Regardless of the financing structure changes due to market uncertainties, Gas Exporting Countries Forum (GECF) sees that the level of investment in upstream and midstream activities is expected to grow. In the medium-term (2020-2030) investments will grow by over $4,700 billion and long-term (2020-2050) by $8,900 billion writes Dr Hussein Moghaddam, Senior Energy Forecast Analyst, Energy Economics and Forecasting Department, GECF Secretariat
Regardless of the financing structure changes due to market
uncertainties, Gas Exporting Countries Forum (GECF) sees that the level
of investment in upstream and midstream activities is expected to grow.
In the medium-term (2020-2030) investments will grow by over $4,700
billion and long-term (2020-2050) by $8,900 billion writes Dr Hussein
Moghaddam, Senior Energy Forecast Analyst, Energy Economics and
Forecasting Department, GECF Secretariat.
As stated in the Declaration of Malabo at the 5th Summit of Heads of
State and Government of the GECF Member Countries, in order to sustain
the security of demand and supply of natural gas, it is necessary to
ensure sufficient investments through the entire gas value chain among
all gas market stakeholders.
Since the start of 2020, every aspect of the global economy, including
investment projects in natural gas industry, have been strongly hit by
the outbreak of the Covid-19 pandemic.
In fact, it is always a challenge to develop an accurate short-term
forecast for tactical decisions, as bias forecast integrity will result
in deeper problems.
In that context, many gas investing companies have been forced to
revise their 2020 capex investment budget by approximately 25% in
comparison to the investment plans that had earlier been sketched for
the entire year.
For instance, Royal Dutch Shell announced that they plan to slash the
oil and gas assets by up to $22 billion, or ExxonMobil plans to reduce
its 2020 capex by 30% to $23 billion.
Nobody expected at the beginning of the crisis that this phenomenon
could spread with such an alarming speed and cause economic activities
to come to a near standstill. The trade-off between society’s health and
economic growth through imposing restrictive health measures has
already brought global investment to its knees by having immediate
effects and lasting consequences.
In response, policymakers have issued investment plans to incentivise
foreign and domestic investments during this harsh time, and also to
protect ongoing projects from any progressive collapse.
The number of factors that were not predictable at the beginning of the
year influenced the investment decline, including global economic
stress, practical barriers on the way to projects implementations, and
problems that occurred across the supply chains such as interruption and
delays that resulted mainly due to the pandemic.
The investment opportunities in the gas industry are shaped by upstream
activities and trade infrastructure including liquefaction, pipeline,
and regasification as midstream. Prior to 2020, the historical upstream
investment between 2010 and 2019 was nearly $800 billion worldwide,
indicating a tremendous accumulative increase of 78% compared to the
investment volume during the 2000s.
A further $310 billion investment was made on gas transportation and
trade infrastructure between 2010 and 2019, showing an increase of 67%
compared to the investment made between 2000 and 2009.
One of the key factors that explain the dramatic growth in global gas
investment during the 2010s, was the US’ ambitious production plans of
shale gas from unconventional resources. In 2012, the US outpaced Russia
for the first time since 1982 in gas production due to intensive
investment in shale gas exploration and production.
Between 2012 and 2019, around $510 billion investment was made in
upstream gas activities in the North American region, representing 64%
of global upstream investments in the past decade.
The current pandemic crisis is not an emerging challenge for the energy
sector investment, as this sector has already experienced another
chaotic situation in 2008 when the financial crisis drove down energy
investments considerably worldwide.
Though, for the second time in this century, the gas industry is
experiencing a muddled situation in the 2020 pandemic, which is much
larger and widespread than the one that happened in 2008.
It is apparent that the effect of the pandemic on gas investment is
significant in the short-run (2020-2022), due to two intertwined issues:
First, there are concerns raised by investors regarding the level of
gas demand. Thus far, the pandemic has had an abrupt shock on the
worldwide economy which has shrunk demand for natural gas. Currently,
the uncertainty regarding when the pandemic will end is fuelling
investors’ hesitation for supporting new projects.
The second issue focusses around natural gas prices, which are already
lower compared to the pre-crisis period along with oversupplied gas
markets. The risk of storage levels nearing capacity may even cause
negative prices due to uncoordinated responses from sellers, traders,
and other middleman suppliers.
There are signals coming from the European gas
storage inventory that oversupply may hit the capacity and
substantially impact global gas market prices. That being said,
according to the Gas Infrastructure Europe at the end of August 2020,
the European gas storage was at 91.46% of capacity, compared to the
five-year average at about 78%.
Although global investment on the gas markets have slowed down however,
according to the GECF forecasts the long-term prospects for gas
investment are promising, with some uncertainties:
*Traditionally, growth in demand has been a major factor influencing
gas investment both in upstream and trade infrastructure. Nonetheless,
in the last few years, the LNG industry has witnessed changes in its
project financing structures due to dynamic factors such as ample
unconventional sources, and emerging technologies in exploration, and
exploitation phases such as floating liquefied natural gas (LNG)
terminals to name a few. Advanced technologies increase production
efficiency through facilitating economies of scales. This causes capex
reduction which provides monetary
incentives for investing companies to sanction new projects;
*However, in the future a project’s financing for the LNG markets can
be structured differently than it was prior to the aforementioned
factors. The future financing structures of LNG projects require more
innovation and flexibility, as the market could become increasingly
fragmented; and
*Furthermore, there is an expected growth in LNG consumption in the
coming decades because of population growth, growing economic prosperity
in developing countries such as China and India, favourable government
regulations, and actions to reduce air pollution.
Although the growth in demand drives an increase in gas investment, LNG
development projects may be difficult to finance in the same way as was
common before the current crisis due to prospective market changes. It
is less likely that in the coming decades LNG projects will be financed
by project-level debt (e.g. Canada LNG) which requires long-term sales
and purchase agreements. This will increase offtake capacity agreements
to secure LNG investment in the short- or medium-term.
According to the GECF Secretariat and based on the latest autumn update
of its Global Gas Model, world gas demand will increase to more than
5,800 bcm in 2050. An era of diminished investment on natural gas value
chain will create a shortfall in production levels, and hence more
cooperation is needed to support investments through the entire gas
value chain to meet rising demand.
(Tradearabia News Service - tradearabia.com, September 29, 2020)
