Covid-19, Climate Change, and Their Implications for LNG Trade and Natural Gas … · 2020. 9....
Transcript of Covid-19, Climate Change, and Their Implications for LNG Trade and Natural Gas … · 2020. 9....
I N T E L L I G E N C E T H A T W O R K S
THINKBRG.COM
I N T E L L I G E N C E T H A T W O R K S
Covid-19, Climate Change, and Their Implications for LNG Trade and Natural Gas in South America
September 15, 2020
Christopher GoncalvesChair and Managing DirectorBRG Energy and Climate
Roberto CunhaDirectorBRG Energy and Climate
Madrid Energy Conference Curtain-Raiser Webinar
I N T E L L I G E N C E T H A T W O R K S
Disclaimers
The opinions expressed in this presentation are those of the individual author(s) and do not represent the opinions of BRG orits other employees and affiliates.
The information provided in this presentation is incomplete without the oral briefing of the author(s), and should not be considered out of context.
The information provided is not intended to and does not render legal, accounting, tax, or other professional advice or services, and no client relationship is established with BRG by making any information available in this presentation.
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Table of Contents
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1. Market Impacts of Covid-19
2. U.S. Carbon Tax Scenario
3. Implications for South America
4. A Closer Look at Brazil
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1 Market Impacts of Covid-19
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I N T E L L I G E N C E T H A T W O R K S
COVID-19 Compounded Natural Gas and LNG Surpluses
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Already oversupplied, US and global oil and gas demand have been deeply damaged by the pandemic and shutdowns, leading to near term market collapse
• In the US, most producers are maintaining output from existing wells, leading to sustained high gas production over the coming few years.
• The pandemic-induced recession has reduced gas and LNG demand in Asia and Europe moderately. Ample supply and sustained low prices for gas and LNG will support demand recovery from the pandemic crisis.
• As a marginal source of global LNG supply, US LNG exports have decreased significantly in 2020, although a measure of recovery is already underway.
• There are several indications of the delay or cancellation of investment and financing activity in LNG production until investors become confident about when the market will rebalance. Market downturn has resulted in a variety of significant FID delays for LNG infrastructure.
• Despite these near term impacts, the gas and LNG sectors are anticipated to recover more quickly and completely than oil consuming industries such as ground, air, and marine transportation.
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U.S. Gas Production Trends and Implications
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In our new Base Case, U.S. associated gas production will decline due to lower oil/NGL prices and shale gas production and production will shift from wet toward dry gas. The U.S. gas production recovery and shift to dry gas will yield only moderate increases in HH given the vast dry gas resources available for production at only moderately higher costs.
Sources: BRG analysis based on LNG Horizon model forecast, EIA, Bloomberg.
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2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
2020
US$
/ M
MBt
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Henry Hub Prices
Historical Forecasts
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2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Bcm
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US Natural Gas Production
Shale-Dry Gas Shale-Wet Gas Conventional/Non-shale
Historical ForecastsHH prices have already
rebounded from below $2 to ~$2.5 per MMBtu in anticipation
of market impacts
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Regional Supply-Demand Balances
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Before 2020, modest WOS surpluses fed modest EOS deficits, but looking ahead from 2021 the WOS surpluses and EOS deficits will become more substantial and inter-regional LNG trade will increase.
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WOS Supply-Demand Balance
WOS LNG Supply WOS LNG Demand
Historical Forecasts
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2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Bcm
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EOS Supply-Demand Balance
EOS LNG Supply EOS LNG Demand
Historical Forecasts
Sources: BRG analysis based on LNG Horizon model forecast, Kpler.
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Natural Gas and LNG Price Impacts
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Relentless production growth, decelerating demand (and recent pandemic impacts) have plunged natural gas and LNG prices to a rock bottom. Looking forward, the delay and destruction of new liquefaction projects and a gradual demand recovery will yield moderate price improvement toward viable, competitive price levels. As a result, U.S. LNG deliveries to Brazil might cost from $5 to $7 MMBtu, but traded market values will reflect seasonal market and competitive conditions.
Global Prices for Natural Gas and LNG
Sources: BRG analysis based on LNG Horizon model forecast, Bloomberg, Platts. Note: ¹ Brazil DES price from U.S. supply equals 115%*HH plus capacity fee, ~$2.5 per MMBtu, plus shipping costs.
