Rising Gas Price: Expert Blames Global Warming on Gas Price ‘Supercycle’

Posted by Shola Akingboye, 11th, October 2021

No new gas fields or liquefied natural gas (LNG) plants are needed if the world wants to limit global warming to 1.5°C , according to the International Energy Agency’s ground-breaking report published in May. Yet gas and LNG prices are rising at a speed that has raised questions over whether the industry is entering a supercycle – an extended period of surging prices as supply struggles to meet high demand. 

“It’s still too early to call if we’re entering any kind of supercycle,” says Jonathan Gaventa, a gas expert at environmental consultancy E3G. “There’s been a huge global disruption that’s still ongoing. There are a few big assumptions about what the trajectory out of it will look like but they mostly seem to be based on modelling and hope, rather than anything more substantial.”

The more likely forecast, for now, is that the industry is entering a period of extreme volatility.This has been exacerbated by the COVID-19 pandemic; mid-2020 saw the lowest LNG prices on record, with LNG delivered into north-east Asia crashing to $2/MMBtu, followed by the highest prices on record just months later, surging to nearly $40/MMBtu at the beginning of the year.

Why are prices rising?

This year’s rise in gas prices in Europe and Asia has been driven by a post-pandemic recovery in demand, unseasonably cold weather, and the strengthening economics of coal-to-gas switching. China is leading the rebound in growth. Its coal-to-gas switching policies has led to a 2.2 million tonnes (mt) surge in demand for LNG since the beginning of the year, 8% more than in 2020, according to a May research note by energy consultancy WoodMackenzie.

 This is the start of a general trend the consultancy expects to see of LNG prices continuing to rise up to 2025 as demand in Asia continues to rise, but supply growth slows.

After 2025 “the picture is interesting,” says Massimo Di Odoardo, Wood Mackenzie’s vice president of gas and LNG research. The second half of the decade should see the 74 mt per annum of liquefaction projects that reached FID in 2019 starting to come online – as well as 33 mtpa of new supply from Qatar, the world’s largest LNG exporter, which sanctioned its $28.875bn North Field East project in February this year, and the 13 mtpa Baltic LNG project in Russia.

“But exactly how much of this supply will come online and when is uncertain,” says Di Odoardo. For example, the 13 mtpa Mozambique LNG project, which was sanctioned in 2019, is under threat. An escalating insurgency in the far north of the country led operator Total to call force majeure on the project in April. COVID has led to delays to multiple other projects. 

The instability felt across the market in 2020 also led developers to postpone the sanctioning of new gas projects; of the 87.3 mtpa of LNG capacity that was expected to reach FID in 2020, only one project succeeded in doing so – the 3.25 mtpa Energía Costa Azul LNG plant in Mexico.

1.5°C or 2°C?

Developers’ uncertainty over whether to push forward was not only due to COVID-related chaos dominating markets, but also uncertainty over the exact role gas will play in the energy transition.

 The IEA’s Net Zero by 2050 report makes it clear no new gas projects will be needed. However, if global leaders do not push to limit global warming to 1.5°C, but to 2°C – as IOCs are assuming they will, the picture looks very different.

Under Wood Mackenzie’s accelerated energy transition 2-degree (AET-2) scenario, rather than gas demand peaking in 2025 and declining rapidly after that, it should remain roughly flat from 2025 until 2040. Gas prices continue to climb after 2025, with LNG reaching $8/MMBtu to $9/Mmbtu by 2040. It is only after 2040 easing due to increased competition of supply.

Despite commitments to keep warming below 1.5 degrees, policymakers seem reluctant to fully abandon the notion of gas as a bridging fuel to a low carbon future.

Following a two-day meeting in May, G7 ministers responsible for Climate & Energy said they “recognise that natural gas may still be needed during the clean energy transition on a time-limited basis.”

Their public financing policies still largely reflect this; research by Oil Change International shows that in the two years after the Paris Agreement was signed, G20 countries provided at least $77 billion a year in fossil fuel financing through their international public finance institutions. 

This may be starting to change. The European Investment Bank will ban oil and gas financing by the end of 2021. The UK government has also ended future public financing for overseas fossil fuel projects. In January the Biden Administration issued a series of Executive Orders focused on ending US public finance for “carbon intensive” fossil fuels, including those provided by its export credit agency (ECA), US EXIM Bank. The Swedish Export Credit Corporation already limited its lending to oil, gas, and coal to a maximum of 5%.

“These are significant shifts in policy and political sentiment and create potential for accelerating global climate action,” said Laurie van der Burg at OCI wrote in a March briefing to policymakers.

Reducing public financing will have a knock-on effect for private finance, which relies on these state-backed loans and guarantees to politically and economically de-risk oil and gas projects, particularly in emerging markets.Furthermore, a growing number of commercial banks are pledging to reach net zero by 2050 and are looking to reduce the volume of oil and gas investments in their portfolios.

The effects of this have yet to be seen in a real slow-down of the financing of gas and LNG projects, however. In fact, in 2020 bank financing for the 30 largest LNG companies was higher in 2020 than in any year since the Paris Agreement’s adoption, according to the report “Banking on climate chaos.”

However, this should change as more governments take a tougher stance on gas. “The EIB and UK decisions to stop financing oil and gas can be looked at as a template for the direction of travel on the private side,” said E3G’s Gaventa. “We are not yet seeing gas projects stalling due to lack of finance but public and regulatory pressures will start to bite sometime soon. The question is, does it start biting before the commodity super cycle kicks off or not?”

For banks committed to continuing investments in LNG projects, the challenge will be how to price in climate risk, as well as volatile oil and gas prices. The fact that LNG projects are capital-intensive, with a long pay-back period, raises the stakes of poor forecasting.

Leigh Elston on 6th July 2021

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