LNG Supplies to Remain Tight Into 2023, Says IEA

LNG Supplies to Remain Tight Into 2023, Says IEA

/ Oil & Gas / Tuesday, 04 October 2022 11:02

Russia’s continued curbing of gas flows to Europe has drastically hiked international prices, disrupted trade flows and led to severe fuel shortages in some emerging and developing economies, with the market tightness expected to continue well into 2023, according to the IEA’s latest quarterly Gas Market Report.

Since 2021, the natural gas markets worldwide have been tightening, and global gas consumption is expected to decline by 0.8% in 2022 as a result of a record 10% contraction in Europe and unchanged demand in the Asia-Pacific region. Global gas consumption is forecast to grow by only 0.4% next year amidst high uncertainty, especially in light of Russia’s future moves and the economic impacts of sustained high energy prices.

Russia’s cutting off of gas supplies to Europe as a response to sanctions imposed against it for its war on Ukraine has left Europe in an economically tight spot. This has impacted the worldwide supply chain for LNG.

“Russia’s invasion of Ukraine and sharp reductions in natural gas supplies to Europe are causing significant harm to consumers, businesses and entire economies – not just in Europe but also in emerging and developing economies,” said Keisuke Sadamori, the IEA’s director of energy markets and security.

European natural gas prices and Asian spot LNG prices touched record highs in the third quarter of 2022, resulting in the reduction of gas demand and prompting the use of other fuels such as coal and oil for power generation. In some emerging and developing economies, the high prices created shortages and power cuts. Europe’s gas consumption declined by more than 10% in the first eight months of this year compared with the same period in 2021, driven by a 15% drop in the industrial sector as factories curtailed production. Also read: How Many More Billions Will Europe Have to Throw In to Combat Energy Crisis?

As per the report, natural gas demand in China and Japan was almost unchanged in that same period, while it contracted in India and Korea. Chinese gas demand is forecast to increase by less than 2% this year, its lowest annual growth rate since the early 1990s. Meanwhile, natural gas prices in the United States hit their highest summer levels since 2008, yet North America was one of the few regions of the world where demand increased, supported by demand from power generation.

Europe has tried to balance the drop in Russian gas supplies through LNG imports as well as alternative pipeline supplies from Norway and elsewhere. Europe’s surging demand for LNG – up 65% in the first eight months of 2022 from a year earlier – has drawn supply away from traditional buyers in the Asia-Pacific region, where demand dropped by 7% in the same period as a result of high prices, mild weather and continued COVID lockdowns in China.

The IEA forecasts that Europe’s LNG imports will increase by over 60 billion cubic meters (bcm) this year, or more than double the amount of global LNG export capacity additions, keeping international LNG trade under strong pressure for the short- to medium-term. This implies that Asia’s LNG imports will remain lower than last year for the rest of 2022. However, China’s LNG imports could rise next year under a series of new contracts concluded since the beginning of 2021, while a colder-than-average winter would also result in additional demand from northeast Asia, further adding to market tightness.

In addition to diversifying supply, the European Union and its member states have taken other steps to increase gas security, such as setting minimum storage obligations and implementing energy-saving measures for the coming winter. EU storage facilities were close to 90% full as of the end of September, though the absence of Russian supply presents challenges for refilling them next year. Both Japan and Korea have instituted policies to reduce reliance on imported LNG for power generation and have developed contingency plans for possible LNG supply disruptions.

For the new report, the IEA conducted a resilience analysis of the EU’s gas market in the case of a complete Russian supply shutdown starting from November 1, 2022. The analysis shows that without demand reductions in place and if the Russian pipeline supply were completely cut off, EU gas storage would be less than 20% full in February, assuming a high level of LNG supply, and close to 5% full, assuming low LNG supply. Storage falling to these levels would increase the risk of supply disruptions in the event of a late cold spell. The report notes that a reduction in EU gas demand through the winter period of 9% from the average level of the past five years would be necessary to maintain gas storage levels above 25% in the case of lower LNG inflows. And a reduction in demand of 13% from the 5-year average would be necessary through the winter period to sustain storage levels above 33% in the case of low LNG inflows.

Also read: Will a Heavy Winter Be Awaiting Europe This Year?

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