Insight: here’s how LNG is changing the global gas market

Europe faced the most severe energy crisis in its modern history in 2022. Russia’s invasion of Ukraine drove gas prices to unprecedented levels, peaking at over €340 per megawatt-hour (MWh) on August 26, 2022 - an annual increase of more than 640 percent. A year later, however, prices have returned to the average for 2019-2021. The risks have not completely disappeared. However, such a rapid return to normal after the crisis was unthinkable just a few years ago. A number of factors contributed to this outcome, the main one being the growing flexibility of gas trading, especially liquefied natural gas (LNG), which has expanded rapidly in recent years. From 2011 to 2021, interregional LNG trade grew more than four times faster than pipeline trade. And in 2020, LNG sales surpassed pipeline trade.

The growth of global LNG trade has significant implications for energy security, as it provides countries with access to a wide range of natural gas supplies and reduces dependence on a single source. Europe has directly benefited from this: when the Ukraine war began in February 2022, it sparked panic over possible gas shortages. By October, LNG tankers queued at European terminals.

Although the worst of the crisis seems to be over, its impact will still be felt for years, especially on the gas trade, on the main import markets, and on the dynamics of competition between the major exporters.

Global gas markets growing

In terms of global demand, North America is the largest market, with a share of approximately 26 percent, of which the United States alone contributes 21 percent. However, unlike Asia-Pacific, the second-largest market with 23 percent of global demand (including more than 9 percent from China), North America is a net exporter.

The other major net importing region is Europe. It is the fifth largest gas market in the world in terms of gas consumption share (14 percent), but depends on imports for nearly 62%. South and Central America are also net importers, but represent a smaller market, contributing only 4 percent of global demand. All other regions are net exporters.

In this context, Europe and Asia-Pacific represent the most crucial markets for gas exporters. However, there are significant differences between the two. Asia-Pacific is a rapidly growing gas market, mainly due to the phasing out of coal, especially in power generation. In contrast, Europe is a mature market that only showed slow growth potential before the war in Ukraine. Following the invasion and the aftermath with its hitherto major supplier, Russia, the European market is undergoing structural changes in sourcing, opening the door for new exporters.

In 2021, 41 percent of the EU’s gas needs were met by Russian gas supplies, with Germany receiving half of those imports. By the end of 2022, that share had fallen to 13%. The significant supply gap resulting from Russia’s decision to cut off most of its gas supplies to Europe during the war in Ukraine was mainly filled by LNG supplies and Norwegian pipelines.

Alternatives for Russian gas exports to the European Union include supplies from Norway (mainly pipelines, but also LNG) or North Africa. Azerbaijan also supplies gas to Southeastern Europe and Italy. Of these alternative sources, LNG remains an indispensable supplement for the European Union to replace Russian gas at current levels of consumption. This is due to the fact that pipeline supplies from Norway, North Africa, and Azerbaijan are limited by the production and/or capacity of the pipelines.

Russia’s energy export strategy

Even before the Ukraine conflict started, Russia was planning a change in the geography of its gas demand. With Asia emerging as a growth hub and the European market stalling or shrinking, Russia aimed to diversify and expand its reach to minimize demand and security risks.

Central to this strategy was the expansion of the LNG trade. A 2013 law allowed companies other than Gazprom, which has a monopoly on pipeline gas exports, and its subsidiaries, to export LNG. Notoriously, these companies are mainly controlled or supported by the government.

The shift from pipeline exports to LNG exports gives Russia greater flexibility and potential for optimization. By investing in LNG infrastructure, Russia can diversify its natural gas exports away from Europe, a market it has depended on for decades through a network of pipelines. With LNG, it can access new markets unrelated to existing pipeline infrastructure.

Regional gas markets

Unlike oil, gas tends to be consumed in the region where it is produced.

Additionally, LNG exports provide Russia with greater flexibility in managing its natural gas supplies and allow it to respond more readily to demand changes. Since LNG can be transported by tanker to different parts of the world, Russia can adjust its exports according to changing market conditions. This gives it greater leverage in negotiations with gas-importing countries, increasing Russia’s prominence and influence on global energy markets, particularly in Asia-Pacific.

