China Will Be Driving the Recovery of Demand on LNG
An average price on gas recorded in the first half of the year at the Henry Hub, a distribution hub on the natural gas pipeline system in the US, amounted to $1.81 per million British thermal units. To put it differently, that is less than $65 per thousand cubic metres. Neither the situation is any better for gas sellers in Europe. For instance, the Title Transfer Facility (TTF) - Europe's most popular trading point for natural gas in the Netherlands - offers a price of $55. In Asian countries, prices on natural gas are traditionally higher, but even there, due to coronavirus, they have not risen above $100 for a rather long time.
Owners of LNG plants are understandably in shock, for their investments only lead to losses - particularly in Australia, wherein a significant amount of money has been spent on building new facilities. At the same time, not much consideration was given to production efficiency. Over a half of the country’s projects, including Gorgon (production capacity of 15.6 million tons), Australia Pacific (9 million tons), Wheatstone and Ichthys (8.9 million tonnes each), will stay unprofitable unless prices rise to $450, which is not going to happen any time soon.
Profitability ratios of companies liquefying gas in other parts of the world, with transportation costs to Shanghai included, are somewhat lower. As an example, the ratio lies between $200 and $250 for Russian, Angolan, Nigerian or Cameroonian enterprises. Yet even with that said, at least a three-fold increase in gas prices should happen so that Russian and African companies reach the break-even point. But is it real?
According to Vladimir Litvinenko, Rector of St. Petersburg Mining University, "The situation we are in is temporary. Once the coronavirus pandemic and its impact on the global economy are over, we will get back to the point where we were. The demand for hydrocarbons, along with the prices, will recover. Even more, unlike the oil and coal industries, the gas industry is on the rise, which is due to both the cost and environmental performance of natural gas. CO2 intensity of 1kWh of electricity generated from natural gas reaches 450 grams. To compare, hydroelectric power plant emits 10 g/kWh and coal plant 1000 g/kWh. Therefore liquified gas becomes, in a way, a win-win solution. It is supported both by those who advocate for green energy sources and those believing in hydrocarbons".
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Most experts agree that China will be the driver for the recovery of LNG demand. After all, five of the world's six largest regasification terminals are being built there. The country also committed itself to reduce the share of coal in the energy mix, with the latter currently standing at about 55%. This activity will be, in turn, primarily carried out by expanding gas usage since alternative energy sources are not yet capable of entirely replacing hydrocarbons at this stage.
It is another matter that returning to the formerly seen volumes of LNG consumption is unlikely to take place this year, with it possibly happening next year when the global economy manages to overcome consequences of the pandemic. According to Shell's forecast that was published this February, the global demand for liquefied gas will have doubled by 2040, thus reaching 700 million tonnes. Ben van Beurden, CEO of the company, noted at the end of the second quarter that he would not go back on his predictions, still holding to an opinion that "LNG is a promising product, a market for which will be growing at the annual rate of around 4%".