LONDON (Feb 20): Asia will be able to absorb most of the growth in liquefied natural gas (LNG) supply from the second half of 2020, with Europe ceasing to be a balancing market, Royal Dutch Shell said on Thursday.
Excess cargoes have been sent to Europe in the past year as global LNG supply has been soaring, in particular from projects in the United States and Australia.
Mild weather and the 2019 novel coronavirus (Covid-19) outbreak in China helped reduce LNG demand in Asia this winter and LNG prices in Asia have dropped to record lows, while European gas prices are wallowing at more than a 10-year low.
"Over the last five quarters, we've seen particularly strong supply growth and Europe having to act as the balancing market to absorb those volumes," Steve Hill, EVP Shell Energy, said in a webcast after Shell presented its LNG outlook.
"But as you look forward from 2020, particularly from the middle of 2020, you see a material reduction in the growth of supply and you see Europe no longer being called upon to provide the role as the balancing markets, and Asia absorbing most of the supply growth going forward."
After almost 30 million tonnes of new liquefaction capacity was added in 2019, the growth in new supply is expected to slow down this year to below 20 million tonnes.
European LNG imports soared by more than 30 million tonnes to around 85 million tonnes in 2019, compared with 2018, as demand fell in Japan and South Korea and rose more slowly than previously expected in China, Refinitiv data showed.
Gas was also more competitive to burn than coal in European power generation.
"While we see weak market conditions today due to record new supply coming in, two successive mild winters and the coronavirus situation, we expect equilibrium to return," Maarten Wetselaar, integrated gas and new energies director at Shell, said.
Shell expects the impact of the coronavirus outbreak in China to be transitory for the country's demand, but added that consumption was affected in February, which is likely to extend into March. It estimated that China's LNG demand will grow by 4-6 million tonnes this year.
Last year, China's LNG imports increased by 14% due to efforts to improve air quality. LNG imports also grew in Bangladesh, India and Pakistan, Shell's outlook showed.
Commenting on the possibility of production shut-ins due to low prices, Shell said there is a possibility of those in the United States, as export economics "is very marginal."
With multi-year low European gas prices and LNG trading in the region at deep discounts to those, sellers of some U.S. cargoes may already see deliveries of U.S. LNG to Europe unprofitable.
Production can also be reduced in Australia, Egypt and Malaysia, as these countries have options to re-direct gas to domestic markets, Shell said.
In its 2020 LNG outlook, Shell said Asia is expected to be the key growth region for LNG in the next 20 years, with South and Southeast Asia generating more than half of the increased demand.
Global demand for LNG is expected to double to 700 million tonnes by 2040, with gas continuing to play a key role in a lower-carbon energy system. Global LNG demand grew by 12.5% to 359 million tonnes last year.
"The global LNG market continued to evolve in 2019, with demand increasing for LNG and natural gas in power and non-power sectors," Wetselaar said.
"Record supply investments will meet people's growing need for the most flexible and cleanest-burning fossil fuel."
Natural gas emits between 45% and 55% fewer greenhouse gas emissions and less than one-tenth of the air pollutants of coal when used to generate electricity.