Background

Natural gas is a central element in Europe’s energy landscape, accounting for about one-quarter of primary energy supply and playing a role across virtually all demand sectors. In the run-up to the crisis, the European continent could count on a multitude of gas supply sources: domestic production, pipeline imports and LNG imports. This diversity of sources fostered gas-on-gas competition and a growing reliance on spot-traded supply, notably in LNG. From 2015 to 2021, the share of short-term and spot-traded LNG imports grew from 10% to about 40% – a share that kept growing through the crisis years to reach 46% in 2024. This allowed importers and buyers to forgo an element of volume risk in their contracting while taking on an element of price risk in cases of immediate and unforeseen demand requirements.

Equally central to the continent’s natural gas landscape is its extensive underground gas storage capacity, totalling about 100 bcm, spread across 19 EU member states and a handful of non-EU markets. Given the highly variable nature of Europe’s gas demand, underground gas storage plays a crucial role in balancing both seasonal and immediate fluctuations in demand and supply, acting as an important pillar of the continent’s security of supply.

Finally, beyond access to varied supply sources and sizeable underground gas storage capacity, Europe’s – and more specifically the European Union’s and the wider Energy Community’s – gas market is underpinned by an important regulatory framework. The framework provides visibility and predictability to the rules dictating trade in natural gas. Successive regulatory packages have enshrined principles of fair competition and market access, ensuring efficient use of the continent’s extensive import and transmission infrastructure. Above all, this regulatory framework acts as a foundation for discussions around the European Union’s security of gas and wider energy supply.

Impact on gas demand in Europe

Gas demand reductions in the European market occurred across all gas-consuming sectors, leading to the region’s largest year-on-year demand drop on record. High gas prices were a key factor in driving this demand; relatively mild winter weather and public awareness campaigns targeting a shift in consumer behaviour also contributed to the decline.

Residential and commercial sector

The largest year-on-year decline in European gas demand came from the residential and commercial sector, reflecting the impacts not only of a high-price environment but also of milder weather, notably in the fourth quarter of 2022 and 2023. Warm temper atures persisted through the autumn months across much of the continent, delaying the start to seasonal heating needs. As the winter progressed, gas demand for space heating broadly remained below previous-year levels.

While weather-related factors are estimated to have accounted for up to about 40% of the decline in distribution-level gas demand, fuel switching and behavioural shifts also played a key role in reducing European gas demand, as did a degree of efficiency gains. These effects were more directly linked to the high-price environment.

High wholesale prices progressively fed through to retail markets, leading consumers to face increasing gas and electricity bills. Despite significant fiscal support by governments – particularly in EU member states – consumer habits shifted under price pressure. Government-led gas-saving measures and public awareness campaigns are also estimated to have driven a part of this shift in demand patterns, with both residential and commercial consumers heeding the call to reduce their consumption habits.

Overall, the residential and commercial sector accounted for close to half the total decline in European gas demand.

Industrial sector

The industrial sector’s demand for natural gas was among the first to respond to the gas price shock in Europe, falling by about 23% year on year. This was the largest relative decline of all sectors in 2022 and accounted for close to 40% of the total volumetric decline in European gas demand.

All-time high gas prices supported a degree of fuel switching away from gas and towards alternative fuels, notably oil products. However, fuel-switching potential was not evenly spread across all industrial activities and remained a secondary driver in the sector’s reduction in gas demand. Several industrial plants across the continent reduced their output or simply shut down, in some cases turning to foreign-produced finished goods or feedstock to replace domestic production. Chemical and fertiliser companies were among the hardest hit, but the production of iron and steel, non-ferrous metals, non-metallic minerals, and wood and paper products was also impacted by cutbacks in activity.

Power sector

Although power generation is the second-largest gas-consuming sector in Europe, it represented a relatively small share of the 2022 demand decline for the continent. Power sector gas consumption fell by around 3% year on year in 2022, not out of line with typical annual volatility for the sector. However, this relatively small market movement was the result of opposing market forces.

High and volatile gas prices drove increased fuel competition between gas and coal. As gas prices rose, coal became increasingly competitive in the power mix, leading to coal-fired power generation growing by about 4% in 2022 (after having already grown by 10% in 2021 amid already rising gas prices and a post-Covid rebound in power demand). This growth contrasted with year-on-year declines in the years preceding the global gas shock.

Two other market drivers supported the trend of declining gas demand in the sector. As high gas prices fed through to electricity prices, overall European electricity demand declined by about 4% in 2022, reducing the call on gas (and other fuels more generally) to generate electricity. Furthermore, continued wind and solar PV capacity additions led to a 10% increase in non-hydro renewable power output.

However, the availability of alternative sources of power generation worked against this declining trend for power sector gas burn. In France, a number of nuclear reactors were taken offline throughout 2022 due to safety and engineering concerns, leading to unprecedentedly low nuclear capacity availability rates. As a result, nuclear power generation fell by 16% across the continent. Simultaneously, European hydropower conditions weakened in 2022, with droughts affecting hydro reservoir levels – notably in southern Europe – leading to a 14% decline in hydropower output. Together, these effects tightened the European power balance, effectively limiting the potential negative impact on power sector gas consumption.

On the whole, gas demand from the European power sector eased during the crisis but would likely have experienced an even steeper decline had it not been for other tightening factors in the electricity supply mix.

Background

Asia is composed of markets with highly varied reliance on natural gas. However, overall, the fuel accounts for a little over 10% of the region’s primary energy supply. Although Asia is a key gas-producing region, its markets rely on pipeline gas trade, as well as intra-regional and inter-regional LNG supply. Although the share of short-term and spot-traded volumes in Asia’s LNG imports has risen in recent years (from about 26% in 2015 to 31% in 2024), it has done so at a slower pace than in Europe and it remains below the equivalent share at the global level.

