One of the primary and most fundamental consequences of the energy crisis is the shift into a structurally more fragile natural gas market environment, compounded by geopolitical uncertainty. The drastic reduction in Russian pipeline flows to Europe also represented a loss of traded gas volumes in the global market. Concurrently, this drove an equally significant reduction in the availability of swing production capacity that had previously provided a degree of price-responsive supply modulation to both the European and global markets. In turn, this led to an increased reliance on LNG trade flexibility to respond to the global market imbalance.

However, while LNG proved capable of providing extra supply to Europe, this was ultimately a zero-sum solution at the global market level, necessitating a loss of LNG supply in other markets. While LNG trade remains highly price-responsive, it offers little upside production response to prices. Simply put, the LNG market – on its own – is ill suited to replacing the global gas swing production capacity lost during the crisis. With fewer supply-side response options available, the global gas market finds itself with fewer tools to recover quickly from sudden or unexpected shifts in fundamentals.

At the heart of the crisis, governments implemented measures that were key in supporting alternative or existing supply-side flexibility tools, including minimum storage obligations in the European Union and the Strategic Buffer LNG scheme in Japan. Flexibility levers such as these, while not intended to replace lost forms of swing production, aim to improve market resilience in case of supply shocks. Further developing such options and mechanism will be key in safeguarding flexibility in the global gas and LNG market and navigating tight market periods.

Asia and Europe are the two largest poles of LNG imports in today’s market, creating a situation of potentially concurrent needs, particularly in times of tight market conditions. The balancing of the global gas market during the crisis and the diversion of LNG flows from Asia to Europe is an example of this fundamental link and of the potentially zero-sum nature of competition for access to LNG between these two regions. In a market with fewer swing production options available and with an increased reliance on LNG to respond to supply imbalances, this reality is susceptible to re-emerging.

While competition may be inevitable in a market system, concurrent necessities and constraints across the global LNG market’s primary poles need not lead to panic buying and bidding wars in crisis periods. Strengthening dialogue, co-operation and co-ordination among like-minded importers and responsible suppliers – notably by developing gas reserve mechanisms – is essential in reducing uncertainty and enhancing predictability around the balancing of the global gas market in response to crises. Crucially, for these developments to deliver their full benefits, they must take place ahead of potential future supply shocks.

In a structurally more fragile and uncertain energy landscape, ensuring supply security is likely to require building out and maintaining a larger energy infrastructure stock than would be optimal in a more stable geopolitical and market environment. Infrastructure remains the backbone of liquid and flexible energy markets, and its redundancy contributes to supply security, particularly in a structurally more fragile energy landscape.

Along the entire gas value chain, targeted redundant infrastructure acts as an insurance policy against market shocks, as seen by the European Union’s rapid installation of floating storage and regasification units in response to the loss of a key supply source. While the European Union’s newly installed floating storage and regasification units remained broadly underused throughout the crisis, their installation meant that Europe was in a better position to weather further supply shocks that could have impacted legacy supply routes. Going forward, careful analysis of the benefits and costs of mobilising investments in gas and wider energy infrastructure – or of extending certain legacy infrastructure lifespans – within countries’ long-term energy planning will be essential in unlocking the potential redundancy value of infrastructure in strengthening global gas security.

A country’s overall energy mix and industrial base, its purchasing power and the fiscal robustness of its government all contribute to its ability to weather the impacts of gas or wider energy market shocks. Another major element is the composition of buyers’ gas and LNG supply portfolios. As illustrated in the 2022-2023 crisis, varying levels of long-term and short-term contractual supply coverage meant that countries felt the impacts of the supply shock with varying degrees of severity.

LNG supply portfolios skewed towards short-term or long-term contracts provide different advantages and drawbacks. The former (skewed towards short term) provide a hedging opportunity against future demand uncertainty; the latter (skewed towards long term) offer stronger assurance of stability of supply even in episodes of tight market conditions. Price formulae in these contracts – whether linked to market prices and indices or to alternative fuels like oil – add another layer of customisation in managing objectives and risks in a supply portfolio.

A relevant example is Japan: Its access to LNG during the crisis was largely unaffected, and average import prices remained well below prevailing spot indices thanks to a large share of long-term contracts indexed to oil prices. A predominance of short-term and spot-sourced volumes in Europe, however, meant that attracting LNG volumes that were not secured through long-term commitments came at a significant cost to buyers and (through support measures) to national current account balances. A third category of LNG importers, notably some smaller gas markets in Asia, did not have the purchasing power to retain short-term and spot-sourced volumes, which they previously had access to in more balanced market conditions. These markets suffered the double sanction of having less stable LNG supply and having to pay more for the reduced volumes that they were able to access on a spot basis beyond their long-term contracts.

Taking a strategic approach to building supply portfolios, including the use of term contracts, can mitigate price and supply risks during emergencies. The contractual and pricing terms of buyers’ LNG supply portfolios should reflect the intentions of supply strategies and should be in line with the risks that market players are willing and able to take with respect to volatility in both volume and price of supply. Expectations of future demand and varying degrees of appetite for risk will mean that contracting strategies will vary across entities and over time, but conscious decisions with respect to contracting – regardless of the entity – remain a determining factor in managing supply shocks and market movements.

The 2022-2023 crisis underlined that energy security itself is not just about access to volumes – it is also about affordability. It matters little if gas supply is cut off because of the lack of physical supply or because it has become effectively unaffordable. In the end, the economic and social result is much the same.

Governments across Asia, Europe and the rest of the world implemented various measures and support mechanisms directly addressing the pressures of high energy prices on their citizens and economies. However, balancing the dual issue of affordability and security in the future – addressing each without undermining the other – will also require bolstering demand-side flexibility tools. Support for affordability should work in tandem with demand response as a targeted flexibility tool, intervening well in advance of detrimental demand destruction as a balancing factor of last resort.

Addressing these dual issues beyond the national sphere could require creating or enhancing solidarity frameworks at an intra- and inter-regional level. Part of this co-ordination should include increased transparency and the sharing of best practices around the implementation of affordability and demand response measures to enhance the market’s collective capacity to tackle future supply shocks.

This report aims to provide a common basis of understanding of the 2022-2023 energy crisis on which to build further analysis of the tools that could be developed and implemented to mitigate the effects of potential future gas supply shocks. The IEA is undertaking specific analysis of these potential tools and mechanisms through its 2-year work programme with Japan’s Ministry of Economy, Trade and Industry and remains committed to advancing gas supply security through its Natural Gas and Sustainable Gases Security Working Party and its regular work and analysis.