2022 was a year of extraordinary turbulence in global energy. Russia, until that point Europe’s largest single supplier of natural gas, slashed pipeline supplies to the EU by 80%. As a result, wholesale prices for natural gas, the main fuel used
for power generation and home heating across Europe, surged to a high of 300 EUR/MWh. Since then, natural gas prices in Europe have retreated sharply and are now down to just below 30 EUR/ MWh, a price that should allow the continent’s economy more breathing space. Lower prices are due to several factors; two consecutive mild winters; energy conservation–European households are consuming c11% less gas to heat their homes and reduced industrial activity by shuttering factories in high energy consuming sectors such as chemicals and base metals. Notwithstanding that drop in demand, it would have been impossible for markets to adapt to such a severe loss of supply without Liquefied natural gas (“LNG”).
A decade ago, LNG’s contribution to the global energy mix was limited and LNG markets underdeveloped. Two Asian countries (Japan and Korea) dominated the market with a 52% share. LNG was bought and sold on fixed destination contracts for terms of 20 years, and spot market trading was minimal. Since then, the market has evolved. Energy traders have become more active participants, securing flexible supply volumes where the destination of the LNG is no longer fixed and chartering fleets of LNG carriers that enable them to move those cargoes freely around the world. In 2022, this was critical in enabling Europe to attract more LNG, at short notice, to fill its supply shortfall. Other markets in Asia and Latin America were better placed to switch away from gas to other fuels. Europe was able to draw upon a much bigger pool of LNG as Asian buyers’ demand dropped more quickly and traders moved to divert their cargoes from Asia to Europe. Traders tripled their LNG supplies to Europe in 2022 whilst overall LNG supply to the EU & UK rose some 71%.
Accessing more LNG required energy companies and governments to act fast to construct new terminals as LNG import capacities were limited in 2022. But the future role of LNG will be positive. Global supplies are set to expand by some 50% over the next five years, investments that were partly secured through supply commitments by energy traders. Europe is well placed to benefit from this supply surge through cheaper energy prices. And access to LNG spot markets can further advantage Europe in future. Since LNG is now freely traded it can respond flexibly as the energy transition progresses. As Europe ramps up low-emissions energy sources, energy traders will be able respond by diverting cargoes back towards growth markets in Asia where gas can replace highly-polluting coal stations. Thus, LNG spot markets can provide both energy security in times of shortage and flexibility to reduce supply in times of surplus, efficiently responding to demand without burdening Europe consumers with costly fixed term contracts that may not be needed in the decades to come.
