War-roiled LNG markets see a major swing to Europe in 2022 and tight supplies in 2023
Energize Weekly, February 22, 2023
The Russian invasion of Ukraine and a pandemic economic hangover has roiled global liquefied natural gas (LNG) markets in ways that could lead to a short-term dearth, but a long-term decline in demand for the fuel.
Analyses by the International Energy Agency (IEA) and the Institute for Energy Economics and Financial Analysis (IEEFA), a think tank focused on clean energy issues, paint a picture of a world market set in disarray by economic and geopolitical forces.
Before the war in Ukraine, Asia – led by China, Japan, and South Korea – had been the major importer of LNG, but when Russia cut piped gas exports to European Union (EU) countries in 2022, it set off a scramble for LNG.
LNG imports into the European Union rose by 70 percent, or 55 billion cubic meters (bcm), in 2022 compared to the previous year – almost twice the annual increase in global LNG production, according to the IEA.
The drop in Russian supplies drove up European wholesale gas prices, and in a chain reaction, prices on the Asian LNG spot market, as well. The strong European prices led to a “reconfiguration of global LNG flows” toward the EU, the IEA said.
European natural gas spot prices averaged $38 for a million British thermal units (MBtus) in 2022, nearly five times the 2016-2020 five-year average. Asian spot market LNG prices averaged $34 MBtus, eight times the five-year average.
“EU buyers purchased record volumes of LNG to replace lost Russian supplies,” the IEEFA said. “Europe’s red-hot demand drove global LNG spot prices to record levels, and squeezed the volumes available to developing economies.”
Lower LNG deliveries deteriorated electricity supply security in South Asian markets – including in Bangladesh and Pakistan – leading to rolling blackouts in 2022.
“In many Asian nations, LNG has now acquired a reputation as a costly and unreliable fuel,” the IEEFA said.
There was one other key factor in the swing of LNG imports to Europe – a sharp drop in demand from the world’s largest importer China. “The strong LNG inflow into Europe was partly enabled by an unprecedented drop in China’s LNG imports, which declined by 21 percent (or 22 bcm) in 2022,” the IEA said.
The drop in demand came as a result of COVID-19 shutdowns, slow economic growth and lower procurements on the high-priced spot market. As a result, Japan overtook China as the largest LNG importer in 2022.
The IEA projects that gas supplies will remain tight in 2023 with the global balance subject to a wide range of uncertainties and risks, including a complete cutoff of piped Russian gas to Europe and a rebound in Chinese imports of LNG and fewer available LNG supplies.
In Asia, gas demand is expected to increase by close to 3 percent, primarily driven by China and India. Natural gas demand in China is projected to grow by 6.5 percent, or 24 bcm, in 2023 and, total Indian gas consumption is projected to increase by 3 percent, driven by higher gas burn in the power sector.
Natural gas demand in the European Union is expected to drop by nearly 3 percent, or 10 bcm to a toral of 350 bcm, in 2023 compared to 2022, according to the IEA.
The IEA said it expects the global natural gas supply to remain tight in 2023, with the incremental LNG supply insufficient to offset the expected drop in Russia’s piped gas supplies to the European Union.
The global LNG supply is projected to increase by 23 bcm in 2023. Some small-scale LNG projects and improved availability of feedstocks could potentially add another 10 bcm of supply, but unplanned outages could limit the growth in new LNG supply to below 20 bcm.
“In the first eight months of 2022, global LNG plants were offline almost as much as they were in all of 2019, with unexpected disruptions rising faster than planned maintenance,” the IEEFA said.
The U.S. was set to overtake Australia as the largest LNG exporter in 2022 until an explosion in June shut down the Freeport LNG plant, in Freeport, Texas. The plant is not slated to return to full capacity until March.
LNG imports to the European Union will increase in 2023 by around 9 percent, or 11 bcm, compared to 2022 – to a total of 140 bcm – while Asian LNG imports will rise 3 percent.
A major wild card in the forecast is China, which the IEA is projecting to increase its LNG imports by 10 percent, 8 bcm, to a total of 94 bcm, in 2023.
But increased pipeline deliveries – Russia’s natural gas deliveries to China via the Power of Siberia pipeline system are set to ramp up by over 40 percent – could reduce LNG demands by 10 bcm or increased economic activity could boost import demand as much as 30 bcm.
The high prices and supply constraints, however, are pushing European and Asian countries to reduce their dependence on LNG, according to the IEEFA.
“Although East Asian countries have long been among the top LNG consumers globally, demand in the region shows signs of medium-term decline,” the institute analysis said. “In both Japan and South Korea, high LNG prices have rekindled interest in restarting nuclear plants, trimming long-term LNG contract exposure, and shifting power targets away from LNG.”
In 2022, high LNG prices and unreliable supplies also led to a 16 percent decline in LNG imports into India, Pakistan, and Bangladesh.
And despite the surge of LNG imports to Europe, the IEEFA said, “overall gas demand on the continent peaked in 2010 and is now poised to shrink, driven by high prices, efforts to bolster energy security, and legally binding emissions cuts.”
