Gas price falls stimulate fresh demand

• Date: 01 April 2020
• DOI: http://doi.org/10.1111/oet.12767
• Published date: 01 April 2020

GAS AND POWER

Gas price falls stimulate fresh demand

The gas price falls of recent months have been world-

wide and without president. The developments are

clearly bad news for producers, but there is at least one

upside—gas is now far more competitive compared to

other forms of energy, especially coal and renewables,

which is stimulating demand. Longer-term, the price

slide may encourage some developing countries to drop

coal plans for a combination of gas and renewables.

The latest falls in oil prices, on top of record low

spot gas prices around the world, are expanding markets

for gas (although the low oil prices also mean more

competition from oil itself). For example, gas has

become more competitive with coal in Japan and South

Korea (where most term supplies are linked to crude

prices), which is expected to encourage coal-to-gas

switching in their large power sectors. In 2019 average

gas prices were relatively high, in line with crude (high

oil-indexed contract volumes dominate the weighted

average cost of gas), at $10-12/mn Btu. With the oil

price fall, these will come down to below $4/mn Btu—

close to current spot levels.

“In Asia, the fall in oil prices will start to affect the

pricing of gas under long-term contracts from late 2020.

This could start to have a major impact on the competi-

tiveness of gas in major Asian markets like Japan and

South Korea,”said Wood McKenzie on 12 March. South

Korea has already seen switching over recent months.

For China, liquefied natural gas (LNG) at current spot

prices and contracted LNG (with oil and $35/bbl or

below) can outcompete both domestic gas and often coal

fired plants, and may also help the government push

down gas prices to end-users. This should help mop up

some of the surplus spot cargoes in the international mar-

ket. However, corona virus has clearly taken a chunk out

of Chinese demand, with importers declaring force

majeure, although there are already (by 20 March) signs

of a slow return to normality in China.

In Europe, the spot price drop has also seen an

improvement in gas competitiveness vs coal. With Sum-

mer TTF spot prices below €10/MWh by early March, gas

power plants with just 57% efficiency were expected to be

profitable for peak-load power generation on most days

this year, according to Rystad Energy; and sometimes

even 35%-efficiency units may be profitable. Rystad had

expected coal-to-gas switching to increase by 6% in

northwest Europe this year, but this could be higher fol-

lowing recent events.

1|INDIAN EXPANSION

The low prices have also stimulated demand from India,

where India wants to lift gas's share of the energy mix to

15%, partly to improve city air quality—although demand

is currently constrained by a lack of import and distribu-

tion infrastructure. However, two new terminals went

online over the last year

1

and pipelines are quickly being

laid, including the completion of GAIL's Kochi-

Mangaluru line, which should help enable more rapid

market growth this year than last. In February, Vitol

CEO, Russell Hardy, said low LNG prices would help to

create demand in India, although the growth would be

spread over a couple of years as infrastructure connected

more customers.

The new terminals have certainly been heavy buyers

of spot cargoes recently, although negotiations over lon-

ger term deals, including with US sellers, have stalled.

Shell said on 20 February that India had taken a lot of

the cargoes of LNG that China was declining, due to the

downturn in demand from coronavirus measures there.

Demand growth is particularly strong in India's power

and city-gas sector.

Overall, India's LNG imports rose to 2.77 bcm in

January, up by a quarter compared to January the previ-

ous year, according to the Indian oil and gas ministry, with

projections of 3.19 bcm (2.36 mnt) for February. The coun-

try's annual LNG imports are expected to rise by another

10% to 15% this year, according to consultancy firm FGE.

However,thespreadofgascouldbeslowedbyverycheap

oil in India as crude slides towards $25/bbl, especially in the

industrial sector, as heating oil, liquefied petroleum gas and

naphtha compete with contracted and spot LNG.

In the longer term, the low prices, combined with on-

going falls in renewable costs, could help persuade some

developing countries to switch power capacity expansion

plans away from coal. Some countries, such as Malaysia,

Indonesia and Vietnam had already been considering

such a move, mainly due to the increased difficulty of

securing finance and environmental clearance for coal

plants. Vietnam expects to scrap plans for about 15 GW

DOI: 10.1111/oet.12767

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