Securing natural gas supply in times of crisis

This seventh issue of the IEA’s annual Global Gas Security Review comes at a time when the global energy crisis – triggered by Russia’s invasion of Ukraine – has put security of supply back on the agenda. This is in sharp contrast with the loose energy supply situation experienced during the Covid-19 pandemic only two years ago.

High prices and a tight supply market environment have led to a decline in natural gas consumption across a majority of regions. In OECD Europe, which is directly exposed to the impact of Russian gas supply cuts, gas demand fell by close to 10% y-o-y in the period January to August 2022. The repercussions of the crisis have extended to all gas importing regions, as Europe’s surging LNG demand has led to supply tensions and spiralling spot prices for competing buyers.

Gas consumption recorded limited to negative growth in most Asian markets: it increased by less than 1% y-o-y in the first eight months of 2022 in China, decreased by nearly 4% in India over the same period, and was flat in Japan during H1. South and Central America experienced an estimated 3% y-o-y decline in H1. North America was one on the few regions where demand increased (up by over 4% in the United States in the first eight months and 8% in Canada in H1), supported by demand from power generation and comparatively lower prices – nonetheless at decade highs.

The European Union and its member states adopted a number of measures to enhance security of supply and market resilience ahead of the coming winter. They include a new storage regulation that sets a minimum 80% filling level at the opening of winter 2022/23, and up to 90% for the following years. The bloc is also ramping up its LNG import capacity, either through the expansion of existing onshore regasification plants or the hiring of floating storage and regasification units (FSRUs). Several EU-based companies secured additional LNG supply via tenders and short-term LNG contracts. In addition to the record inflow of LNG, EU member states started to diversify their imports from non-Russian pipeline suppliers. The European Union adopted a 15% voluntary reduction target for its gas demand between 1 August 2022 and 31 March 2023, compared with its five-year average.

The IEA conducted a seasonal resilience analysis of the European market in the case of complete Russian pipeline gas supply cut-off, starting from 1 November 2022, including the risk of a potential late cold spell. The analysis shows that a demand reduction of 9% compared to the five-year average would be necessary to maintain storage levels above 25% in the case of lower LNG inflow, while a reduction of 13% compared to the five-year average would be necessary through the winter period to sustain storage levels above 33% in the case of lower LNG supply. In this context, implementing gas saving measures will be crucial to minimise storage withdrawals and keep inventories at an adequate level until the end of the heating season.

Global LNG trade expanded by nearly 6% y-o-y in January through to August 2022. The market was driven by surging LNG demand in Europe, which rose by 65% y-o-y, triggering a wholesale realignment of LNG trade flows around the world. The Asia Pacific region, where LNG demand fell by 7% (or 18 bcm) y-o-y as a result of mild weather, high prices and Covid-related disruption in China, has provided most of the relief for the European market so far in 2022.

Amid high and volatile spot prices, LNG contracting activity rebounded strongly in 2021 (up 28% y-o-y) to about 80 bcm, second only to the 2018 record of 88 bcm. It has slowed in 2022 to date, with 27 bcm contracted with operational projects or projects under development – against 48 bcm in the same period of 2021. Two projects have taken final investment decision (FID) so far this year, both in the United States, for a total annual export capacity of 32 bcm.

The return to a sellers’ market with growing LNG supply tension since 2021 has led to changes in contracting patterns, and especially a marked decline in destination flexibility. Flexible contracts accounted for almost 80% of the average contracted volumes in 2018-2019, and were driven by new FIDs in the United States. The share of destination-flexible volumes in new contracts dropped to 35% in 2020 and 11% in 2021.The trend has been more balanced in the first eight months of 2022, with destination-fixed contracts accounting for 47%. Contract duration has also been increasing, with long-term contracts (over 10 years) accounting for around 74% of newly signed LNG contract volumes in 2020 and 84% in 2021, up from an average of 60% in 2015-2019.

The gas crisis in Europe has drawn away from Asia not only flexible LNG volumes, but also the limited number of available FSRU vessels – which were initially expected to be deployed mainly in South and Southeast Asia as part of the region’s energy transitions. As of August 2022 just over 20 FSRU vessels were available or under construction. Since the invasion of Ukraine, 12 FSRUs have been secured for recently approved import facilities in Europe, and another nine additional FSRU-based terminals are planned. This shift and resulting scarcity of FSRUs is challenging for emerging markets in Southeast Asia, where floating units were expected to account for a sizeable share of future regasification capacity.