The sudden plunge of oil prices that took place earlier this month in a context of global coronavirus crisis and a Saudi-Russian price war, has brought the price per barrel below $US 30. Natural gas is not immune to such a brutal decrease even if its price has progressively been decoupled from crude oil prices over the past 10-15 years due to the “shale revolution” in the US creating tremendous additional supply, the rise of alternative transport modes such as LNG and the development of spot trading, among other factors. As a result, this oversupply of natural gas and increased distribution capabilities have kept prices relatively low. More recently, before the economic slowdown we are facing in Asia, in Europe and the US and the associated decrease in demand, prices had been stable at a low level.
Such a dramatic change in prices in the current global context makes it difficult to believe that what oil and gas markets are going through would not have both significant economic and political implications. Nevertheless, what one should keep in mind is the duration of both the coronavirus and price war crises as key variables to measure the magnitude of the implications I will be describing.
First, on the economic level, it is necessary to separate natural gas exporters and importers. A sustained low demand resulting from a potentially slow recovery in Asia, Europe and the US, would have deep consequences on the broader oil and gas sector globally and more specifically for stakeholders exposed to markets where break-even prices are close to current selling prices.
This puts a wide range of natural gas business actors in places such as the US, at risk. A large number of businesses would face a rapid decline in profitability, and calls for government support to weather the crisis are already being heard. The Saudi move towards low prices might sound like a market share race to US shale producers. No matter how the US shale sector manages its way out of the crisis, investments will suffer from the low prices, even more than for conventional natural gas producers (Saudi Arabia, Russia) whose investment capacity is already facing limitations.
However, the economic impact might not be limited to the oil and gas sector as far as natural gas exporters are concerned. We should not overlook the consequences on resource-rich countries including Saudi Arabia itself as well as other exporters in the Gulf region where economic diversification away from hydrocarbons has only started for some (Saudi Arabia) and accelerated for others (UAE or Qatar). Diversification in the Gulf currently implies multi-billion dollar investments in the development of new sectors such as tourism and large infrastructure programs (megacities, transport). Even if countries such as Qatar, Saudi Arabia and the UAE are financially shielded by large sovereign wealth funds and other government-held assets, low hydrocarbon prices combined with a long lasting global recession would amplify existing fiscal deficits and put at risk a significant number of large-scale, transformative government-sponsored initiatives.
Other producers are significantly more exposed to low prices especially when the hydrocarbons sector represents a dominant portion of their exports and government revenues, coupled with a precarious fiscal balance and low economic growth. Countries such as Iran, Malaysia and Nigeria are still heavily dependent on oil exports to secure government revenues. The case of Iran, an OPEC member, is specific as the country is facing international sanctions which, among other sectors, have severely penalized its capacity to export natural gas, hence limiting government revenues. Nigeria, although a booming economy, does not have a sufficient budgetary margin of manoeuver to compensate for revenue loss from declining natural gas prices.
Consequently, the economic implications of sustained low natural gas prices not only threatens the oil and gas industry globally but also the long-term economic prospects of exporting countries. Interestingly, according to analysis of the 2014-2016 oil price collapse, this perspective does not necessarily play in favour of importing countries as suggested by analyses from past plunges. This would probably ease the budgetary position of countries where natural gas still represents a significant share of the energy mix (several EU countries, China, Turkey) but low hydrocarbon prices have a limited economic impact in a context of recession. At best, it would provide some budgetary ease to conduct structural reforms but even there, the impact of the recession might not allow this opportunity to appear.
On the political front, the diplomatic dynamics that led to interruption of the OPEC+ (OPEC and key non-OPEC members including Russia) dialogue to influence oil prices are giving indications of the political perspectives for the international natural gas market. The key government actors on the international oil market are almost identical for the gas market. This is also true for importers.
