Wood Mackenzie’s latest gas and LNG report flags six things to watch out for in the sector this year.

While record high prices are a clear signal that more investments in supply are required, there’s still some lingering questions around the role of gas as a transition fuel.

Plus, high gas and LNG prices are kind of a double-edged sword.

WoodMac says on the one hand they will improve balance sheets and support investments, including in decarbonisation, but at the same time, it could put pressure on gas demand globally.

So, what will the year ahead bring?

Let’s get to it.

Gas/LNG price drop dependent on Nord Stream 2

WoodMac said the key factors affecting how prices will trend this year are weather dynamics and the timing of the Nord Stream 2 European gas pipeline start-up.

At current levels of Russian exports and considering normal weather conditions, European storage inventories will get below 15 billion cubic metres (bcm) by the end of March – that’s a record low.

Prices will eventually come down as the winter is through, but requirements to refill storage facilities will be high, some 20-25 bcm more than last year.

Basically, the commissioning of Nord Stream 2 might well be the only option to refill storage and avoid a repeat of last year’s winter crisis.

WoodMac VP of gas and LNG research Massimo Di Odoardo said things could get a lot worse.

“A cold winter could add up to 10 bcm of additional gas demand, pushing storage inventories to zero before the end of March,” he said.

And the commissioning of Nord Stream 2 could be stopped altogether if tensions between Russia and Ukraine escalate, as the German government has recently warned.

“Normal winter weather, including in Asia, and visibility on Nord Stream 2 commissioning would push prices down, although demand for storage (and high carbon prices) will maintain prices above US$15 per metric million British thermal units (mmbtu).

“But a cold winter in Europe and Asia, alongside continued uncertainty about commissioning of Nord Stream 2, could see prices increase further throughout 2022 – get ready for another bumpy year ahead.”


Oil-indexed levels in long-term LNG contracts to increase

Oil indexation – which is basically contractually pricing natural gas using oil or other refined fuels prices – in long-term LNG contracts has been on a declining trend for the past 10 years.

This is mainly due increased availability of uncontracted supply and more recently from Qatar, and reduced appetite for long-term contracts in favour of more spot exposure.

But WoodMac says 2022 will be a turning point for LNG oil-indexed contracts, with the level of indexation firmly on the rise.

“With Asian LNG spot prices expected to average close to US$15/mmbtu over the next five years, the current level of oil indexation (and oil prices) will result in a US$7/mmbtu annual average discount over spot LNG,” they said.

“Inevitably, demand for long-term contracts will increase, pushing oil indexation levels up.”

The prediction is that oil-indexation levels will rise, potentially reaching 12% on a weighted average basis.

But the market will remain split – with contracts starting before 2025 attracting premiums while those starting after will be priced at a discount.

FIDs unlikely to come from majors

There’s plenty of momentum behind new LNG projects, with WoodMac expecting 79 million tonnes per annum (mmtpa) of additional LNG to take final investment decision (FID) over the next two years – including 33 mmtpa in North America, 16 mmtpa in Qatar and 20 mmtpa in Russia.

And there is potential for upside.

While some action from oil majors is likely in 2022, major sponsoring of equity projects seems unlikely.

WoodMac reckons that gas will continue to be a pillar of majors’ energy transition strategies, but their optionality for investments in brownfield and greenfield equity projects remains limited.


Will LNG shift to CO2 reduction?

Carbon-offset LNG flourished in 2021, but the report flags that the enthusiasm appears to be fading, possibly because of high LNG prices but also a consequence of increased criticism to what had started to be seen as a ‘greenwashing’ practice because of the low quality and costs of the offsets.

“This will push the LNG industry to focus on CO2 reduction across the value chain, which must be the ultimate goal, with offsets deployed only for unavoidable emissions,” WoodMac says.

Producers have been exploring programs to reduce flaring, venting and methane leakages, while LNG developers in the US have been looking at procuring gas certified by third parties that is closer to the plant and with low methane emissions.

But more capital-intensive projects, including use of low-carbon power and/or carbon capture and storage (CCS), remain at an evaluation stage.

WoodMac flagged the US as the place to watch, also because of a tax credit of up to US$50/t for CCS developments.

Gas demand will be under pricing pressure

Signs of demand destruction have been limited so far, but Di Odoardo said that eventually, higher prices will put pressure on demand.

“In Asia, the rationale to switch from coal to gas will diminish, as higher spot LNG prices will translate into higher oil-indexed contract prices,” he said.

“Meanwhile, investment in renewables and batteries will increase, limiting the headroom for gas demand to grow.

“And in Europe, where the move towards renewables is already underway, policy makers will look to accelerate the shift away from natural gas, as the recent EU proposal to support biomethane and hydrogen suggests.”

Does gas have to play a role in the energy transition?

In the year ahead, EU Member States will be debating the taxonomy for sustainable investments after the European Commission released its latest version, classifying efficient unabated gas-fired power plants as transitional investments.

Financial and non-financial investors will be able to increase their corporate “green scoring” by investing in gas, including outside Europe, and other countries developing similar taxonomies will be emboldened to include gas too – particularly in Asian markets where coal still dominates.

But Di Odoardo said the EU recognition of gas power plants as a transitional investment is “no panacea for the gas industry”.

“Gas prices will need to come down to accommodate increased investments in gas use.

“And the proposed CO2 emission cap of 270g/KWh, alongside the commitment to use at least 30% of renewable or low carbon gas by 2026 and 100% by 2035, means that the use of conventional natural gas would need to reduce over time if a gas fired power plant has to be classified as “transitional”.

“The use of unabated natural gas in the EU is set to decline, even if the EU classifies investments in gas-fired plants as transitional investments.”