The International Energy Agency has described the start of 2020 as a “meltdown” for the international gas market, with export prices and demand for gas smashed so hard that its puts any prospect of a “gas led” economic recovery into serious question.
In its Gas 2020 report released on Wednesday, the International Energy Agency said that global gas markets are set to become significantly oversupplied, as investments in new gas production coincides with a largest ever decline in consumption see prices tumbling.
In its report, the IEA said that 2020 was on track to be the largest ever “demand shock in the history of global natural gas markets.”
“The magnitude of the impact remains however unprecedented: this would be the largest recorded annual decrease in consumption since the natural gas market developed at scale in the second half of the 20th century,” the IEA said.
According to the International Energy Agency, a slump in gas demand triggered by Covid-19 while countries, including Australia, have continued to ramp up gas supplies, has led to a significant fall in international gas prices.
The IEA estimates that the global gas market is on track for its largest annual decline on record and is expected to see consumption fall by 4 per cent, twice the drop observed during the global financial crisis in 2008.
It’s bad news for Australian gas producers, with around three-quarters of Australia’s gas production destined for the export market. Lower international prices will lead to cuts to the value received by Australian gas producers, and a sluggish recovery to global demand will undermine any contribution the gas industry may be able to make to an Australian economic recovery.
“Natural gas has so far experienced a less severe impact than oil and coal, but it is far from immune from the current crisis. The record decline this year represents a dramatic change of circumstances for an industry that had become used to strong increases in demand,” IEA executive director Dr Fatih Birol said.
The Morrison government has attracted criticism for establishing a National Covid-19 Coordination Commission stacked with gas and oil industry executives, that has been tasked with overseeing Australia’s economic response to Covid-19.
Unsurprisingly, the commission has prepared a large number of recommendations that involve ramping up production in Australia’s gas industry, but according to the IEA’s latest report, this is unlikely to be a strategy that is fruitful for the Australian economy.
“Global oversupply is pushing major natural gas indices to record lows, while the oil and gas industry is cutting spending and postponing investment decisions to make up for the significant shortfall in revenue. Although a rebound is expected in 2021, the IEA report does not assume a rapid return to the pre-crisis trajectory,” the IEA said.
With additional gas supplies expected to come online across North America, Russia and Africa, as well as any new investments made in Australia, the international gas market faces a significant risk of oversupply and low prices.
Gas prices across all regions have fallen over the last year, with Asian spot prices falling 44 per cent in 2019, European prices fell 45 per cent, while oil-linked prices in Japan and South Korea remained comparatively stable, falling 2.6 per cent in 2019.
However, these prices were smashed in the first few months of 2020, after oil prices crashed due to the combined effects of Covid-19 cuts to energy use and a Russian led price war in international oil and gas markets.
Additionally, demand for gas in each of these markets, which make up some of Australia’s largest gas customers, have fallen month-on-month since the start of 2020. This includes Japan, the world’s largest importer of gas, which saw its demand drop by 5 per cent in the first five months of 2020,
The IEA report showed that the United States has now joined Australian and Qatar as one of the top 3 suppliers of gas to an international export market, after boosting its export capabilities.
Despite this, the IEA said that major gas companies were winding back investment in new gas capacity, as a way to cut costs and to avoid further exacerbating an already oversupplied global gas market.
The executive director of the IEA, Dr Fatih Birol, said that the impacts of the Covid-19 related economic disruptions will be felt for some time and that the sector should not expect a quick recovery.
“Global gas demand is expected to gradually recover in the next two years, but this does not mean it will quickly go back to business as usual,” Dr Birol said. “The Covid-19 crisis will have a lasting impact on future market developments, dampening growth rates and increasing uncertainties.”
A spokesperson for federal energy minister Angus Taylor told RenewEconomy that the Morrison government remained optimistic for the gas industry over the long term.
“The IEA forecasts in its Gas Report 2020 that global natural gas consumption will continue to grow by an average of 1.5 per cent per year over the period 2019 to 2025. This is despite an expected single year decrease in 2020 as a result of COVID-19,” the spokesperson for Angus Taylor said. “The IEA forecasts that global LNG trade will increase 21 per cent on 2019 levels by 2025, driven by emerging Asian markets including China and India.”
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