Russian Natural Gas - 2022 War
Russia’s invasion of Ukraine in 2022 triggered the first truly global gas crisis, with natural gas and LNG markets contending with supply disruptions and unprecedented price volatility. While the immediate effects of last year's supply shock have eased in recent months, the structural changes that emerged in 2022 will persist for years – and should be taken into account both by policy makers and market players. The European Union’s 100 bcm of working storage capacity accounts for over 25% of annual gas demand.
Russia’s steep cuts in gas deliveries to the Europe Union – a drop of almost 80 bcm, equating to 15% of global LNG trade – put unprecedented pressure on European and global gas markets in 2022. This gas supply shock caused by Russia led to a reconfiguration of global LNG flows, drove natural gas prices to alltime highs, both in Asia and Europe, and necessitated a readjustment in gas demand. Natural gas consumption fell by an estimated 1.5% in 2022 – similar to the drop experienced in 2020 following the first wave of Covid-19 lockdowns.
Since the start of 2023, natural gas markets moved towards a gradual rebalancing due to timely policy action, efficient market forces and favourable weather conditions over the 2022/23 heating season. Spot gas prices in Asia and Europe fell by over 50% yearon-year in H1 2023, albeit remaining 140% and 180% above their H1 average levels between 2016-20, respectively. In the United States, strong growth in domestic gas production, together with an unseasonably mild Q1 2023, put downward pressure on benchmark Henry Hub prices, which fell by 60% year-on-year in H1 2023.
The steep decline in natural gas prices in Asia and Europe occurred despite a tight supply environment. Russia’s piped gas deliveries to the European Union fell by over 75% (or 36 bcm) in H1 2023, while global LNG supply rose by an estimated 3% (or 9 bcm) – insufficient to offset the decline in Russian piped supplies. Several non-Russian pipeline suppliers faced heavy maintenance and unplanned outages, further tightening supply.
The year 2023 may well prove to be an even sterner test for Europe because Russian supplies could fall further, global supplies of liquified natural gas (LNG) will be tight – especially if Chinese demand for LNG rebounds – and the unseasonably mild temperatures seen at the start of the European winter are not guaranteed to last. The European Union faces a potential shortfall of almost 30 billion cubic metres of natural gas in 2023 – but this gap can be closed and the risk of shortages avoided through stronger efforts to improve energy efficiency, deploy renewables, install heat pumps, promote energy savings and increase gas supplies,
European Commission President Ursula von der Leyen said 12 December 2022, “We have managed to withstand Russia’s energy blackmail. With our REPowerEU plan to reduce demand for Russian gas by two-thirds before the end of the year, with a mobilisation of up to €300 billion of investments. The result of all this is that we are safe for this winter.... So we are now turning our focus to preparing 2023, and the next winter. For this, Europe needs to step up its efforts in several fields, from international outreach to joint purchasing of gas and scaling up and speeding up renewables, and reducing demand.”
Despite all of this, the EU’s potential gas supply-demand gap could reach 27 billion cubic metres in 2023 in a scenario in which gas deliveries from Russia drop to zero and China’s LNG imports rebound to 2021 levels. This gap can be closed through additional actions on energy efficiency, renewables, heat pumps, energy savings and gas supplies.
Russia's invasion of Ukraine profoundly transformed European and global gas markets. While the immediate effects of the 2022 supply shock have eased in 2023, the structural changes which emerged in 2022 will persist for years – and should be carefully assessed both by policy makers and market players. Consequently, the role of LNG in the European market drastically shifted. While in the past, LNG cargoes supplied the marginal molecule, LNG has become a baseload source of supply for Europe, with its share in total EU demand rising from an average of 12% over the 2010s to close to 35% in 2022 – similar to the contribution from Russia’s piped gas before the invasion of Ukraine.
High inventory levels at storage sites in key Asian and European markets provide grounds for cautious optimism ahead of the 2023-24 winter heating season in the Northern Hemisphere. If injections continue at the average rate observed since mid-April, EU storage sites will reach 90% of their working capacity by early August and could be filled close to 100% by mid-September. However, full storage sites are no guarantee against market volatility during the winter. A cold winter, together with a full halt in Russia piped gas supplies to Europe early in the heating season, could easily renew market tensions. Fierce competition for gas supplies could also emerge if Northeast Asia experiences colder-than-usual weather and economic growth is stronger than expected in China.
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