In the run-up to the gas supply shock, Russian natural gas (pipeline and LNG combined) accounted for a growing share of European gas supply. Prior to 2010, Russian supply made up a relatively steady 30% of the European Union’s gas supply. However, the combination of plateauing demand and rapid decline in EU domestic production, which started in the early 2010s (linked to the decision to phase out the historical Groningen gas field in the Netherlands), led to growing dependency on gas imports across the European Union. The Russian share of the European Union’s gas supply grew from close to 30% in 2010 to over 45% by 2019 – a significant concentration in gas supply for the bloc.

This increased supply concentration and reliance on Russian gas occurred against a particular geopolitical backdrop: Previous breaches in energy security, including the temporary interruptions of Russian pipeline gas supply to Ukraine in both 2006 and 2009, had downstream implications for EU energy security, prompting EU legislation on supply security and gas market liberalisation.

The unravelling of this dominant Russian supply position began ahead of the 2021/22 heating season through two significant and related developments. Russian pipeline flows to Europe fell by about 25% year on year in Q4 2021, notably as a result of Gazprom’s strategy to halt short-term and spot gas sales to EU buyers via its Electronic Sales Platform (which Gazprom set up in 2018 to sell spot volumes on the European market and used extensively to sell its surplus gas in 2019-2020). Simultaneously, Gazprom did not replenish EU underground gas storage capacities that it owned or had booked, leading to a significant divergence in filling pattern between Gazprom-held and other capacities. As a result, overall EU underground storage fill was at its lowest point in nearly a decade by the end of the 2021 injection season, uncovering a vulnerability in the EU market and contributing to an environment of “artificial scarcity”.

The decline in Russian piped gas supplies accelerated steeply over the course of 2022, against the backdrop of the Russian Federation’s full-scale invasion of Ukraine. In response to EU sanctions on its central bank (itself a measure in response to the Russian Federation’s invasion of Ukraine), the Russian Federation (hereafter “Russia”) attempted to impose a rouble payment system on EU buyers for existing contracts. This action led to unilateral cuts in exports and Russian sanctions on certain buyers as EU member states contested the legality of the move.

Furthermore, by October 2022 only three pipeline routes connecting Russia to Europe (the Ukrainian transit route, Blue Stream and TurkStream) remained functional after Russia’s decision to cease transit through the historic Yamal-Europe pipeline (May 2022) – through Belarus and into Poland – and the still unelucidated acts of sabotage on the Nord Stream and Nord Stream 2 pipelines (September 2022), which connect directly to Germany through the Baltic Sea. Following, and linked to, these acts of geopolitical reprisal, Russian piped gas exports to OECD Europe fell by an estimated 50% (83 bcm) year on year in 2022, dropping to their lowest levels since the mid-1980s.

The sheer magnitude and pace of the cut in piped natural gas – particularly in the context of growing European supply concentration in the hands of one country (Russia) and company (Gazprom) – lent gravity to the situation, denting the European gas balance and introducing an unprecedented element of uncertainty in the market. Illustrating the wide range of potential vulnerabilities to modern energy markets, geopolitical instability – far removed from market fundamentals – proved to be a potent and unpredictable element of disruption, particularly when added to the fault-lines of increasing supply concentration.

Although the natural gas supply crunch in Europe started as what could have appeared to be a regional issue, its truly global nature and repercussions were felt without delay: The global LNG market proved to be a highly reactive link between regional fundamentals and global gas dynamics. A decade of increasing liquidity and flexibility conferred on LNG trade the ability to be a key global gas market balancing lever.

As Russian pipeline gas deliveries to Europe fell precipitously in 2022 and 2023, European buyers scrambled to secure alternative supply volumes. However, supply-side flexibility from other legacy pipeline suppliers proved limited. Pipeline flows from Norway rose by just 3% (4 bcm) in 2022, and although deliveries from Azerbaijan increased by 40% as the Trans Adriatic Pipeline operations reached full nameplate capacity, this represented only 3 bcm of incremental supply. Combined flows from Algeria and Libya fell by 10% (4 bcm), linked to availability constraints. In total, non-Russian pipeline supply to Europe increased only marginally compared with the loss in Russian volumes.

