Could ESG Investing Disrupt The LNG Boom?

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Global natural gas demand and within it, liquefied natural gas (LNG) demand, is set to grow in the long term, despite the setback in demand for all kinds of energy due to the coronavirus pandemic.

Coal-to-gas switching from North America to Europe and Asia, as well as increased use of natural gas in the industrial sector, will drive demand for LNG over the next two decades, analysts and the key players in the LNG market say.

However, the expected growth in demand in LNG consumption through 2040 is not without risks, most of which have nothing to do with COVID-19 and its impact on the energy markets, Wood Mackenzie said in a recent analysis.

The ongoing drive toward clean technologies—much cleaner than natural gas—such as green hydrogen and carbon capture and storage utilization (CCSU), the increased weight of spot pricing on LNG trade, and the increased scrutiny of the carbon intensity of energy sources could drag LNG demand growth slowing down from current projections, WoodMac’s Massimo Di-Odoardo, Global Head of Gas Analysis, and Simon Flowers, Chairman and Chief Analyst, say.

COVID Hasn’t Wiped Out Long-Term LNG Demand  

Due to the pandemic, total global natural gas demand is expected to drop by 4 percent year over year in 2020, but return to growth as early as in 2021, the International Energy Agency (IEA) and the International Gas Union (IGU) say.

The cost-competitiveness of natural gas and the increased access to gas in developing countries are set to be the key drivers of higher gas demand in the medium term, especially for LNG, according to the Global Gas Report 2020 from August published by the IGU, research company BloombergNEF (BNEF), and Italian gas infrastructure firm Snam.

According to the IEA, the global LNG trade will jump to 585 bcm/y by 2025, up by 21 percent compared to 2019, thanks mostly to Asian consumers China and India, while the United States will account for almost all of the net growth on the export side.

This year alone, despite the gloomy global gas demand outlook, China is set to raise its LNG imports by as much as 10 percent to new records, thanks to lower LNG prices and the faster-than-expected recovery in its industrial sector, analysts told Reuters last week.

Despite the pandemic, Wood Mackenzie is bullish on LNG long term, expecting global LNG demand to double over the next 20 years, thanks to Asian demand and gas-over-coal policy support.

Shell, the world’s biggest LNG trader, also sees global LNG demand doubling to 700 million tons by 2040, as natural gas plays a growing role in shaping a lower-carbon energy system, the supermajor said in its annual LNG outlook in February, just before the pandemic crippled oil and gas prices.

Even after the pandemic, Shell still “very much believe that with the current supply-demand outlook, this is a fundamentally strong sector that will grow at a rate that is close to 4% per year,” chief executive Ben van Beurden told Bloomberg in June.

But Long-Term LNG Demand Growth Faces Downside Risks

LNG demand growth will be there for years to come. Yet, environmental and carbon-related factors may clip some of that demand growth in the longer term, according to Wood Mackenzie.

“Longer term, intensifying interest from policymakers and investors in new technologies, including green hydrogen and CCUS, casts doubt on the sustainability of demand growth,” Di-Odoardo said.

The increased scrutiny of LNG projects’ carbon intensity could also be a growth-limiting factor.

“LNG’s track record on emissions isn’t good. Inert gases including CO2 must be removed before liquefaction and typically are vented into the atmosphere. Liquefaction itself is energy intense, usually fuelled by produced gas,” WoodMac noted.

In addition, spot pricing will play a growing role in LNG trade, thus increasing the exposure of new LNG project economics to spot pricing instead of traditional oil price-linked contracts, Di-Odoardo says. This means there could be higher volatility to the economic returns of future LNG projects.

Short-Term Supply Glut, Longer-Term Supply Crunch

Apart from China, the global natural gas markets will not flourish this year with decreased demand from the pandemic. Global LNG supply growth was already running ahead of demand growth even before COVID-19 crushed oil and gas prices and energy demand. Over the next few years, supply will be abundant to meet demand, after a record volume of 70 mmtpa of new LNG capacity was sanctioned in 2019.

This year, however, will likely not see a single major LNG project approved – for the first time in 20 years – as energy majors and smaller developers alike look to save cash and defer final investment decisions (FIDs) until this period of high uncertainty on the energy markets ends.

“We do not expect any major FIDs on LNG export projects this year,” Devin McDermott, Morgan Stanley’s lead commodity strategist for natural gas and power, told Reuters in early September.

By 2030, however, there will be a supply gap of 102 mmtpa, according to WoodMac, with low-cost Qatar already planning to fill nearly a third of that supply gap. The development of Qatar’s North Field East is expected on its own to absorb 32 mmtpa, “negating the need for new supply from other sources until the late 2020s and pushing out FIDs for projects elsewhere by two to three years,” the consultancy said.

There will be projects elsewhere vying to capture the expected LNG demand growth, but developers may have to consider many additional factors in their project economics on top of pricing. Emissions-cutting policies and Environmental, Social, and Governance (ESG) investing could extend to LNG, especially in developed economies, potentially limiting the expected doubling of LNG demand through 2040.

Crude Oil

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