WB: Gas exports from Azerbaijan expected to rise, facilitated by new pipelines

The World Bank expects natural gas and coal prices to remain at high levels through the start of 2022 but then decline as supply constraints ease and production increases, reads a WB October report “Commodity Markets Outlook,” Report informs.

“However, additional bouts of price volatility remain a distinct possibility. European natural gas prices and Australian coal prices are forecast to each decline 14 percent in 2022 and then fall a further 27 percent and 25 percent, respectively, in 2023. In contrast, after doubling in 2021 natural gas prices in the United States are expected to see only a very small decline, given continued high demand for US LNG exports. Asian delivered natural gas prices, which saw the smallest rise in 2021, are expected to see a relatively modest fall in 2022. Asian natural gas prices are primarily contract-based and are less susceptible to the volatility seen in spot prices,” the WB noted.

“Coal production is also expected to increase as some of the supply disruptions seen this year ease. China’s coal production is expected to rise in response to government efforts to raise output. Natural gas production is expected to rise in the United States, alongside the recovery in shale oil production, and the US EIA forecast a 6 percent increase in US LNG exports. Exports from Russia and Azerbaijan are also expected to rise, facilitated by new pipelines in the region,” reads the report.

In the short-term, natural gas and coal markets remain particularly vulnerable to weather-related shocks, according to the report.

“A particularly cold winter could see further price surges as both supply and demand are price inelastic in the short term. For example, unseasonably cold weather in Texas in the United States in February 2021 both reduced natural gas production and increased consumption, which resulted in US natural gas prices temporarily doubling the impact on regional electricity prices was particularly severe, with Texas wholesale prices temporarily rising 75-fold in February,” the WB said.

More broadly, the events of this year have highlighted that evolving weather patterns due to climate change are a growing risk to natural gas and coal markets. They can affect demand for these commodities by increasing energy use for cooling and heating as extreme temperatures become more common. They could also affect demand for these fuels by causing fluctuations in renewable energy generation, requiring the use of back-up generating capacity. Finally, extreme weather can also affect the production of natural gas and coal. Examples include the flooding of coal mines (as occurred in Indonesia and China this year) and shutdown of natural gas production because of freezing temperatures or hurricanes (which have occurred in the United States).

From an energy transition perspective, concerns about the intermittent nature of renewable energy production highlight the importance of the need for reliable baseload and backup electricity generation.

“At present, this tends to take the form of natural gas- and coal-powered electricity plants. In order to reduce greenhouse gas emissions, however, baseload and backup sources of energy will increasingly need to be from low-carbon sources, such as hydropower or nuclear power, or from new and better methods of storing renewable power. At the same time, high natural gas and coal prices observed this year make solar and wind power, which were already a cost-effective substitute, even more competitive as a source of energy. Countries may benefit from accelerating the installation of renewable energy to reduce their dependency on fossil fuels,” reads the report.

When talking about spillover risks, the WB stresses that high energy prices could contribute to higher inflation in many countries, especially energy importers, both directly in terms of higher electricity, transport, and heating costs, as well as indirectly via their impact on the production costs of other commodities and products.

“Indeed, higher energy prices are already impacting the production of other commodities. In Europe, several fertilizer plants have closed or reduced production in response to higher natural gas prices - natural gas is a key input into fertilizer production - causing fertilizer prices to rise sharply (see Fertilizer section). In China, its “dual policies” on energy intensity and overall consumption has led to government restrictions on aluminum production, which is particularly energy intensive. Industrial production in China and India has been negatively impacted by electricity shortages amid insufficient electricity availability. Higher energy prices could therefore also weigh on economic growth, which would in turn reduce demand for natural gas and coal,” reads the report.