COVID-19 Impact on Natural Gas in the Chemical and Materials Industry

COVID-19 Impact on Natural Gas in the Chemical and Materials Industry

  • Chemical and Materials
  • Oct 07, 2020

COVID-19 Impact on Natural Gas in the Chemical and Materials Industry

 

INTRODUCTION

Natural gas has been described as “clean burning” as it produces a very fewer amount of undesirable by-products per unit energy in comparison to petroleum or coal. The amount of combustion units of the carbon dioxide released from the burning of natural gas in any sector is almost half of the coal. The natural gas usage has been increased in various formations because of the growing environmental impacts which have maximized the areas of application. The Environmental Protection Agency’s, considered natural gas as the cleanest source of energy. Along with this, the natural gas is very much energy efficient as it produces more energy in the gas-fired plant by the usage of turbines as compared to the other sources of energy such as coal among others.

  • According to the International Energy Agency (IEA) New Policies Scenario, the energy demand globally is expected to be grown between 2015 to 2040 up to 30%

The natural gas technologies are accelerating the synergies as well as various fuel switching along with the integration of hydrogen, green gas, carbon dioxide solutions, and various renewables to achieve net-zero emissions as per the green growth concepts. The government is choosing competitive natural gas as well as abundant supplies that provide importance to the requirements of clean air. The pandemic of COVID-19 has impacted the demand of the natural gas engine in the global market and inclusive this the producers as well as manufacturers are forming the strategies in such manner that they can adjust with the available limited amount of the storage of natural gas, as the international trade has been stopped among various countries due to the complete shutdown all over the world.

IMPACT ON DEMAND FOR NATURAL GAS 

Oil and natural gas is that market in which the impact of demand cannot be justified as short term and long term. Prima facie it is expected that the impact on demand in the natural gas market will be short term and later will be dependent mainly on the recovery of the market. At the beginning of the year 2020, the demand for natural gas has been fallen sharply, but as the industry is moving towards recovery, the demand is expected to stabilize. Also, the government stimulus packages regarding energy policies will decide the future trajectory of the economy. This is important due to the strong correlation between GDP and natural gas demand of any country. For instance,

  • As per IEA, the demand for natural gas is dropped by 4 percent yearly, or it can be said that natural gas decreased by 150 billion cubic meters in the year 2020. The demand of the gas is hit mostly in all regions but the huge impact is seen in mature markets of Europe, Asia, Eurasia that has accounted the loss of almost 75 % of the gas consumption in 2020.

The major difference between the oil and natural gas market is that unlikely the oil market, the natural gas demand is not dependent on transportation. As natural gas is used as relevant material of power mix in some countries, required for heating homes and powering key for industries even during the COVID-19 pandemic. LNG is one of the segments which has registered continuous growth since 2012 but has impacted this pandemic for the short term. It has been noticed that due to the outbreak of COVID-19, the buyers are postponing or canceling contracts and producers are delaying the acceptance of new projects due to safety and off-take concerns. China being the second-largest LNG importer and one of the fastest-growing market has also registered a dip in the LNG demand.

IMPACT ON SUPPLY

The LNG market is itself in turmoil as there was already oversupply in the supply before COVID-19 due to the addition by the United States. As per Ron Ozer, founder of gas-focused hedge fund Statar Capital LLC in New York,” The global oversupply of LNG has been building and building and building. The gas market can’t stomach the oversupply and warm weather, and it’s getting both.” Due to this, the OPEC oil production has been adjusted into May along with shut-ins of non-OPEC oil production will naturally reduce drilling operations globally. It is expected that as oil wells will be barred from any further drillings and oil producers will shut their production sites, the associated gas production will also register a decline. As the associated gas production will decline, the potential shutdown will also result in shut-ins of natural gas production for existing LNG and pipeline gas projects that can work to reduce natural gas supply over time.

Recently another step has been noticed towards the delay or cancellation of investment decisions for proposed LNG export terminals globally. Additionally, the major impact on supply is due to interrupted supply chain as lockdown is prevailing in most of the countries and the pandemic has also caused workforce shortages which have delayed the construction of already approved projects. The step of investment cuts is expected to rebalance and tighten the market at least for the short term and medium term. Also, the over-dependency on China for the import of natural gas has interrupted the market and economy of many countries.

IMPACT ON PRICE

As there has been an oversupply of natural gas in the market, it is for sure that the prices of natural gas have fallen. In the month of June 2020, the spot price for natural gas was reported to be $ 1.63 million British thermal units (MMBtu) which are down 12 cents/MMBtu from May and the lowest inflation-adjusted monthly average price since at least 1989. If the demand for natural gas will keep declining, the prices may surge further. It is also likely to be expected that the natural gas prices may go negative if the demand doesn’t emerge and the economy doesn’t boost.

As the experts, in the third quarter, the natural gas prices may touch $1.65/ MMBtu expecting a slight increase in demand and decrease in production later in 2020. Also in the fourth quarter of 2020, the prices may touch $2.46/ MMBtu which will bring the overall average price of natural gas for the year 2020 to $1.93/ MMBtu. Also if the production keeps on declining, the average price in 2021 may go up to $3.10/ MMBtu.

FUTURE OF NATURAL GAS

For natural gas companies, the emerging long term outlook creates a critical strategic challenge. They seem to be highly risk-averse currently, and their finances are under intense pressure. Various companies are undercutting capital spending. But at the same time, the natural gas producers need to be prepared for the opportunities and threats in the new world that lies ahead once the crises come to an end.

One of the important lessons that producers have learned in this COVID-19 pandemic is to be prepared for rapid decision making. Thus has made the manufacturers at least analyze the medium-term implications of their decision, if not long term. This is where the difference has appeared between those who had to quit the market and those who made profits during this pandemic. Also, organizations have to be aware of what the expenses that need priority are and what are to be postponed for later.

CONCLUSION

Natural gas is a mixture of gases that is rich in a variety of hydrocarbons. The gases which are used in natural gas are found in the atmosphere. Natural gas is not the purest form of gas; it is formed from the processing techniques as well as from the extracting from the natural resources. The upcoming few months and years do not look much fruitful for the businesses in the economy. The impact of COVID-19 will affect all players. To avoid any mass layoffs, most of the firms are now looking for short-work schemes. However, early expansion, acquisition, investment, and trade agreement decision is expected to take the market back to a stable state earlier than anticipated.

At the same time, manufacturers are struggling to maintain the supply as per the demand. The gap in the supply chain is hampering the timely availability of end-product in the market. Thus, the government is taking various initiatives to curb the demand-supply imbalance and enforcing domestic manufacturers to reduce dependence over imports. The government is also providing various financial benefits to small and medium-sized enterprises to maintain the rising demand for natural gas.

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