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For LNG, a web of vulnerability

Photo by Nicolas Lannuzel on Flickr, Tanker deliveries in Singapore: the four economies that rely entirely on LNG imports for gas are in Asia.

Some economies' heavy reliance on liquefied natural gas (LNG) means a supply disruption could have global implications

5 October 2012

This article appears in the latest issue of IEA Energy: The Journal of the International Energy Agency.

By Anne-Sophie Corbeau

Concerns about a gas supply crisis usually focus on pipeline disruptions, but large parts of the world depend on liquefied natural gas (LNG). Japan, South Korea, Chinese Taipei and India rely entirely on LNG for their gas imports, helping LNG represent a total of 9% of global gas demand. Those economies' dependency brings critical and specific vulnerabilities, especially since any disruption to LNG supply would have global implications.

LNG can be redirected fairly easily, and the liquefaction trade has increased significantly since 2009. But that growth hides the fact that global LNG trade is very dependent on one gas producer: Qatar, which provided 30% of the 2011 LNG trade and sent almost half of that supply to just those four most dependent economies. Any event significantly reducing Qatari LNG supplies could have severe effects on energy security. Not only would the LNG importers suffer, but so would other gas importers, with prices potentially rising sharply as economies dependent on LNG diverted supply from other markets.

There is currently little spare LNG output capacity in the world, as LNG producers tend to produce as much as they can. Therefore, other options would have to be used: primarily increased domestic output, notably in the Americas and possibly China, and fuel switching in the power sector.

In such a crisis, the United States could re-route all the non-Qatari LNG it receives, thanks to its surging domestic production from unconventional gas drilling and by switching back to coal from gas in power generation. But as North America does not yet have an LNG export infrastructure, it cannot add to LNG supply, limiting its adjustment contribution to just reducing imports.

Unfortunately, increasing domestic production and re-routing from the United States would not suffice to replace missing LNG to the four most dependent economies. Besides, both Japan and India currently operate their electricity systems at near capacity, limiting fuel switching. Additional diversions would be needed, mostly from Europe. Since incremental gas supplies from other suppliers, particularly in North Africa, are limited, Europe would have to increase reliance on Russian pipeline gas. With the Nord Stream pipeline operational, there is enough excess capacity to get the gas from Russia to Europe, but Russia's ability to ramp up production quickly would be a constraining factor. European countries could also switch to coal, especially if gas prices indeed surged, although a significant switch could result in bottlenecks in coal production and transport.

Timing defines the knock-on effects

A disruption of a week, a month or more would have varied consequences on global gas markets, calling for different types of responses. Timing, too, matters. In late January to early February, storage is relatively empty and demand in Asia and Europe is traditionally higher. A disruption then would affect storage deliverability, which decreases with the volume of gas left in facilities. A disruption of a couple of months in the second or third quarter of the year would hit Japanese power demand, which peaks in summer. In Europe, a disruption then would affect the refilling of underground gas storage facilities, so  there would be problems in the next Northern Hemisphere winter for residential users, the one customer group that cannot change fuels.

The International Energy Agency (IEA) produces IEA Energy, but all analysis and views contained in the journal are those of individual authors and not necessarily those of the IEA Secretariat or IEA member countries, and are not to be construed as advice on any specific issue or situation.

Anne-Sophie Corbeau is an IEA Senior Gas Analyst. She previously worked at Cambridge Energy Research Associates, focusing on European gas markets, and in PSA Peugeot-Citroën's fuel cell and hydrogen department. She studied engineering in France and Germany.