The question of whether the world has enough gas looms large as the Northern Hemisphere faces its first winter since Russia’s invasion of Ukraine triggered upheaval in global energy markets.
Asian buyers are feeling the blowback from the economic battle between Russia and Europe over gas. Moscow’s restrictions on gas supplies to the EU via pipeline and Western determination to end the use of Russian fossil fuels have raised demand for liquefied natural gas, which is shipped around the globe.
Asian countries, usually the biggest buyers, have stepped up efforts to secure supplies for winter and beyond, as Europe’s emergence as a bigger LNG buyer has altered market dynamics.
“Asia now has to scramble for LNG, competing with Europe for which LNG is no longer a supplemental energy source,” said Takayuki Nogami, chief economist at state-owned Japan Oil, Gas and Metals National Corp. (Jogmec).
According to the International Energy Agency, which this week will release its closely watched “World Energy Outlook,” Europe’s LNG imports surged 65% in the first eight months of 2022 compared to the same period last year. The extra demand stemmed from Europe’s desire to secure gas for winter. Europe’s inventory levels stood at 87% of their working storage capacity as of late-September, according to the IEA.
Europe is still aiming for a 15% voluntary reduction in gas demand over the period from August through March, compared with its five-year average. “It’s a question of how we cut demand and what the weather will be like,” warned Naohiro Niimura, a partner at Japanese commodities consultancy Market Risk Advisory, referring to the LNG market.
Europe has benefited from lower demand elsewhere. “Asia’s reduction in LNG imports in the first half of 2020 made volumes available to the European market,” said Hiroshi Hashimoto, head of the gas group at the Institute of Energy Economics, Japan (IEEJ).
S&P Global Platts’ Japan Korea Marker, the benchmark for LNG spot prices in Northeast Asia, soared in August to its highest point at $69 per million British thermal units. Prices have more than halved since then.
As LNG prices surged, China, the world’s largest importer of LNG, cut its volumes and instead increased its use of domestic gas and coal as well as imports of gas via pipelines. China’s economic slowdown and zero-COVID policy also reduced demand.
“LNG demand will increase through the winter, but China remains well covered with its contracted LNG and it is unlikely to be having to procure spot LNG, unless the winter is particularly cold,” said Massimo Di Odoardo, vice president of gas and LNG research at Wood Mackenzie.
Other Asian LNG stocks also look relatively robust. As of June, LNG stocks in Japan and South Korea stood 8% above their five-year average. Korea Energy Economics Institute said this month that public natural gas company Korea Gas Corp. will secure 90% of its LNG reserve capacity by next month. According to Japan’s Ministry of Economy, Trade and Industry, the LNG stocks of the country’s largest power generation companies stood at 2.5 million tons as of Oct. 16, well above their five-year average of 1.8 million tons.
Analysts say it is unlikely that gas-importing countries will immediately fall short of supplies but an unexpectedly severe winter could change that.
In Japan, the cabinet this month approved changes to a law that will allow state-owned Jogmec to procure gas when private companies can’t secure enough supply. In South Korea, the government last month hosted a meeting with gas companies to discuss supplies for this winter. Korea Gas said in the meeting that it sees no problems so far with LNG imports. However, the company plans to secure additional supplies for the season and carefully monitor the international market.
Qatar, the world’s second-largest LNG exporter in 2021, has assured Asia it will meet all its contracts to Asian buyers despite rising demand from Europe.
“Qatar absolutely is committed to the sanctity of its contracts,” energy minister Saad Sherida al-Kaabi told Nikkei Asia on Oct. 18. “The volume we have committed to Europe will go to Europe, but we will not be taking away from Asian buyers and diverting it to Europe.”
Despite countries’ efforts to cut demand and the emergence of new supplies, analysts say energy security for many countries remains fragile.
“Europe might only be able to get 80% to 85% of gas in storage by end of October 2023,” said Wood Mackenzie’s Odoardo. “However, if this winter is colder than average and Russian exports to the EU are cut further, Europe might only be able to get to 60% to 70% of gas in storage, despite maximizing LNG imports. Demand reduction measures would be inevitable under those circumstances.”
On top of Russia-related risks, this year has brought unexpected supply disruptions, including a fire at a Freeport LNG liquefaction plant in the U.S. state of Texas, strikes at a Shell LNG facility in Australia and a force majeure declaration by Malaysian gas producer Petronas after a pipeline leak.
For Japan, risks remain regarding gas supplies from the Sakhalin-2 project in Russia, which has been taken into Russian hands and abandoned by previous operating partner Shell.
As Shell was instrumental in providing technical knowledge, “if the project requires massive maintenance in the future or a sudden failure occurs, it is uncertain whether the Russian entity will be able to respond appropriately,” said Daisuke Harada, director of energy research at Jogmec.
Japan imports approximately 9% of its LNG from the project. Japanese trading houses Mitsui & Co. and Mitsubishi Corp. are shareholders of the newly established Russian entity Sakhalin Energy LLC.