How will the Covid-19 pandemic impact the LNG sector?

“This is the defining global health crisis of our time” the director general of the World Health Organisation (WHO) Tedros Adhanom Ghebreyesus said, perhaps best defining the ongoing crisis.

As governments continue to grapple with dwindling economies and industrial slowdowns, and as the contagion tests institutional and individual resolve, global commodities bear their share of the brunt too.

Oil has hit a 21-year low on account of swelling supplies and cratering demand. Meanwhile, the glut in liquefied natural gas (LNG) has been exacerbated due to the pandemic and global oil price shocks.

Amid such uncertain times, Dr. Juan Vazquez, managing director and partner at Boston Consulting Group (BCG) tells Gulf Business about the ongoing challenges surrounding the LNG space and the forecast for the sector going forward.

What is the current situation in the LNG sector?
Globally, continued growth in LNG is expected by 3.5-4 per cent in the medium-to-long term. However, the demand growth will likely slow down this year and also in the years to come due to the economic crisis. The Middle East’s LNG sector is unique, and it produces the most competitive LNG in the world. Therefore, it will not likely be as affected as other producing regions with higher break-even costs (e.g. Australia, US).

The industry should be cognisant that the Middle East LNG sector will be impacted by the low oil and spot LNG prices and from the potential cancelation of cargoes from some regions that are under lockdown conditions.

Where are the challenges currently being faced?
There are essentially two forms of challenges for the LNG sector, one very short-term and the other one on the longer-term.

In the short-term, LNG producers need to deal with low prices and potential cancelation by buyers that invoke force majeure clauses. How to deal with that and trying to find win-win solutions with clients would be fundamental.

In the longer-term, the drop in oil prices combined with structural LNG oversupply will lead to a new scenario of sustained high liquidity and very low gas/LNG prices, which would impact economics and also make it much more complex to finance new developments leveraging long term contracts.

What is the short term/long term forecast for the region?
The Middle East is fundamentally an exporting region of LNG. Accordingly, in the short term, the region will be affected by the current state of low oil and LNG spot prices.

In the more medium/long term, we can expect some difficulties to finance new LNG projects via long term contracts. In contrast to producing and exporting regions, importing countries of LNG may benefit from this situation.

What can be done to mitigate the risks associated with Covid-19?
A deep understanding of the local market dynamics of key customers and strategic thinking beyond the short term is important. In particular, points that should be taken into consideration when evaluating the long term picture, to capture value in light of the situation, are as follows:

LNG producers: Securing operational continuity is imperative. LNG producers should aim towards assessing specific market risk exposures in the near term, particularly to buyers or regions that are likely to be more directly affected by the Covid-19 outbreak. Taking advantage and leveraging new digital tools and capabilities is likely to be a strong option to improve performance in the short term. Once businesses have been stabilised, LNG producers can turn their attention toward bolstering marketing capabilities and portfolio moves that strengthen their market position over the medium-to-long term.

LNG buyers: Buyers will thrive in the current low-price environment, with an opportunity to close deals in low-cost supply; however, they should also assess their near-term exposure while identifying ways to maximise value over the long term. LNG buyers should review their existing commercial exposure and engage with suppliers to create as much near-term flexibility as possible so they can manage their potential demand shocks. At the same time, they should have a clear approach for maximising value from contracts for the longer term.

How long before we see a recovery in LNG prices?
Given the considerable uncertainty of the impact of Covid-19 in the global economy, and thus in the global LNG demand, it is challenging to predict an accurate timeline of recovery in LNG prices. However, given the substantial amount of LNG liquefaction projects under development and the lower LNG demand expected in any of the scenarios considered, we can expect at least 2-3 years of significant low spot LNG prices.