Home / Oil & Energy / Oil & Companies News / The fashioning of a new global gas world order

The fashioning of a new global gas world order

The fashioning of a new global gas world order is underway. Specifically, we are witnessing the unravelling of a 50-year relationship built around gas between Europe and Russia.

The repercussions extend way beyond that continent as the partial isolation of Russia – until recently the world’s largest gas exporter – is being felt across the world. All gas importers are scrambling to secure supplies from a common LNG “pool”.

High gas prices and dizzying volatility prevail, and are hitting emerging countries especially hard, in conjunction of course with high oil, coal and fertilizers prices. Gas prices have at times risen above $500 per barrel of oil equivalent. Suppliers are reshuffling their trade patterns, and producers are re-assessing prospects and new opportunities for developing alternative supply sources.

The short-term challenges are becoming acute as peak winter demand beckons in both Europe and Northeast Asia, setting up a potential tug-of-war for supply. There is an asymmetry in market exposure. Asia is better insulated from the crisis because of its long-term contracts, but its lack of significant gas storage infrastructure still makes it ultimately exposed to the vicissitudes of the spot market and specifically the Platts JKM benchmark LNG price. Europe is more exposed to spot markets given a lower level of long-term contracts, but it has built up its defenses by filling its storage to over 90% of capacity. The anticipation of the Northern Hemisphere winter will be the backdrop as top industry executives meet in Abu Dhabi for ADIPEC at the end of the month in the region, with huge but not unlimited discretionary resources and the ability to swing supply between East and West as most appropriate.

Two points should be emphasized about the longer term.

First, within Europe there is no going back to the status quo ante once the Russian-Ukrainian conflict finds some sort of resolution or stasis. The 50-year relationship was based on trust, and that trust has been irrevocably broken. And besides, the unhealthy dependencies and vulnerabilities of the European-Russian gas relationship have been laid bare for all to see, irrespective of the politics. Europe’s dependence on Russian gas reached 33%. For the EU it reached as high as 38%. This was clearly too high. Now the EU policy – or at least aspiration – is to reduce Russian gas volumes to zero by 2027. It is doubtful this aspiration will be reached, but equally Russia’s market share is likely at best to return to half the previous levels, probably less. Meanwhile, Russia will look to pivot East, although it will take not years but more than a decade to build its export volumes heading East to the same levels as those that went West.

The second point is that the crisis has added further impetus to energy transition, at least in Europe. It is true that Europe has been forced into reverse by the need to bring back emergency coal supplies, but this is a short-term tactical retreat. The longer-term strategic response is to develop as soon as possible a higher use of low carbon and indigenous renewable resources. So, it is unclear whether there is a long-term diversification of gas supply away from Russia toward new sources in North America, the Middle East and Africa, or instead a renouncement of natural gas and an acceleration of renewable energies at the expense of natural gas.

What has been the response of LNG developers?
In the Middle East, Qatar pushes forward with its giant developments and the UAE has brought forward proposals to build liquefaction, with ADNOC planning to double its LNG production capacity by 2026. There has been a flurry of recent foundational long-term LNG contracts – over 50 Mmtpa – mainly from the US. These developers are probably focused longer-term on the emerging markets for growth, but they see the European crisis as an opportunity to kick-start projects earlier than would otherwise have been the case.

So, the industry continues to believe in the long-term growth narrative for natural gas in general and LNG more particularly. The associated issues around the optimal business model, financing, costs, and the pace and implications of the energy transition will all be front and center in ADIPEC discussions.
Source: Platts

Recent Videos

Hellenic Shipping News Worldwide Online Daily Newspaper on Hellenic and International Shipping