Gas Line, Q4 2020

Gas Line is a quarterly publication that looks at major news stories in global gas—ranging from project development to markets and geopolitics. My goal is not to cover every story but to draw connections between stories across time and space in order to shed light on the major themes that will drive global gas markets in the years ahead. My main takeaways from this quarter:

An Unprecedented Rally in Gas Prices

The bottom line: When prices hit record lows, they have nowhere to go but up. But the rebound in prices has been remarkable, helping to offset a year in which most prices reached low points for extended periods of time. This rally, however durable, will provide some support for companies looking to make investment decisions in long-term supply, muting some of the fears expressed in this piece that the spread between U.S. gas prices and those overseas might never return to their previous extreme levels. At a bare minimum, this is a reminder that volatility is ever present, and that a few “good” months of high prices can compensate for many months of low prices. More importantly, these prices might provide the signal needed that gas demand is still robust enough to justify a long-term investment.

The backstory: Gas prices have increased significantly in recent months. The Japan Korea Marker (JKM) went from $2 per million British thermal units (MMBtu) in late April to over $14/MMBtu at year-end, surpassing even the price for oil-linked contracts in Asia. The Title Transfer Facility (TTF) in the Netherlands rose by a factor of almost six since this summer, although it still traded at half the rate of JKM. And Henry Hub in the United States experienced a mini rally too, with prices more than doubling between June and October. Almost uniformly, these increases are due to restrictions in supply—unplanned outages at liquefied natural gas (LNG) facilities, a slow recovery in gas production in the United States, shipping bottlenecks, insufficient storage in Asia, and a transition to colder weather. And, especially for JKM, they could also signify insufficient liquidity, as the price moves on the back of a few transactions.

But no matter the cause, it is hard to miss that in a time of overarching bearishness across the global economy, the price for gas is rising dramatically, even if the extent of the price increase might be hard to justify on fundamental factors alone. Only one new liquefaction project was sanctioned in 2020, which is an unusually low number for the industry—but several other projects made progress with an eye to a more auspicious 2021. With capital becoming scarcer for hydrocarbon projects, this boom in prices provides a relief valve and a justification for any investor who doubts that money can be made in natural gas. Again, the boom in prices might prove short-lived, but its existence is a bright spot that the industry can point to in a year with little clear good news to celebrate.

Turning the Page on European Energy Security

The bottom line: Opening up a new gas corridor into Europe has been a long-term goal of both the European Union and the United States for decades. Now that the infrastructure to deliver this corridor is complete, the event is passing almost without mention. In fact, the European Union has proposed to stop financing gas projects under its flagship support system for gas infrastructure, the Trans European Network for Energy (TEN-E). These events signal a profound shift in how Europe thinks about energy security—and the disparity between that view and how European energy security is perceived in Washington and in some capitals in Eastern Europe. Over time, these divergent perspectives could produce more clashes within Europe and between Europe and the United States.

The backstory: On December 31, the Trans Adriatic Pipeline (TAP) began transporting gas, finally connecting Azerbaijan to Italy. Also in early November, DESFA, the Greek gas grid operator, joined the Alexandroupolis floating storage and regasification unit (FSRU) in Greece—a project that will further bind Greece with other Balkan markets, especially Bulgaria. Greece also received three non-binding bids for the Kavala gas storage facility, a key missing link in a complex web of projects in Northern Greece that promise to reshape gas flows in the region. Meanwhile, further north, the FSRU LNG Croatia arrived in Krk, bringing LNG to one of the last corners of Europe without it.

In earlier times, these events would have marked a profound shift in energy and geopolitics. Instead, they passed largely unnoticed, evidence of how much the gas market has shifted. A similar disconnect can be observed in northern Europe. In December, Congress passed another round of sanctions against the Nord Stream 2 pipeline, albeit with provisions for consultation that could create space for diplomacy and prevent speedy action that could tie the hands of the incoming administration. Meanwhile the Polish anti-trust regulator imposed in October a hefty fine on Gazprom and the European companies that financed the Nord Stream 2 project. These events are largely ignored in Brussels—there is, of course, the occasional frustration with sanctions or a nod of support for them, depending on where one sits. But these topics no longer preoccupy Brussels and most European policymakers and thinkers—their focus is squarely on the Green Deal and the energy transition. The role of gas remains a deeply contested topic, but the conversations are largely about how quickly it may be phased out—a reality that puts Europe at odds with the United States, although there might be greater alignment with the incoming administration than there was with the outgoing one.

Gas Increasingly Confronts Net Zero

The bottom line: In a world where more governments are committing to net zero carbon emissions by 2050, gas is coming under increased pressure, with more forecasts making clear that such a move could hit gas use in the medium to long term. But the energy transition is still playing out differently around the world—and there are several instances where recent policy moves are favorable to natural gas.

