1. Trade volume to reach 400 million tons in 2022
- BloombergNEF expects global LNG demand to reach 400 million metric tons in 2022, up 6.6% from 2021. China and emerging Asian markets will account for most of the demand growth this year. (Gas demand estimates for 2022 assume 10-year normal weather.)
- China’s LNG demand growth continues to be underpinned by economic growth, continued coal-to-gas switching, expanding gas transmission and distribution networks and the commissioning of new gas power projects. Japan and Korea’s demand could fall due to higher generation from coal (Hitachinakaand Hirono coal plants by Jerain Japan) and nuclear (Shinhanul1 reactor by Korea Hydro & Nuclear Power in Korea).
- India’s LNG imports could recover in 2022 after registering a year-on-year decline in 2021. Gas demand recovery from the pandemic and spot LNG prices cooling down after the first quarter are all positive drivers for India LNG imports. Pakistan, Bangladesh and Thailand are expected to see higher LNG imports as domestic gas supply declines this year.
- Northwest Europe and Italy could see LNG deliveries rise by 10 million tons in 2022. However, the region could import more LNG than forecast if gas storage falls to critically low levels, prompting the JKM-TTF spread to shrink to a point where Europe outcompetes Asia for spot cargoes.
- U.S. LNG accounts for more than 40% of the total year-on-year supply increase in 2022. Australia and Pacific Basin sources are likely to see higher output as plants conducted major maintenance last year. A total four new projects and two expansions could commence in 2022.
2. China: Import capacity buildout outpaces LNG demand and contracts for 2022
- More Chinese LNG buyers are emerging as they increase access through their own new import terminals or third-party access (TPA) from PipeChina (China Oil & Gas Pipeline Network Corp)’s terminals. In 2022, 9 new terminals and 4 existing terminals’ capacity expansion projects are expected to be commissioned, with a total additional receiving capacity of 38.9 million metric tons a year.
- The gap between China’s LNG contract supply and import terminal capacity is estimated to balloon from 45 million tons to 93.5million tons in the next five years. Utilization rates across China’s import terminals are going to drop from current highs of around 80% to about 60% in 2022.
- On the other hand, the gap between LNG demand and long-term contracted volume is set to shrink in 2022. In 2021, the gap was around 24.1 million tons. BloombergNEF estimates China may import 84.6 million tons of LNG in 2022, 7.5% higher than last year. Contracted LNG volume increases to 62 million tons in 2022, so the gap drops to 22.6 million tons. In 2021, China’s contracted LNG deliveries are estimated to have accounted for 70% of total imports. This means China’s spot market reliance share would be lower than 30% for 2022.
3. Europe: The European gas balance will remain unusually tight in 2022
- The curtailed supply, record high gas prices, unprecedented volatility and geopolitical tensions that made 2021 such a tumultuous year for the European gas market shows few signs of abating in 2022. As such, significant risks to the European gas supply-demand balance remain in 2022.
- Russian flows: Early 2022 experienced a continuation of the reduced Russian gas flows to Europe that were a key driver of 2021’s record high gas prices. As Europe’s largest gas supplier, curtailed Russian pipeline flows –whether driven by domestic policy or as a result of sanctions relating to possible Russian action in Ukraine –will overwhelmingly be the key risk to the European gas balance in 2022.
- LNG flows: LNG will be an even more vital part of the 2022 balance than usual. Robust Asian demand, compounded if North Asia experiences a cold winter, would draw LNG cargoes away from Europe, creating a continued supply risk and gas price risk for the European gas market.
- Gas storage: The pivotal issue facing the European market is how low gas storage will end the winter. This will dictate how hard the market needs to work to rebuild gas storage during the summer injection season –all of which is set against a backdrop of disrupted flows and high prices. Gas storage levels in BNEF’s Europe perimeter are forecast to end the winter at a level lower than the last couple of years.
4. Europe: Uncertainty over Russian gas flows to Europe will be a key factor in 2022
- Russian pipeline imports into the BNEF perimeter collapsed in the second half of 2021, despite low gas inventory levels in the region. As a result, 2021 imports totaled only 91.4 billion cubic meters, 3.3Bcm below the previous year and over 20Bcm below the highs of 2018-2019.
- Despite record high gas prices, Gazprom has not offered any gas supply on its Electronic Sales Platform, as it did in previous years. This, and the messaging from the Kremlin, made it increasingly clear that Gazprom will keep volumes of gas to Europe low in 2022; and will seek to use current market conditions to push European buyers into signing long-term contracts and secure final approval for the Nord Stream2 pipeline.
