Oil Companies, Major LNG markets - COVID-19 adds to woes although some longer-term positives emerging

Due to COVID-19 & sharp drop in expected company spending, we now envisage that majority of potential liquefied natural gas (LNG) projects will be delayed into 2021+, with demand impact appearing with China Q1 LNG imports down -4.3%.

15 Apr 2020

Project sanctions since 2016, plus 2020 potential final investment decisions (FIDs)

Source: Company data, UBS Estimates

Demand impact as COVID-19 sends major economies into lockdown

COVID-19 demand linked impacts are already clear, with China, a key market, seeing liquefied natural gas (LNG) imports down 4.3% year over year in 1Q, and Chinese, South Korean and Indian buyers reportedly seeking force majeure contract relief. 2Q import/export data, however will provide a clearer insight into the extent of demand impacts from the coronavirus pandemic - the impact is not as significant as it is for oil that sees a particular impact on transport demand, but in Europe, for instance, in affected economies we are seeing power demand down ~10% and gas demand down ~15%.

Supply-side now seeing meaningful delays and cancellations

Industry capex budgets are being cut, reflecting the plunge in oil markets (Global Integrateds cutting 2020 capex 20-25% - in a bid to preserve capital, bolster financial resilience and protect dividends) and long cycle capital intense projects such as LNG are especially vulnerable to reduced spending. With price volatility and difficult capital markets, long-term commitments and bank funding are also more difficult to come by. Hence, we have seen quite a number of new projects, previously looking to start up around 2025, being delayed or cancelled. Service contractors are under even greater financial pressure and human resources and equipment supply chains are increasingly problematic in the context of the restrictions engendered by the pandemic. Therefore not only are we seeing new final investment decisions (FIDs) 'move to the right' but we expect start-ups of already sanctioned projects to do so also. Both imply an improving medium-term market.

Global gas hubs slide as economic landscape deteriorates

Global gas hubs had been under pressure anyway because of the cyclical supply glut. Another warm winter and now virus-related demand softness just add to the problem in the spot market, while weaker oil prices are starting to work their way into contract pricing also. European and Asian spot prices fell >30% quarter over quarter in 1Q20, while US natural gas dropped >20% - and the northern hemisphere spring/summer now approaches. US natural gas remains at multi-year lows (record production, high inventories), although the drop in shale/Permian drilling activity and the prospect of falling liquids production with lower associated gas could provide something of a support to prices going forward (as would a more tempered longer-term investment scenario which appears increasingly likely).

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