In 2021, Russia accounted for nearly 8 percent of global LNG trade, ranking fourth behind Australia (20.9 percent), Qatar (20.7 percent), and the United States (18.4%). While LNG exports were still small compared to the traditional Russian pipeline business in 2021 (LNG exports accounted for 17% of total Russian gas exports), largest increase in LNG export capacity from Russia by 2026. However, these plans are now being jeopardized by sanctions, which limit access to the necessary technology and capital.

Competition among LNG exporters

The conflict in Ukraine has created a major gas supply gap in Europe and provided an opportunity for LNG exporters, especially the top three exporters (Australia, Qatar, and the United States), which account for 60 percent of global LNG trade. The fourth largest LNG exporter, Russia, has less than half the market share of each of the top three exporters.

Europe has a well-established infrastructure for LNG receiving terminals, with more planned in response to the war, making it an attractive market for LNG exporters. The region is developing as a significant new LNG import destination.

LNG export capacity by country

Interestingly, while most Russian gas pipeline supplies to the EU were stopped following the war, LNG deliveries to the EU have continued, increasing by almost 22% in 2022 compared to 2021. However, Russia’s role in the European LNG market will depend on its ability to expand its LNG export capacity, the potential for sanctions on such trades, and growing competition from other, more powerful.

The big three LNG exporters have significantly expanded their LNG export capacity and the competition between them is intense.

Australia, due to its location, has focused on the Asia-Pacific region, unlike Qatar and the United States, which aim for greater market coverage. Based on Qatar’s reserves and production costs, the Middle-Eastern country has a clear lead over its closest competitors. Qatar is well positioned to benefit from any increases in LNG demand in both Europe and Asia. Qatar typically sells its LNG under long-term contracts. The competitive advantage of US LNG includes not only its geographical location, which allows the US to supply competitively to both the European and Asian markets but also the flexibility of its contractual arrangements for LNG, especially the flexibility of destination, which allows buyers to divert cargo to the more lucrative LNG market.

In Europe, competition is bound to intensify between Qatar and the United States, which have expanded their presence on the market to the detriment of the Russian gas pipeline. Europe is currently Qatar’s second largest market after Asia-Pacific, albeit with a much smaller share. However, it could become a more significant market for Qatari LNG due to ongoing geopolitical tensions. In November 2022, QatarEnergy, the national energy company of Qatar, signed two long-term agreements with ConocoPhillips to supply Germany with up to 2.72 billion cubic meters of LNG starting in 2026, for 15 years, marking the first long-term LNG supply contract to Germany.

EU LNG imports by origin

For the US, Europe is also an important market, ranking second after Asia-Pacific and accounting for 32% of its total LNG exports in 2021. By April 2023, the US would provide 50% of total EU LNG imports – exceeding supplies from the Middle East, Africa, and Russia combined.

In the process, increased global export capacity and competition are likely to cause the two crucial regional markets - Europe and Asia - to become increasingly interconnected and prices more correlated.

LNG’s importance in globalizing international gas trade and linking production and consumption centers with limited pipeline access is indisputable. LNG helps integrate regional gas markets into a global one. We are already seeing the emergence of a key element needed to support the ever-growing network of LNG cargoes connecting more remote supply and demand centers.

The Ukraine war highlighted LNG’s importance in improving the supply chain. Germany’s decision to build LNG import terminal in 2022 is a notable example.

In 2012, the International Energy Agency predicted a golden age for gas. Following the war in Ukraine, the same agency said that this long-awaited golden age was drawing to a close before it even had a chance to fully unfold. Nevertheless, LNG is currently experiencing a golden age as a result of the dynamics that accelerated after the war.

Original article published on Money.it Italy 2023-07-22 07:00:00. Original title: GNL, ecco come sta cambiando il mercato mondiale del gas