- As such, Nord Stream 2 is one of the key factors to watch in 2022. The German approval process for the pipeline is paused and the head of the institution responsible stated a decision is not expected in the first half of the year. This makes it highly unlikely that the pipeline will start before then, and the decision will be made by the European Commission rather than Germany alone.
- Both Nord Stream 2 and Russia’s role in Europe’s energy crunch will remain key factors to watch in 2022, given the geopolitical situation. Possible developments around the pipeline and what this means for flows remain incredibly uncertain. However, it seems highly unlikely that Russian gas will ease the crunch in the European and global gas markets without major concessions in return.
5. Europe: Robust gas demand expected despite strong coal margins
- Following a record breaking year in which European gas TTF front-month prices surged beyond 180 euros/MWh ($60/MMBtu) in December, the European gas market is expected to remain significantly tight throughout 2022 with elevated prices baked into the forward curve. As such, a carbon price of at last 200 euros/t is needed to incentivize switching from coal to gas.
- As gas price gains across Europe’s more liquid trading hubs far outpaced that of carbon and coal equivalents, the profit margins for gas-fired power plants plunged in 2021. The average TTF forward curve price for the balance of 2022 was priced at 89 euros/MWh at the start of the year (as of Jan. 4, 2022). This resulted in the difference between spark and dark spreads going negative up until at least summer 2023, which should encourage robust power generation from coal and lignite assets. In Germany, Europe’s largest electricity market, power output from gas fell 48% year-on-year during 3Q 2021, while coal generation increased by 56%.
- However, despite strong coal and lignite margins, falling generation capacity from accelerated plant closures will lead to strong gas burn in 2022, which will also pick up the slack when renewable output fluctuates. This will drive up gas consumption in the European power sector, which combined with the need to replenish Europe’s low gas storage stocks, will also create further impetus for gas demand and imports.
6. Other LNG markets: Kuwait steps up imports; four new countries to join LNG importers list
- Shoulder season markets growth: Kuwait’s commissioning of the onshore Al-Zour terminal last year is set to spur LNG imports growth as demand rises from the refining, petrochemicals and power sector. A 3 millions tons a year contract with Qatar starts in 2022.Brazil’s LNG demand will be supported by the new GNA ILNG-to-power project. However, it could see a year-on-year decline in LNG imports if hydro generation recovers. Demand dynamics in these two markets will be important to watch as they impact the LNG flows available to refill gas and LNG inventories in Europe and North Asia during the storage season. Last year Brazil reached record high LNG imports, pulling away U.S. LNG supply that would have otherwise gone to replenishing European gas storage.
- New LNG import markets:
– Vietnam could start LNG imports in late-Q4 2022. PV Gas is targeting to complete its 1 millions tons a year ThiVai terminal in October, while the Hai Linh Co.’s 2 millions tons a year terminal construction is complete and could start operations in by the end of2022.
– The Philippines could start imports as First Gen is targeting its offshore LNG terminal at Batan gas to start in Q4 2022.
– El Salvador’s FSRU is ready for operation and could come online sometime this year. Shell will supply LNG to the project.
– Ghana received its first FSRU in May 2021. However, the start-up is delayed due to Covid conditions and is now expected to be this year.
– Hong Kong’s LNG terminal is under construction and could finish in 2022. However, BNEF currently projects LNG delivery to begin in 2023.
7. U.S. gas: Increased upward gas price volatility in a changing power stack
- Historically, gas demand for power generation has been one of the most price sensitive forms of domestic consumption, but that’s changing. As coal gets phased out of the power sector, the reliance on gas for dispatchable energy increases. This trend was exacerbated in 2021 due to pandemic-driven coal shortages. Generally, a coal minus gas price spread of $1/MMBtu would generate power burns of 20-30Bcf/d. In 2021, they regularly reached over 40Bcf/d.
Meanwhile, an insatiable tide of solar and wind additions across the U.S is limiting the size of the thermal gap, or the slice of the pie that is filled by dispatchable generation such as gas and coal.
- These two forces combine to hamper the ability of the gas market to self-regulate. In times of oversupply, lowering the price will not incentivize as much additional burns as it once did. Coal retirements and increased renewables means that gas constitutes a larger portion of a shrinking thermal gap. The gap to the ceiling is lower and therefore, upward potential is limited. Meanwhile, when undersupplied, the market requires higher prices than before to reduce burns since there is less coal to come in and replace the lost generation.
- The two biggest takeaways are that an oversupplied market is becoming increasingly difficult to solve while an undersupplied market will lead to greater price volatility than previously.
