring the COVID-19 situation and sharing its analyses with the public through a series of articles on the impact of the virus on the global economy and gas market, which are available on the GECF website.