09 Mar GAS and LNG IN 2022: 12 THEMES
Top questions in everybody’s mind include when will the energy crisis come to an end and when will energy markets return back to normality. These and a host of other uncertainties frame 12 themes expected to shape the outlook, markets and prices for natural gas and LNG in 2022. Key factors will be the state of the pandemic and the global economy,the EU’s green agenda, a decisive move towards clean energy combined with a sustained attack on the global oil and gassector, energy finance, combating climate change and global geopolitical developments.
1. Covid-19 pandemic
Will 2022 be year when the pandemic will be tamed, or at least will the world come into terms with it? Suspicions are that it will be the latter, especially as new deaths have been falling substantially worldwide. As recovery from Covid-19 continues and as the world comes to terms with the pandemic, demand for all fossil fuels is expected to carry on increasing in 2022.
2. Impact on IOCs
The international oil companies (IOCs) will continue capital discipline and consolidation in 2022, as they face policy uncertainty and the focus on renewable energy increases. In addition to climate change pressure, the greatest challenges IOCs will face in 2022 are: shareholder pressure for a faster transition to low-carbon energy, increased court action, financial institution investment pressure and increasing uncertainty limiting their ability to invest in new long-term projects.
3. Financing oil and gas
2022 will be a year when financing oil and gas attracts more attention and becomes more challenging than ever before. ESG pressure and new requirements for sustainability disclosures will make it more difficult for oil and gas companies to raise funds for new, long-term, projects, leaving them facing higher costs for capital, with credit pressures increasing. Oil and gas project financing will get harder in 2022.
4. Strengthening climate pledges
Consequences of accelerating energy transition without ensuring the security of energy supplies first have been driven home by the energy crisis engulfing Europe and the world. Europe’s push for clean energy will drive inflation higher in 2022 and beyond. In 2022 the fallacy that renewables alone will power Europe and the rest of the world in the future will become clearer. The unintended consequences of single-mindedly driving energy transition without properly dealing with intermittency and its cost implications must be addressed. There is increasing realization that this endangers reliability, affordability and security of energy supplies.
5. Methane and Scope 3 emissions
In 2022 there will be increasing pressure for companies to commit to significant cuts in methane emissions, as well as track and disclose Scope 3 emissions. The agreement by more than 100 countries at COP26 to cut methane emissions by 30% by 2030, and eventually eliminate them altogether, will impact the oil and gas sector massively. Pressure to focus on transparency of disclosures and reduction of Scope 3 emissions will increase in 2022. Expect new commitments by COP27.
EU energy debate in 2022 will be dominated by negotiations around the Fit-for-55 package. But progress in these negotiations is not guaranteed. There are still major differences between EU member states. The Taxonomy is crucial to the future of sustainable finance. The inclusion of natural gas and nuclear will
be agreed and confirmed early in 2022, albeit under some quite strict conditions. This has been aided by the energy crisis – a recognition that at least during energy transition they are needed to back-up to intermittent renewables.
7. 2022 will be the year when the role of natural gas in the future energy mix becomes clearer
Not only gas will be included in EU’s Taxonomy in 2022, but it will regain a role in Europe and remain an important part of the global energy mix for the longer term. In Asia, where natural gas and LNG will continue playing an important role in 2022, not only replacing coal in power generation but also in satisfying Asia’s increasing energy demand as economies come out of the pandemic.
8. Natural gas price
By early 2022 the TTF natural gas price in Europe dropped below 50% from the peak experienced in October 2021, and while the downward trend persists, it is still exhibiting substantial volatility. The expectation is that it will return nearer to normal levels by mid-2022, as more supply becomes available to catch up with demand, and to pre-pandemic levels by 2023. This assumes no pandemic flare-ups and that gas supply will not be impacted by the Ukrainian war.
9. Nord Stream 2
All eyes in 2022 will be on the fate of the delayed final certification of Nord Stream 2 (NS2). The pipeline is already loaded with gas and ready to operate. This is linked to the outcome of the Russia – Ukrainian war in progress.
10. LNG market and price volatility
Global LNG demand and supply will carry on growing. The focus in 2022 will be on a stronger return to LNG term-deals, following a volatile year for the spot market in 2021. This is now favoured by Chinese and South Korean LNG buyers. A factor in this is oil price and oil-price-indexation. A major factor in global LNG supply is what happens in the US, which in 2021 became the top LNG exporter in the world.
11. US-China relations
As the tension between US and China increases, so will the impact on global energy, from ensuring a timely energy transition, to availability of rare minerals to global clean energy markets, to LNG markets and trading, and global geopolitical polarisation affecting efforts to combat climate change.
12. Uncertainties to dominate oil and gas markets in 2022
These include inability to control Omicron, or the next variant, leading to more lockdowns, and rising inflation, a cold snap this winter, escalation of the US-China, Russia-Ukrainian and China-Taiwan confrontations, a weakened Biden, failure of the Iran nuclear talks leading to a crisis, a hotter summer and even more extreme climate events, another oil crisis, the ongoing energy transition, political turmoil in Europe, to name but a few risks to global economic recovery. With spare global natural gascapacity remaining low, any disruptions could cause further market and price shocks.
Another factor that may influence energydevelopments in 2022 is rising solar and wind installation costs decelerating new capacity additions and slowing down energy transition. And this at a time of more coal and nuclear plant closures coming up in Europe. One more reason why natural gas is likely to have a longer-term role to play.
Following the rebound in demand in 2021, the oil and gas industry and markets are entered 2022 with renewed uncertainties about prices, demand and the industry’s longer-term prospects.