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Australian gas producers at the forefront of international gas market “meltdown”

Australian gas producers are at the forefront of the international gas market “meltdown,” as an effect of the COVID-19 crisis, as global consumption is set to drop by 4 percent this year, more than twice the drop during the 2008 financial crisis.

In its Gas 2020 Report, the International Energy Agency said that demand for gas has been smashed and 2020 was on track to experience the largest ever “demand shock in the history of global natural gas markets.”

The report states: “The magnitude of the impact remains however unprecedented: This would be the largest recorded annual decrease in consumption since the natural gas market developed at scale in the second half of the 20th century.”

The IEA said global oversupply is pushing major natural gas indices to record lows. The issue is compounded by the fact that the oil and gas industry is cutting spending as it attempts to compensate for significant shortfalls in revenue by postponing investment. 

Gas prices tumble globally

Gas prices across all regions have fallen over the last year, with Asian spot prices falling 44 percent in 2019, European prices fell 45 percent, while oil-linked prices in Japan and South Korea remained comparatively stable, falling 2.6 percent in 2019.

These prices were smashed in the first few months of 2020, after oil prices crashed due to the combined effects of Covid-19 cuts to energy use and a Russian led price war in international oil and gas markets.

Australia’s predicament has been worsened because the demand for gas in each of these markets has fallen month-on-month since the start of the year. This includes Japan, the world’s largest gas importer, which saw its demand drop by 5 percent in the first five months of 2020.

Risk of oversupply

With additional gas supplies expected to come online across North America, Russia and Africa, as well as any new investments made in Australia, the international gas market faces a significant risk of oversupply and low prices.

Although a rebound is expected in 2021, the IEA does not assume a rapid return to the pre-crisis trajectory.

“Global gas demand is expected to gradually recover in the next two years, but this does not mean it will quickly go back to business as usual,” Dr Birol said. “The Covid-19 crisis will have a lasting impact on future market developments, dampening growth rates and increasing uncertainties.”

Natural gas has so far experienced a less severe impact than oil and coal, but it is far from immune from the current crisis. 

IEA Executive Director Fatih Birol said: “The record decline this year represents a dramatic change of circumstances for an industry that had become used to strong increases in demand.”

75 percent of Australian gas is exported

Around three-quarters of Australian produced gas is destined for the export market, but with prices as low as they are and demand being anemic, there is little hope that gas can light the way forward for economic recovery post-Covid.

Australia has experienced a gas crisis of a different nature in the past, when local prices skyrocketed as a result of exports.

The IEA report showed that the United States has now joined Australian and Qatar as one of the top three suppliers of gas to an international export market, after boosting its export capabilities.

On the upside, however, a reduction in exports could lead to more gas being released onto the local market, which should translate into lower prices for generators, which could, in turn, be passed on to Australian electricity users. 

The Australian Government, however, says it has faith in the gas sector. A spokesman for Energy Minister Angus Taylor told Renew Economy: “The IEA forecasts in its Gas Report 2020 that global natural gas consumption will continue to grow by an average of 1.5 percent per year over the period 2019 to 2025.”

“This is despite an expected single-year decrease in 2020 as a result of COVID-19,” the spokesperson for Angus Taylor said. “The IEA forecasts that global LNG trade will increase 21 percent on 2019 levels by 2025, driven by emerging Asian markets including China and India.”

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