When we take global actors – Qatar, Russia, Saudi Arabia, and the US –, because of the economic realities described earlier, the US appears to be the most vulnerable in terms of market share, all the other global actors being able to sustain low prices in the short term. However, the lack of knowledge about the duration of the coronavirus crisis and whether some countries would recover earlier than others and at what speed, generate doubts about the location and levels of demand. As a result, flexibility to shift stored natural gas reserves from a low-demand market to a high-demand one will be key. This is where LNG, which has grown significantly in the recent past, could become central to gas supply. This is an opportunity which some large LNG exporters such as Qatar might benefit from if the US shale gas industry were not rescued by the government. If not, Qatar and other LNG exporters would fill the gap.
In other natural gas exporting countries such as Iran or Nigeria, the short- and medium-term internal political consequences might be significant; with already strained government budgets, public service delivery would be impacted and further deepen existing social and political unrest. While one cannot speculate about regime survival prospects, particularly in the case of Iran, it is reasonable to say that the ruling political establishments in several hydrocarbon exporting countries are facing serious challenges.
On the demand side, the role of natural gas in the energy mix has evolved in recent years. As an increasing number of countries are going through energy transitions to address the adverse effects of climate change by reducing emissions of greenhouse gases (GHG), natural gas has come to be considered a “transition fossil fuel”. Advocates of this approach claim that although the integration of renewable energy sources into the energy mix is moving at a rapid pace, it would still take time to replace fossil fuels, particularly in electricity production. Moreover, the limited storage capacity for clean electricity generated from renewable energy sources requires the development (ongoing) of affordable and efficient capabilities (batteries) without which we would face power intermittence if we did not have electricity generated from fossil fuels (including nuclear). Therefore, natural gas, which generates less GHGs than coal or oil, is becoming part of the solution to the energy transition challenge, according to the countries adopting it. The European Union and China are integrating natural gas into their energy transition planning, which has the potential to maintain demand over the medium term. Before the current crises erupted, demand for natural gas was expected to grow steadily in key markets including the US and Asia, with moderate growth in Europe, until 2030. The switch from coal to natural gas would be a key driver of consumption in China during this period, as the government is working towards reduced air pollution. In the Middle East, power generation was expected to stimulate demand while development of the petrochemical sector in the US was planned to contribute to consumption growth. As renewables take the lead post-2030 and electricity storage challenges are expected to be overcome by 2030, natural gas demand growth would decline at different levels depending on scenarios (current or ambitious sustainable policies).
In conclusion, the oil price collapse resulting from the coronavirus and the price war involving OPEC+ partners Saudi Arabia and Russia, in a context of low demand for hydrocarbons including natural gas, will have consequences at both the economic and political levels. On the economic level, some actors such as US shale producers might partly be driven out of business if the government does not rescue the sector, while several natural gas exporters whose economies remain dependent on hydrocarbon exports are at risk of deepening fiscal deficits, even the wealthiest of them. In parallel, low natural gas prices might not benefit importing countries either, due to currently low economic growth and potential global recession. Nevertheless, projections for natural gas demand see growth until 2030 in both advanced and developing economies, mainly because gas is increasingly adopted as a “transition” energy source with lower GHG emissions compared to coal, until renewable energy sources take over post-2030. At the political level, the dynamics between exporting countries might also shift in favour of LNG exporters benefiting from a larger market share. However, other exporters highly dependent on hydrocarbon exports might suffer unrest due to diminishing revenues limiting governments’ capacity to ensure basic public service provision. Any analysis of the international gas markets is currently heavily dependent on the duration of both the coronavirus crisis and the OPEC+ price war. The ongoing economic crisis and the demand for energy will be determined for a large part by this set of factors.
The views expressed in this article only reflect the author's opinion and are separate from his affiliation
2 American Oil Drillers Were Hanging On by a Thread“, NYT, 20 March 2020.
3 “White House likely to pursue federal aid for shale companies hit“, Washington Post, 10 March 2020.
4 “Oil Price Crash Threatens Petrostates Iran, Nigeria, Algeria ...“, Foreign Policy, 12 March 2020.
6 With the Benefit of Hindsight: The Impact oft he 2014-15 Oil Price Collapse, Global Economic Prospects, Special Focus 1, World Bank, January 2018.
8 “Gas 2019, Analyses and Forecasts to 2024”, International Energy Agency, June 2019