Global Gas Security Review 2020
About this report
In this extraordinary context, LNG contracting activity has collapsed from its high of 95 bcm in 2018 to about 35 bcm in the first nine months of 2020. Meanwhile, the structure of LNG supply is set to be reshaped, since about one-third of active contracts are due to expire between 2020 and 2025, while export capacity is set to expand by 20%. These trends create an unprecedented challenge and opportunity for market participants.
This report offers a detailed analysis of recent LNG contracting developments and assesses the role of flexibility in gas supply adjustment during the Covid-19 crisis. It also provides updates on the latest developments in global gas markets and on the near-term outlook.
Executive summary
Low LNG contracting activity, contract expiry and capacity expansion set to shape LNG supply to 2025
After a wave of strong contracting activity culminating in 2018 with 95 bcm signed, LNG contracting slowed down in 2019 with a total volume of 74 bcm. Activity collapsed in 2020 with only 35 bcm signed to date - with no further contracting activity, this would mark a year-on-year decrease of over 50%.
Although Covid-19 is contributing to a historic demand shock, a well-supplied market since 2019 is a larger driving factor behind this decreased activity. From 2015-19, the share of total contracts with fixed destination clauses decreased as new flexible-destination volumes entered the market. By contrast, despite the decline in total volumes, fixed-destination contracts have grown to date in 2020.
About 190 bcm of legacy contracts are due to expire in the next five years, accounting for about one-third of current active volumes. Over the same period global liquefaction capacity is to increase by 20% from projects currently under development. These two factors will strongly impact the structure of LNG supply, and create new opportunities for buyers and challenges for marketers in a context of demand uncertainty.
LNG takes centre stage in the supply response to gas demand drop in H1 2020
Faced with an unprecedented fall in global gas demand in the first half of the year, the whole natural gas value chain has had to provide flexibility to adjust supply, including production shut-ins, contractual flexibility mechanisms to reduce LNG and pipeline gas volumes or optimising storage utilisation onshore as well as at sea.
Although pipeline gas exporters bore the brunt of the supply-side adjustment to the demand drop caused by Covid-19, the majority of LNG exporting countries also experienced varying degrees of supply curtailment over the first half of 2020. The United States accounted for the biggest share of the downward adjustment in global LNG supply, underscoring the outsized role of US LNG in market balancing at a time of a historic oversupply.
Without the flexibility of global LNG supply, the adjustment to the 2020 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.
Short-term outlook: A historic fall with slow rebound
Global natural gas demand is forecast to fall 3% y-o-y or about 120 bcm in 2020. The decline in demand has been revised from our previous June forecast, which was projecting a 4% fall for this year. In spite of this revision, 2020 is still assumed to experience the largest recorded drop in global natural gas demand.
Most of the declines in gas consumption have been observed in mature markets across Europe, Eurasia, North America and Asia. Taken together these markets account for over 80% of the expected drop in global natural gas demand for 2020.
Natural gas demand is forecast to increase by 3% y-o-y in 2021 (or about 130 bcm). The resurgence of Covid-19 cases and the prospect of a prolonged pandemic brings further uncertainty to the pace of recovery in 2021, which has led to a downward adjustment from the previous report. The recovery of global gas demand in 2021 is likely to be supported by fast-growing markets in Asia, Africa and the Middle East. More mature markets should see gradual recovery, and some may not reach their 2019 level in 2021.