GECF: Economic risks pose biggest obstacle to gas growth

• Bloc of exporting countries covers over 70% of global gas reserves

• Members include leading LNG exporters Qatar and Russia

• Secretary General shares outlook on fundamentals, pricing

LONDON (ICIS)–Slower economic growth, subsidised renewables and a turn away from fossil fuels by institutional investors represent the main challenges to the future of gas demand, according to the head of the international organisation that represents the world’s biggest exporters of the fuel.

The 12 members of the Gas Exporting Countries Forum (GECF) claim over 70% of the world’s proven gas reserves and supplied 46% of its LNG in 2019, according to LNG Edge.

The GECF long-term outlook on the future of the gas industry, published in February, expects global demand for gas to increase by 52% to almost six trillion cubic metres by 2050, due to population growth, rising demand for electricity and coal and oil-to-gas switching.

In an interview with ICIS, Secretary General Yury Sentyurin put obstacles to economic growth at the top of his list of potential challenges to that outlook.

“The medium-term economic outlook is impacted by the low-price environment for commodities, US-China trade tensions, Brexit complications. We should not ignore some entirely new, different risks like the Wuhan Coronavirus,” he said via email.

“There is also the issue of visibility on gas demand and revenues which has been exacerbated by the large development of intermittent renewables, supported by subsidies and privileged regimes.”

Europe, where government support has boosted renewables’ share in the energy mix, is the only region where the GECF expects gas demand to fall by 2050.

Sentyurin also pointed to the double challenge of a lack of gas infrastructure in some parts of the world and a new unwillingness from institutional investors like the World Bank and European Investment Bank to finance it.

India, for example, is one of the growth markets that major LNG players such as Anglo-Dutch major Shell are pinning demand hopes on, but delays in pipeline construction have repeatedly delayed the import capacity required to receive those volumes.

PRICING MECHANISMS

As the volume of gas available on the global market grows, a key question will be the terms on which future volumes are traded.

“In our view, the long-term LNG contracts will still persist in the future as a way to secure the stable supply of natural gas, especially in Asia, even though their duration is much less than the historical contracts (which mostly exceeded the 20 years duration),” said Sentyurin.

Price divergence between oil-indexed LNG supply contracts and the cheaper spot market has encouraged some buyers to reconsider oil indexation.

But Sentyurin cautioned against the assumption that moving to gas-based pricing would always result in lower prices.

“The resorption of LNG oversupply, expected over the medium term, can drive higher gas prices, and the reliance on spot gas transactions can pose a security of supply issue.”

By contrast, he said, oil-indexed contracts “provide visibility on revenues, which support investors in developing risky and costly LNG projects. Furthermore, the oil indexation enables [market participants] to provide liquid and transparent indexation reference for LNG transactions.”

The GECF chief believes flexibility will be key to future contracting and pricing mechanisms, but that it could come at least in part from within the bounds of oil indexation.

“Flexibility can be reached by leveraging various options including not only indexation, but also the conditions of adjusting the slopes to oil indexes, the duration of contracts, and take-or-pay conditions.”