Global natural gas industry development status and trend analysis



I. Recent developments in the global natural gas market

(1) Mismatch between supply and demand in the natural gas market

Recently, global gas supply has lagged behind booming demand. On the supply side, the utilization rate of LNG export plants in the United States is close to full capacity, the growth potential of natural gas supply in Russia is limited, the domestic natural gas production in Europe continues to decline, and the natural gas inventories in the United States, Russia and Europe are lower than the average inventory level, which makes the market more sensitive and the concern about insufficient supply in winter deepens. On the demand side, driven by economic recovery, extreme climate, energy transition and other factors, natural gas demand in Europe has recovered growth, and natural gas demand in Asia has continued to grow rapidly. In the short term, the mismatch between supply and demand in the market is difficult to ease.

1. Tight global gas supply

In 2020, affected by the epidemic and the historic slump in international oil prices, the upstream production of natural gas has been hindered, the output of major natural gas producing countries such as the United States and Russia has declined, and the operation of liquefied projects has been delayed and investment has slowed down. BP data show that in 2020, the world's natural gas production of 3.85 trillion cubic meters, down 3.3%, of which the United States, Russia - Central Asia and Latin America production fell 15.4 billion cubic meters, 32.1 billion cubic meters and 19.4 billion cubic meters, respectively; In addition, natural gas exploration activity declined throughout the year, with global recoverable natural gas reserves of 188.1 trillion cubic meters, down 1.2% year-on-year.

LNG supply and project investment under the COVID-19 epidemic

Since 2021, with the gradual control of the epidemic and the resonance recovery of the global economy, natural gas production capacity has gradually climbed, but the repeated epidemic has made it impossible to fully recover the production capacity gap, and the continuous supply-side impact has led to the shortage of natural gas production capacity. In the face of rapidly rising demand, global gas supplies are tight.

From a regional supply perspective, the United States accounts for about 24% of global natural gas supply, making it the world's largest natural gas supplier. More than 80% of the US natural gas supply is used to meet domestic demand, and the rest is exported (915 BCM of production and 137 BCM of exports in 2020), with LNG mainly exported to Europe and the Asia-Pacific region and pipeline gas mainly exported to Canada and Mexico. With a certain percentage of natural gas reinjection each year (3,56bn cubic feet in 2020, or about 10% of its well gas production), the United States is relatively productive. In February 2021, the United States experienced extremely cold weather, widespread power outages in Texas and Ohio, damage to natural gas infrastructure, and rapid declines in natural gas production. In August, Hurricane "IDA" caused the United States Gulf Coast natural gas production to decline again, and the recovery of production is not as expected. In addition to emergencies to inhibit the short-term supply of natural gas, the current utilization rate of LNG export plants in the United States is close to full capacity, and its pipeline capacity to Canada and Mexico is difficult to convert into global LNG circulation, and the capacity of export facilities has become the main bottleneck of the supply of natural gas from the United States to the global market.

Russia accounts for about 17 percent of the world's natural gas supply, making it the second largest supplier after the United States. In addition to meeting domestic demand, more than one-third of Russia's natural gas supply is exported (638.5 billion cubic meters of supply in 2020, up to 238 billion cubic meters of export), most of which is piped gas /LNG to Europe, and the rest mainly to China, Japan, Belarus and other countries. Russia is expanding its LNG supply year by year, but its natural gas exports are still dependent on pipelines. Of Russia's pipeline capacity to Europe (210 billion m3 / year), transit through Ukraine accounts for about half. The recent attention of the international market on Russian natural gas is the progress of the operation of the "Nord Stream 2" natural gas pipeline, which is designed to carry 55 billion cubic meters/year of cross-border pipeline once put into use, will become the main channel for Russia to bypass Ukraine and other countries to export natural gas to Europe, when Russia's natural gas supply capacity to Europe will be greatly enhanced. On November 17, the German energy regulator suspended the approval process for Nord Stream 2, making it difficult for the pipeline to relieve pressure on European gas supplies this winter, and in the short term, the growth potential of Russian gas supplies on the international market is limited.

Europe is the world's largest natural gas importer, and its domestic gas production has continued to decline in recent years (around 219 billion cubic meters of production and 541 billion cubic meters of consumption in 2020). European gas production fell 10 per cent in the first half of the year. On the one hand, several gas fields in the North Sea are running out, as are some in the Netherlands. Groningen gas field in the Netherlands, an important gas field in Europe, will stop regular production in 2022 due to frequent earthquakes, which is estimated to affect about 5% of the total gas supply in Europe. On the other hand, in the context of carbon neutrality, European oil and gas companies have reduced their investment in upstream operations. Companies such as BP, Shell and Total have set targets to reduce the carbon intensity of their upstream operations and committed to becoming net zero emissions companies by 2050 or earlier, while overall investment and output by European oil and gas companies are declining, and overall regional self-sufficiency rates are falling sharply.

