European gas producers are well placed to withstand the downturn in prices for at least a year, according to a new report from Standard & Poor Global Ratings (S&P).
The analysis comes as a welcome boost to the industry, which saw prices fall to their lowest in a decade in early September.
However, they warned that if the downturn continued for longer than expected, companies would have to adjust their strategies in order to preserve their resilience.
The combination of an unexpectedly mild winter in 2018 and oversupply caused by the commissioning of substantial new natural gas capacity has kept prices low since early 2019.
S&P examined supermajors Shell, BP and Total, as well as companies such as Repsol, Equinor, and Gazprom.
A number of factors are responsible for gas companies’ resilience to low prices, including diversification, lower competitive costs, and meaningful headroom in their financials.
According to the research, Gazprom and Equinor are the most vulnerable to a continued downturn in prices.
However, a combination of financial headroom and the likelihood of state support – especially in the case of Gazprom – mitigates against ratings downside.
Equinor released its third-quarter trading update last week, which remained in line with forecasts despite an average 26 per cent decline in the price of gas sold to Europe.
S&P’s report assumes that 2020-2021 will see a gradual increase in average annual European gas prices as the market rebalances and global demand picks up.
Much depends on the kind of winter Europe has. Another mild one could lead to a repeat of 2018-2019, whereas a cold one could result in the markets’ absorbing much of the oversupply.
In the longer term, the increasing focus on renewable energy as a replacement for fossil fuels is likely to further limit demand.
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