Hit hard by response to the COVID-19 pandemic, global gas demand in 2020 is set to to tumble by twice the amount lost after the 2008 global financial crisis—its largest annual decline in history—the International Energy Agency (IEA) says in its latest annual market report Gas 2020.
As of June 2020, the fall has been significant in all major gas markets around the world, and especially in mature markets across Europe, North America, and Asia, which are forecast to see drops of up to 75% of the total decline in gas demand in 2020. Compounding the market that had already experienced a slowdown in annual growth last year is that global oversupply is pushing major natural gas indices to record lows, and the oil and gas industry is cutting spending and postponing investment decisions to make up for the significant shortfall in revenue, the report notes.
Power Generation Hardest Hit
The expected global demand slump in 2020—of up to 4% or 150 billion cubic meters (bcm)—is affecting different sectors, but power generation is the hardest hit, making up half the total demand decline, followed by the residential and commercial sector, and then the industrial sector.
After two years of especially strong gains, the global natural gas market was already showing signs of weakening last year. Natural gas consumption in 2019 grew only by an estimated 70 bcm, reflecting a “a cocktail of mixed signals.” The IEA said the largest single contributor to natural gas consumption growth last year was coal-to-natural gas switching, which accounted for more than 55 bcm of additional demand. “Low spot prices drove fuel switching for power generation, while clean air policies remained the principal driver of fuel conversion in China,” it noted.
In the U.S., in particular, gas-fired power generation last year reached new highs, soaring by 8% or 123 TWh compared to 2018 to a record share of 38% of the nation’s total generation. In 2019, however, U.S. gas generation’s growth was lower than in 2018, when incremental gas burn accounted for 172 TWh, it noted. In Europe, gas-fired power plants also saw output increases in 2019 by about 11% compared to 2018. “Spain was the single largest contributor to higher gas burn with an annual increase of almost 50%, which accounted for about 40% of the growth in gas demand in the European Union,” said the IEA.
However, slower economic growth in some regions burdened natural gas demand growth in 2019, the agency said. Nuclear output rebounded in both Japan and Korea, which led to a decrease in gas for power estimated at 12% and 2%, respectively. Turkey, meanwhile, experienced record hydropower generation, which strongly affected gas needs for power generation. Iran also ramped up hydro output and “had to switch back to oil products for power generation due to gas supply constraints,” the IEA said.
In 2019, markets for liquefied natural gas (LNG) also burgeoned, growing 12%, with supply increasing by a record amount of more than 50 bcm. While growth was mainly driven by the U.S., Russia, and Australia, U.S. LNG exports grew by “an impressive 70%, supported by the commissioning of over 30 bcm/year of liquefaction capacity,” the IEA noted. “With LNG exports above 45 bcm, the U.S. became the world’s third-largest LNG supplier after Qatar and Australia.”
An Unprecedented Shock
The COVID-19 pandemic, however, delivered an “unprecedented macroeconomic shock” to the sector. During the first quarter in Europe, falling gas prices supported further coal-to-gas switching for power, with the share of gas-fired generation in thermal generation increasing from 45% to 49% at the expense of both coal and lignite. However, strong wind power generation “weighed on thermal generation requirements, including gas- fired power,” depressing gas demand by an estimated 2.5 bcm.
Lax electricity consumption in Europe between March and June more severely weighed on gas generation, “which fell by over 20%, equivalent to an estimated 5 bcm of lost gas use,” the IEA said. In Italy and the UK, Europe’s biggest gas power producers, gas generation plunged by 25% and 36%, respectively, between March and June. In Turkey, gas generation fell nearly 50% during that period. In the U.S., however, natural gas generation increased during the winter, despite lower demand, helped by low fuel prices and new additions of combined cycle capacity in 2019.
Globally, in 2020, “Sector-wise, our projection sees consumption for power generation drop by around 5% y-o-y, accounting for half of the decrease in global demand,” the IEA said. “Gas use in the residential and commercial sector falls by close to 4% globally—mainly in the … mature markets—and accounts for 20% of total consumption loss. The industrial sector also accounts for close to 20% of the global decrease, dropping by about 4% y-o-y in 2020,” it said.
Recovery Will Be Slow
Although a rebound is expected in 2021—including from power generation in Europe, Eurasia, and North America, the IEA report does not assume a rapid return to the pre-crisis trajectory, and it says COVID-19 may have “long-lasting impacts” on natural gas markets. “Repercussions from the Covid-19 crisis are set to result in 75 bcm of lost annual demand by 2025, which is the same amount as the increase in global demand in 2019,” it notes.
Bright spots for gas generation, however, may emerge in Asia, the Middle East, and Africa in the 2019-2025 timeframe. A “demand expansion” from the power sector in Asia is emerging, underpinned by the addition of 15 GW of gas-fired generation capacity across the region, the IEA said.
In Africa, it expects gas consumption will grow at an average 3.3% per year to reach almost 195 bcm in 2025. “It remains primarily driven by industrial and power generation needs in North Africa’s major markets of Algeria and Egypt, followed by Nigeria.” In the Middle East, meanwhile, demand is set to increase by nearly 100 bcm/year and reach nearly 660 bcm/year by 2025. More than 60% of this net demand increase from the Middle East (mainly from Iran and Saudi Arabia) will be driven by the power and water desalination sectors, it said.
The IEA is also optimistic about Europe’s uptake of more gas generation through 2025. “In the power sector, the gradual phase-out of over 50 GW of nuclear-, coal- and lignite-fired power generation capacity creates additional market space for gas-fired power plants,” the report notes. “However, growth is limited by the rapid expansion of renewable power generation, set to increase by almost 30% over the medium term.”
In North America, meanwhile, the IEA expects gas consumption will grow at only 0.4% annually through 2025, mostly owing to industrial consumption. Demand growth in Central and South America will also be moderate at about 0.6%, led by the power sector, which is seeing growing electricity demand and fuel switching.
—Sonal Patel is a POWER senior associate editor (@sonalcpatel, @POWERmagazine).