From the perspective of regional inventories, after the outbreak of the epidemic last year, many natural gas producing countries cut production capacity, and the extremely cold weather at the beginning of this year consumed a large amount of natural gas storage reserves, resulting in natural gas inventories in the United States, Russia, Europe and other places lower than the average level of previous years, and the relatively high gas prices since the beginning of this summer narrowed the summer and winter price gap, weakening the summer gas storage power. Further aggravate the tight market supply situation. In the U.S., natural gas inventories for the week ended Oct. 29 were 3,611 billion cubic feet, 313 billion cubic feet, or 8%, lower than a year ago. That's 101 billion cubic feet, or 2.7 percent, below the five-year average. In Europe, during the gas injection cycle this year, the inventory injection in the European region was only 77%, significantly lower than the 95% in the same period last year, which is the lowest level in more than a decade. In Russia, as the largest supplier of natural gas imports to Europe, the current inventory level of Russian Natural gas company (Russian gas) is also far lower than the same period in previous years, only to meet Russia's domestic winter needs, Russian gas in nearly 2 months a day to Russia's underground storage is equivalent to 80% of its daily exports to Western Europe. The persistently low natural gas inventories in these countries and regions have increased market sensitivity and deepened concerns about winter supply shortages.

2. Strong global demand for natural gas

In 2020, the world's natural gas consumption is 3.82 trillion cubic meters, down 2.3% year on year, and the consumption of major economies has increased and decreased, among which the consumption of natural gas in North America and Europe has decreased by 2.6% and 2.5% year on year, respectively, and the consumption growth rate in the Asia-Pacific region has slowed down, and the consumption of natural gas has increased by 0.1% year on year.

Since 2021, in the context of the global economic recovery, industrial production and consumer demand have rebounded strongly, changing the downturn of last year. The International Energy Agency (IEA), in its Global Gas Market Report for the fourth Quarter of 2021 released in October, noted that global gas market demand remained strong in the first three quarters.

From the perspective of demand growth regions, natural gas demand in Europe has recovered growth, and natural gas demand in Asia has continued to grow rapidly. In the first three quarters, European gas consumption increased by nearly 10% year on year; In the first eight months, China's natural gas consumption rose 16 per cent year on year; In the first seven months, consumption in South Korea, Japan and India increased by 17 per cent, 8 per cent and 3 per cent respectively. The IEA expects that for the whole of 2021, gas consumption in Europe will increase by 4.5% year-on-year; Gas consumption in Asia will grow by 7 per cent year on year, with China contributing 73 per cent of the annual increase, emerging economies 16 per cent and South Korea 6 per cent.

From the perspective of demand growth, first of all, global economic activity is gradually recovering, and the economic growth rate in Asia and the Middle East is accelerating, boosting gas demand in the power sector and the industrial sector.

Second, natural gas demand is more sensitive to climate change, and this year, climate factors, especially extreme weather factors, have driven a significant increase in natural gas demand. The frequent occurrence of extreme weather is gradually changing from accidental factors to long-term factors, affecting the supply and demand pattern of natural gas market.

The extremely cold weather at the beginning of the year and unusually high temperatures in the summer increased residential heating and cooling demand, driving up demand for natural gas power generation.

-- The continuous high temperature in the Northern hemisphere this summer is in sharp contrast to the decline in rainfall during the rainy season. Drought conditions in North America, Russia and many parts of Europe have occurred to varying degrees. The dry weather has caused shortages of hydropower and increased demand for natural gas as an alternative energy source. In the Southern Hemisphere, countries such as Brazil and Argentina are also experiencing severe droughts, and the reduction in hydropower generation has increased the demand for heat distribution in these countries, and natural gas consumption has surged.

Affected by the climate, the overall wind volume in the northern Hemisphere has generally declined this year, from the United Kingdom to Germany, many countries have seen a sharp decline in wind power generation in the first half of the year. Wind power generation is the most important source of renewable energy in many countries, especially in European countries. In order to fill the gap in wind power generation, natural gas power generation needs to be used as a supplement, driving the further growth of natural gas demand.

