Following a tumultuous 2020 dominated by Covid-19 demand destruction and energy transition initiatives, the natural gas industry stands ready to turn the page. As the new year dawns under a change in political leadership, the industry looks to rebound and evolve in episode 2021.
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Analysts at Raymond James and Associates Inc. estimated gas futures could reach $4.00/MMBtu by the end of 2021. While residential demand held up last year amid the elevated work-from-home levels imposed in response to virus outbreaks, commercial and industrial demand declined during the initial depths of the pandemic last year.
The Lower 48 exploration and production (E&P) sector has fallen into an “altered landscape,” with the financial outlook and portfolio options now less certain, executives said.
With vaccinations beginning, global gas demand is expected to rise, but the long-term profitability of U.S. LNG is still an open question. Arbitrage opportunities to Asia and Europe have decreased since the first wave of domestic projects was funded in the previous decade.
Even the Waha hub in West Texas, which saw wild pricing swings and went negative on numerous occasions in 2020, should see more stability and a reduced differential to Henry Hub for the “foreseeable future”
“The latest survey results show some signs of improvement in the oil and gas sector,” said Dallas Fed’s Michael Plante, senior research economist. “Business activity levels rose for the first time in a year, and firms became more optimistic about the outlook."
“I don’t think there’s any question that until this nation gets a handle on the Covid-19 virus and people can return to what we would call normalcy, it’s going to be more difficult to explore, drill and produce,” Burd said.
While López Obrador’s ratings are high at around 60%, a majority of polls also show citizens are weary of the government’s economic policy, as well as its response to the coronavirus and its handling of public safety issues.
With bid rounds, farmout tenders and service contract migrations frozen until further notice by President Andrés Manuel López Obrador, upstream activity will in the meantime be limited to state oil company Petróleos Mexicanos (Pemex) and the 111 E&P contracts awarded from 2015-2018 under the previous government following the 2013-2014 market-opening energy reform.
Mexico’s second infrastructure plan announcement in December had a $6 billion energy focus that was completely dominated by natural gas. These projects are slated to begin works in 2021. The Finance Ministry included in the list six combined-cycle plants. The Baja California Sur, Tuxpan, González Ortega, Mérida, San Luis Río Colorado and Valladolid projects are worth a total of 59 billion pesos ($2.95 billion) in investment.
After the United States went to the polls in early November, analysts suggested energy would be a major issue in the Mexico-United States relationship from 2021 under U.S. President-elect Biden. According to the analyst team at political risk firm Eurasia Group, the most serious risk to bilateral ties is López Obrador’s energy policy, “which is generating growing criticism in the U.S. given efforts to favor state-owned companies Pemex and the CFE, while also targeting renewables.”
Reuters recently calculated that in the first 10 months of 2020, China’s purchases of U.S. crude oil, LNG, propane, butane and other energy products totaled $6.61 billion, or about 26% of this year’s $25.3 billion target.
“The world has changed a lot in four years,” Erin Blanton, senior research scholar at Columbia University’s Center on Global Energy Policy, told NGI. “I think the industry is starting to really wake up to the fact that they have to deal with this black eye, which is methane…if they want to survive.”
What’s clear is that no one wants to remember the year that shall not be named. The energy complex was challenged last year “in ways we couldn’t have imagined,” the Evercore analysts said. Operators now are picking themselves off the mat, encouraged in part on recent events that may improve oil and gas consumption.
Several key themes this year could shape the return to normal, including the pace of economic reopenings/demand recovery amid the Covid-19 pandemic, the incoming Biden administration and the trajectory of commodity prices, analysts said.
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