8. Shipping: U.S. LNG will keep Suez Canal busy, and less new tankers to launch this year
- The Panama Canal route is the anchor of the U.S. LNG trade flow to the Japan-Korea-China-Taiwan region. Cameron and Sabine Pass LNG are the top two projects taking the Panama Canal to reach North Asia. Unsurprisingly, Japan and Korea are the top destinations, as they are major off takers from the two plants, respectively. These long-term contract journeys can be planned well ahead to secure Panama transit slots.
- But this year, eyes should move to the Suez Canal transits of U.S. LNG. An increase in U.S. deliveries to JKCT are linked to an increase in U.S. ships taking the Suez Canal. A total 91 U.S. LNG tankers transited via Suez to JKCT in 2021, compared to just six in 2020. Granted a big chunk of this happened in early 2021 when the Panama Canal experienced congestion and tankers took alternative routes to get to Asia. More U.S. LNG taking the Suez is going to add to the already existing heavy trade flow of Qatari supply that goes to Europe throughout the year.
- This year the market is expected to see 22 new ships enter the global fleet, approximately worth 2.8 million metric tons of LNG carrying capacity. This is much lower than the 54 ships delivered in 2021. The smaller addition may not necessarily equate to a tighter shipping market. The thing to watch is the Atlantic LNG shipping freight rates, currently commanding a premium over Pacific rates. If more ships are required this year to shuttle LNG deliveries from the U.S. Gulf Coast to Europe, less ships will be tied up on the longer U.S.-to-Asia journeys via canals.
9. LNG decarbonization: Expect more transparency on cargo emissions in 2022
- LNG cargo deliveries with emission statements are expected to begin in 2022 as the industry further develops an understanding of the reporting methodology. Cheniere will be the industry’s first-mover, expected to begin offering ‘Cargo Emissions (CE) Tags’ with all cargoes it offers from 2022. Qatar Energy, Chevron and Pavilion Energy published a landmark collaborative report on the methodology for LNG emissions measurement, in support of their long-term contracts for delivery to Singapore that will include these cargo emissions statements.
- Although the carbon offset –or ‘carbon neutral’ –LNG trade boomed in 2021 with at least 22 cargoes reported delivered, the credibility and intent of this trade is still in question. The emissions footprint of these cargoes were largely estimated through standard emission factors, such as those published by the U.K.’s Department for Environment, Food and Rural Affairs (Defra). The International Group of Liquefied Natural Gas Importers (GIIGNL) also published a framework for the measurement, reporting and verification (MRV) of emissions. It also sets to define a standard framework for carbon neutral LNG moving forward. The methodology builds on existing internationally accepted standards rather than creating a new one. The framework includes emissions disclosure, which would support the validity of increasing the carbon offset LNG trade.
- Providing accurate measurements of emissions associated with an LNG cargo is a crucial first step in decarbonizing production as it assesses the size of the problem. Carbon capture and storage appears to be the top running solution for LNG developers to decarbonize production. BNEF’s top candidates for final investment decision in 2022 all include CCS proposals.
10. ESG focus and gas: Investor pressure will demand accountability and disclosure
- Last year highlighted the impact of ESG trends in fossil fuel sectors: from activist investors shaking up ExxonMobil’s board to certified ‘responsibly sourced’ U.S. gas selling at a premium. BNEF expects these impacts and influences to grow throughout 2022.
- The shifts are rapid. BNEF’s tracking of commitments to remove investments, lending and underwriting activity from coal, oil and gas show increased activity. The tally reached 1,370 by mid-2021, representing U.S.$38 trillion and a 500% increase since year-end 2019. See BNEF’s Fossil Fuel Divestment and Phase-Out Tool (web| Terminal). The growth in ‘carbon neutral’ LNG cargoes, which use mechanisms like nature-based credits to offset their emissions, is seen as one measure companies are taking to help address emissions considerations. Trading house Gunvor committed to reporting Scope 1, 2, and 3 carbon emissions related to its LNG trading in a new trade finance arrangement with banks.
- Regulators globally are increasing oversight of ESG issues. In the U.S., the Securities and Exchange Commission will continue to target green washing and the Commodity Futures Trading Commission announced a focus on ESG. Responsibly sourced gas (RSG) will likely become standardized by third-party certification companies and the Global Methane Pledge brings new focus to a gas-centric emissions problem.
- Financial markets (debt and equity) will continue the shift away from fossil fuels in most markets. Investor pressure will demand additional executive-level accountability to address climate risk. Companies will need to disclose additional ESG information if they want to stay relevant.