The backstory: In a few months, several countries said they planned to be carbon neutral by 2050: South Korea, Japan, Canada, and South Africa. (Brazil also announced a plan to be climate neutral by 2060, but this was largely a call for foreign help; the European Union firmed up its 2030 goal, targeting a 55 percent reduction in greenhouse gas emissions versus 1990.) These announcements, some of which are merely statements of intent without much backing in terms of policy or resources, raise questions about the role of gas over the next three decades.

Scenarios that entailed aggressive action on climate change penalize gas less than oil or coal. Until last year, the International Energy Agency (IEA) envisioned a long-term plateau for gas demand through 2040 in its Sustainable Development Scenario. But this year the IEA’s World Energy Outlook shows a more bearish view for natural gas in the long term in a Paris-compliant world. The BP Energy Outlook, released in September 2020, shows something similar: gas survives through carbon capture and storage and by being used for hydrogen production. The consultancy Wood Mackenzie showed an “accelerated transition” scenario that foresees limited space for additional liquefied natural gas projects, with considerable resources remaining stranded, never to be developed.

But these pressures manifest themselves differently in different markets. In Asia, Pakistan and the Philippines pledged to not build new coal-fired power generation facilities, decisions that could boost gas use. Vietnam, a perennial hopeful for LNG suppliers, took steps to advance several gas projects (but, as usual, nothing definitive or final). Officials in Myanmar also expressed an interest in a rapid expansion of LNG-to-power capacity. And gas demand in India has recovered to its pre-crisis levels, with the government making one more announcement to support gas (this time for LNG use in trucks). All the while, the boom in LNG bunkering continued, with one shipbroker estimating that 10 percent of the new orders for tankers in 2020 were for ships that could run on LNG. These are all cases where the energy transition favors gas.

Elsewhere, however, the pressure on gas is growing. In the United States, San Francisco, San Jose, and Oakland joined an ever-expanding list of cities and communities in California (and elsewhere) that are restricting gas use for new buildings. In Europe, this pressure has prompted the gas industry to articulate a clearer vision for how it can contribute to a net zero energy system—chiefly through hydrogen and biomethane. But, so far, we have not seen the U.S. gas industry come up with a similar vision statement—although the pressures from the incoming Biden administration might make such a response more likely.

This quarter saw further movement on the continuous battle to deal with methane emissions. In October 2020, the European Union announced its long-anticipated methane strategy, which mostly focused on improving the data and regulatory infrastructure that could support stricter action in the future, while in November 2020, the oil and gas industry announced a new reporting framework for emissions. In November, Qatar Petroleum and Pavilion signed a long-term LNG contract whereby the supplier, Qatar Petroleum, will document the emissions associated with each cargo—a first for the industry. News also came out that the French government had pressured Engie, in which it is a shareholder, to refrain from signing a new long-term contract to purchase U.S. LNG, in part due to emissions associated with producing and transporting the fuel.

How Will Biden Deal with Gas Overseas?

The bottom line: The president-elect’s climate agenda will affect gas, which provided over 38 percent of the country’s electricity in 2019 and the president-elect is committed to carbon neutrality by 2035 for the power sector. But gas also presents difficult choices overseas from countries with different climate agendas—some looking to import U.S. gas or secure financing from U.S. institutions to enable their energy transition. How much will the new administration support U.S. gas exports through regulation, diplomacy, or money?

The backstory: Some changes in gas diplomacy between the Trump and Biden administrations will be predictable and easy to implement. We are unlikely to see the secretary of energy go overseas to sell U.S. LNG as we did under the Trump administration. Nor can we expect the United States to give extra credit to countries that buy or pledge to buy gas from the United States—cheering each cargo that arrived overseas or allowing trade commitments to override other concerns like human rights or the rule of law (as in the case of Poland). Gas will take a more appropriate place in the pecking order of U.S. priorities—important but not top-tier.

But gas will present challenges. In fiscal years 2019 and 2020, the Export Import Bank (EXIM) of the United States approved $13.6 billion in transactions, a third of which went to one LNG project in Mozambique. And EXIM has made other loans to support oil and gas. The U.S. International Development Finance Corporation (DFC), and its predecessor, the Overseas Private Investment Corporation (OPIC), have supported gas transactions recently too—for examples, see here, here, and here. More importantly, the prospect of securing finance from the DFC has been a selling point for U.S. diplomacy, especially in Southeast Asia and Eastern Europe. In December 2020, the DFC committed $300 million to the Three Seas Initiative Fund—some of this money is likely to finance gas infrastructure. In Vietnam, DFC has talked about supporting the country’s LNG ambitions (as has EXIM).

The question for the Biden administration is whether to continue such support overseas, especially at a time when we can expect tighter regulatory oversight from the Environmental Protection Agency on emissions and the Federal Energy Regulatory Commission on infrastructure permitting. Can the president squeeze gas at home while EXIM and the DFC finance gas projects overseas? And if there is a shift away from gas, how will that be communicated, especially in places where countries see gas as a central element of their near-term decarbonization or energy security strategies?

Some Further Reading

Nikos Tsafos is a deputy director and senior fellow with the Energy Security and Climate Change Program at the Center for Strategic and International Studies in Washington, D.C.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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Nikos Tsafos