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USGC FOB Prices TTF JKM DES Price
Historical
Booming shale production, U.S. LNG exports, oil price collapse, and LNG demand destruction drove LNG
prices down to rock bottom levels in 2020
Prices will increase moderately as European and Asian LNG demand rebounds, absorbing excess
storage inventories and production capacity
Forecasts
2020 US $/MMBtu ¹ Low High
Estimated Brazil DES Price Supplied from U.S. $5.0 $7.0
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2 US Carbon Tax Scenario
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U.S. Carbon Tax Scenario Assumptions
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Assuming a Biden victory and/or a substantial shift of power in the U.S. Senate, one policy scenario would feature the implementation of a carbon tax to mitigate climate change.
Source: Electricity and Gas Market Surveillance Commission (EGC); IEEJ Sept 2018
Energy Innovation and Carbon Dividend Act, most stringent tax and likely to be implemented according to this analysis
Year 2022 2023 2024 2025
Carbon tax $/metric ton 25 35 45 55
• Among other proposals, the Energy Innovation and Carbon Dividend Act has gained traction amongst policymakers in recent years.
• On this basis, we assume that a carbon tax will be implemented in 2022, starting at $25 per metric ton, increasing by $10 per year, reaching $55 per metric ton by 2025, and eventually climbing to $100 per metric ton.
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Carbon Tax Impacts on LNG Exports
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In a carbon tax scenario, U.S. LNG exports will decline by 13-19 Bcma during the first two years of policy implementation because the carbon tax is more detrimental to coal-fired generation and therefore boosts gas-fired generation and gas prices. The higher gas prices make LNG exports less economic in the near term, but these impacts moderate as renewable energy catches up to lighten the demand pressure on natural gas prices.
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Delta of LNG Exports between U.S. Carbon Tax and Base Case
US Qatar Australia Russia OtherSources: BRG analysis based on LNG Horizon model forecast.
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Carbon Tax Impacts on LNG Prices
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A U.S. carbon tax scenario will have only minimal near term impacts on LNG prices due to the substantial LNG supply surplus. In the initial years, USGC FOB prices will increase slightly due to the increased U.S. domestic gas demand, resulting in lower U.S. LNG exports and slightly higher global LNG prices. However, the impacts reverse longer term as renewable energy penetration increases and displaces U.S. gas-fired generation, resulting in lower gas prices and higher U.S. LNG exports.
Sources: BRG analysis based on LNG Horizon model forecast.
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LNG Price Differential between U.S. Carbon Tax and Base Case
USGC FOB Prices TTF JKM DES Price
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3 Implications for South America
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I N T E L L I G E N C E T H A T W O R K S
Just 20 years ago LNG trade in South America was limited to exports from Peru and Trinidad & Tobago
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2000s
Flow Idle Route Possible Flow Liquefaction Terminal Regas Terminal
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Then, eight regas terminals helped bridge the gap between growing demand and flagging supplies
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2010s
Flow Idle Route Possible Flow Liquefaction Terminal Regas Terminal
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Going forward, the region is on track to exceed 12 terminals and flexible cross border pipeline trade
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2020s
Flow Idle Route Possible Flow Liquefaction Terminal Regas Terminal
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However, the need for more LNG import capacity is waning in all countries except Brazil and Colombia
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2020s2000s 2010s
Flow Idle Route Possible Flow Liquefaction Terminal Regas Terminal
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4 A Closer Look at Brazil
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Brazil’s power mix has seen increasing additions of natural gas and renewables sources in the 2010s
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Source: EPESource: EPE
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Hydro Renewables Other Natural gas
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Hydro Renewables Other Natural gas
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Going forward, more CCGT additions are still needed to enable greater renewable penetration
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Hydro Renewables Other Natural gas
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Gas 2020:~15GW
~9%
Gas 2040:~45GW~15%
Natural gas additions take place as needed to provide backup capacity to the intermittency of wind and solar sources
Stagnating hydro capacity due to few large prominent sites remaining
Renewables replace hydro as the main source of capacity additions
Nuclear, coal, oil and biomass grow more slowly than gas
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By increasing from a 9% to a 15% share of the mix, Brazil would add up to 20 GW in new CCGTs by 2040
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Hydro Renewables Other Natural gas
The share of non-renewable technologies would continue to average 25%, with a relative gain from natural gas, which would gain share over coal and oil-fired power plants
Combined, hydro, wind and solar would sustain an average share of 75% of the Brazilian power generation capacity mix
I N T E L L I G E N C E T H A T W O R K S
LNG is the cheapest source of flexible supplies for a growing need of backup gas-fired power plants
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Source: EPE, BRGSource: EPE, BRG
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Hydro Renewables Other Natural gas
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Hydro Renewables Other Natural gas
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Gas 2020:~15GW
~9%
Gas 2040:~45GW~15%
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Thank you!
Christopher GoncalvesD: +1 202.480.2703M: +1 [email protected]
Roberto CunhaD: +55 21.3747.1606M: +55 [email protected]