Finally, in the context of the low-carbon transformation of the global energy system, natural gas has obvious advantages over coal in terms of carbon emissions, and carbon trading costs continue to rise, fueling the demand for natural gas. At the end of 2020, the European Parliament agreed to raise the 2030 greenhouse gas reduction target from 40% to 55%, and carbon emission control is becoming more stringent. In July 2021, the European Commission put forward an energy and climate package called "Fit for 55", which proposes to further tighten the carbon trading market and reduce the total amount of carbon credits in the carbon market reform. As the policy continues to tighten, the price of carbon trading in the EU has soared. Data from the Intercontinental Exchange (ICE) show that as of the end of November, the EU carbon price has exceeded 70 euros/ton, compared with the price of 34 euros/ton when the fourth trading phase of the EU carbon market was launched on January 4, the EU carbon price has doubled this year. Because of the lower cost of carbon emissions from gas and electricity, as carbon prices rise, the demand for natural gas from power plants increases.

2. Natural gas prices hit record highs

Affected by factors such as supply and demand imbalance, extreme climate, and energy transition, global natural gas prices have risen all the way, and have become the largest increase in energy commodities this year. With a base period of March 2021, average monthly gas prices in Europe and Asia have increased by almost four and five times respectively by October 2021. The soaring price of natural gas has triggered a series of ripple effects in alternative energy markets such as coal and oil, as well as in electricity markets. In the context of economic globalization, the energy problem continues to ferment, and the shortage of energy supply is spreading around the world.

In late 2020 and early 2021, strong demand caused by cold weather led to a surge in LNG prices in the Asian spot market, before temperatures recovered and gas prices fell to normal levels. The story in Europe was similar to Asia, where gas prices retreated after rising for two months in a row. In mid-February 2021, the United States experienced the most extreme cold weather in many years, causing natural gas prices to rise sharply.

Entering March, natural gas prices in major markets around the world were mainly stable, with a small range of shocks. Subsequently, driven by many factors such as market supply and demand mismatch, natural gas prices continue to rise, and in the third quarter, the first European natural gas prices led the world, and then the rise extended to the spot market in Asia and other places, natural gas jumped to become the largest increase in energy commodities this year. On October 27, the Henry Hub natural gas main contract in the United States reached $6.2 / million British thermal units, up 87.3% year on year. At the end of October, the main contract price of the Dutch TTF, which represents the European benchmark, closed at 74.3 euros per megawatt-hour (about $25.43 / mmBTU), and the December spot LNG CIF price in Asia reached $26.534 / mmBTU, both at historic highs. Using March 2021 as the base period, the average monthly price of natural gas in Europe and Asia has increased by nearly four and five times respectively by October 2021, and the average monthly price of natural gas in the United States has also doubled. In contrast, the price of pipeline gas supplies has been less volatile, but has also risen by more than 50%.

Considering the imbalance between supply and demand, energy transition and other factors, coupled with the "La Nina" phenomenon again this winter, global natural gas prices will not fall significantly in the short term. Industry consultancy Wood Mackenzie pointed out that there will not be any weakness in LNG prices going into winter, and demand side management and eventual power rationing may be the last resort.

The soaring price of natural gas has triggered a series of chain reactions in alternative energy markets such as coal and oil, and as the price of various fossil fuels has risen, the price of electricity in many countries has risen to a record high. In the context of economic globalization, the energy problem continues to ferment, and the shortage of energy supply is spreading around the world. In a globalised world, energy supply problems are likely to be widespread and long-lasting, especially in the context of disruptions to supply chains and cuts in fossil fuel investment in response to climate change.

(3) Increased competition in natural gas trade

Since the beginning of this year, the more prominent feature of global LNG trade is that regional competition is more intense and mutual influence is deepening. Traditional LNG suppliers such as Australia and Qatar are increasingly competing with emerging LNG exporters such as the United States and Russia on the supply side. Major Asian consumers and emerging importers with faster growth in gas demand are also competing with European countries on the demand side.

On the supply side, competition between traditional LNG suppliers such as Australia and Qatar and emerging LNG exporters such as the United States and Russia has intensified. In February 2021, Qatar Petroleum approved the $28.75 billion North East Project (NFE), the largest LNG project approved in recent years, which will increase Qatar's LNG production capacity to 110 million tons per year by 2025. In addition, Qatar also plans to build two new production lines with a combined capacity of 16 million tons per year from 2027. If the two production lines are successfully put into operation, Qatar's LNG production capacity will increase to 126 million tons per year after 2030.

Australian LNG developers' investment plans for 2021 include more than $10 billion in gas drilling and LNG filling projects to consolidate their position as the world's leading supplier of LNG.