This greater role of long-term contracts in ensuring LNG supply in Asia is the product of multiple elements. Among these elements is the reliance of markets like Japan, Korea and Chinese Taipei on LNG for the entirety of their gas needs. Additionally, the lack of a regional benchmark gas trading hub and the lack of significant underground gas storage capacity have left the region with few flexibility levers in responding to unforeseen market movements. In such a market environment, long-term contracts have emerged as a key security of supply tool.

For example, while spot LNG volumes were rerouted in a short time span in response to significant shifts in inter-regional price dynamics during the crisis, long-term contract holders in Asia had a greater assurance of delivery within the terms of their contracts. These contracting arrangements provided access to LNG volumes despite tighter market conditions. Furthermore, the predominance of oil indexation in these long-term contracts reduced the price volatility faced by contract holders. However, an analysis of the impacts of the crisis shows that not all markets in Asia were equally prepared to face the 2022-2023 gas supply shock.

Impact on gas demand in Asia

The main LNG-importing countries in Asia were not uniformly impacted by the sharp rise in spot LNG prices in 2022, leading to different degrees of demand destruction across these markets. Differences in purchasing power, exposure to spot LNG purchasing or long-term contracts, domestic market structure (in gas and power), and the availability of fuel substitutes are all factors that explain the extent of the demand impact in any given market.

Larger and more mature gas and LNG markets in the region generally had less exposure to spot LNG trade in the run-up to the crisis. Despite being heavily reliant on LNG for their gas requirements, markets like Japan, Korea and Chinese Taipei were better shielded from spot price movements thanks to an important share of oil-indexed long-term LNG supply contracts, largely resistant to spot LNG price fluctuations.1

More price-sensitive markets, such as Bangladesh, India and Pakistan, were generally more reliant on short-term or spot LNG supply, leading to exposure to the high-price environment that emerged throughout the crisis. Despite having less reliance on LNG in their gas mix compared with Japan, Korea or Chinese Taipei, these markets faced a marked cutback not only in LNG imports but also in total gas demand.

The financial and fiscal burden of higher spot LNG prices weighed more heavily on these smaller markets. Although high prices acted as the market signal to help balance the global gas market through demand reductions and reorganised LNG flows, they also had a detrimental economic impact on LNG-importing emerging markets, through both supply shortfalls and higher import bills.

Country-specific impacts on gas demand

In China, the 2022 decline in gas demand was partially the result of elevated global gas prices but also partially the result of Covid-related lockdowns. The effects were most visible in the electricity sector, with power sector gas burn decreasing by about 10% year on year in 2022 despite overall power demand growing by about 5% over the same period. Faced with weaker demand and high LNG import prices, gas-fired power plant operators reduced operating hours and, in some cases, outright idled plants.

Total Chinese gas demand fell by close to 1% in these market conditions, but Chinese LNG imports fell by more than 20% (22 bcm). This decline in imports reflected the clear lack of competitiveness of spot LNG volumes compared with domestic and pipeline gas imports, as well as a readiness for certain sectors to alter production schedules or simply switch away from gas towards alternative fuels.

Japan and Korea saw limited demand response to high spot LNG prices in the short term, due notably to lesser price elasticity of demand. Particularly in Japan, relatively low reliance on the spot LNG market also contributed to shielding the country from the worst of the crisis price spikes. Much of Japan’s supply mix is made up of long-term contracts with price indexation to oil, ensuring a degree of relative stability in times of important gas market fluctuations. These more stable and lower prices – combined with relatively strong purchasing power– allowed for a much more muted crisis-related impact on final gas demand.

Natural gas use in power generation dropped significantly in India, with much of the gap filled by a ramp-up in coal-fired plants. Skyrocketing LNG prices in the spot market – where Indian buyers are traditionally relatively active and highly responsive to price dynamics – made an already premium fuel even more expensive relative to alternatives. Gas consumption in the refining and chemical sectors also took a heavy hit as operators with flexibility options switched to oil. Overall, total natural gas demand was down by close to 7% in 2022, and LNG imports fell by 17%. The drastic fall in LNG imports reflected a lower level of willingness among Indian buyers to source cargoes beyond their long-term contractual arrangements at a time of record global spot prices.

Pakistan was among the markets hardest hit by the global natural gas supply shock, as high spot LNG prices led both to a forced reduction in gas demand and to a significant fiscal and economic burden on the country. LNG imports fell by about 18% year on year in 2022, and overall gas demand shrank by close to 9% as power generation switched away from gas and towards oil. Despite this fuel switching, the country faced rolling blackouts amid fuel shortages.

Simultaneously, the LNG volumes sourced at high prices from the global market – key for a number of sectors including in fertiliser production and other industrial applications – fed into double-digit inflation, falling foreign exchange reserves and a worsening current account balance. Furthermore, some of Pakistan’s term suppliers defaulted on more than a dozen contracted cargoes scheduled for delivery throughout 2022, likely driven by lower contractual penalties than the potential gain of selling volumes on the spot market. This further limited the country’s access to lower-priced volumes.

Bangladesh experienced similar widespread power cuts to Pakistan as it significantly curtailed LNG imports at the height of the crisis, leading to the shedding of nearly 20% of the country’s power load during peak summer demand.

Overall, emerging and developing markets across Asia illustrate the critical impact of the crisis not only on natural gas demand but also on annex energy markets and on governments’ budgetary constraints. While outright fuel shortage remained a relatively minor factor in European gas demand reductions, it played a much more important role in scaling back demand in a number of more vulnerable Asian markets exposed to the spot LNG market.