Consequently, Europe turned to the LNG market to compensate for a share of lost Russian pipeline supply, sparking a significant reconfiguration in global LNG trade flows. In 2022, European LNG imports grew by 64 bcm (over 60%) year on year, effectively replacing Russian pipeline flows as the primary natural gas supply source for the continent. However, with global incremental LNG supply totalling just 25 bcm over the same period, Europe’s growing appetite for LNG meant that cargoes had to be redirected from other importing markets.

In 2022, a share of LNG volumes destined for Asia and other markets rerouted for Europe almost instantly as European spot buying accelerated in response to the supply shock. By the end of the year, increased European buying had been accommodated by a nearly 30-bcm (or 8%) drop in Asian LNG imports and a 9-bcm (or 38%) drop in Latin American LNG imports.

Despite LNG market reactivity helping rebalance the global gas market in 2022, globally traded natural gas volumes fell as a result of the lower Russian pipeline gas deliveries to Europe. These lost volumes had no way of reaching alternative demand markets, thus constraining the global gas balance. Apart from a redirection of LNG flows, record high global gas prices did little to prompt a genuine supply-side response, given the tendency of liquefaction facilities to run near nameplate capacity (leaving little upside flexibility) and the absence of easily marketable spare production capacity elsewhere. This meant that the market had to find other ways of balancing – primarily through demand curtailment.

The global gas supply crunch proved significant not only because of the gas volumes lost by Russia’s turndown in exports to Europe but also because of the loss of price-responsive supply that these exports represented. Russian upstream assets have the technical capacity – and European long-term contracts had the necessary flexibility – to allow for monthly and annual delivered volumes to fluctuate in response to demand dynamics and the price competitiveness of alternative supply. The arbitrage between European LNG imports and pipeline imports from Russia was at times the balancing act to both the European and global markets.

In the absence of significant supply-side response to the market imbalance during the crisis, demand emerged as the ultimate balancing variable, not only in those markets from which LNG was redirected but also in those markets that registered record high LNG imports.

Although global gas demand reductions were highly concentrated in Europe, Asian markets also experienced a significant scale-back in gas demand. As a whole, Asian demand fell by only 2% (compared with 14% in Europe). However, demand in smaller, more economically vulnerable markets in Asia (also among those most exposed to spot LNG markets) fell by about 7% from 2021 levels. The background of the change in LNG imports in each region is investigated in the following chapter.

European willingness to pay for incremental LNG volumes edged out more price-sensitive markets as key global gas and LNG price benchmarks rose to unprecedented levels in 2022. This willingness to pay drove European price markers to a premium against Asian benchmarks, sparking a fundamental shift in global LNG trade. With a sizeable share of flexible volumes, the global LNG market was able to respond to the European market imbalance. However, this shift still mutualised the repercussions of the supply shock to markets as far away as Bangladesh, India and Pakistan. In the increasingly globalised market that LNG has become, the reverberations of regional fundamentals are felt globally, notably through spot pricing.

Spot pricing enables market participants to trade gas volumes for short-term delivery, providing a key balancing function at both the individual portfolio and broader market levels. Wholesale spot LNG and gas pricing acted as the market signal for the reconfiguration of global LNG trade flows during the crisis, notably through a shift in relative pricing between regional price benchmarks. This shift in pricing helped balance the market for a commodity in a tight supply situation.

The swift readjustment of global LNG flows illustrated a degree of flexibility and efficiency in responding to a market imbalance. European hub gas prices at the Title Transfer Facility shifted from a 12% discount relative to the Asian spot LNG marker in 2021 to an average premium of 19% in 2022, illustrating Europe’s stronger willingness to pay for spot LNG cargoes. Traded LNG volumes followed suit, shifting from Asia to Europe.

However, beyond the relative shift in regional gas price benchmarks, absolute prices reached prohibitively high levels. European month-ahead hub gas prices at the Title Transfer Facility averaged over USD 50/MBtu in summer 2022 – a fourfold increase on summer 2021 levels. Asian spot LNG prices rose in tandem, also reaching record highs over this period.

While price increases had the function of paring back demand to help balance a tight market situation (see next chapter), their sheer magnitude also had detrimental effects on the security of energy supply, economic activity and governments’ fiscal situations.

Not all LNG-importing countries faced the same pricing realities through this supply shock. Although spot prices rose to many multiples of their previous yearly averages, prices for volumes delivered through long-term contracts – often indexed to oil prices – were, by design, much less volatile. As such, countries with different supply mixes and varying degrees of spot market exposure faced different price pressures from their supply portfolios.