Natural gas prices have seen unprecedented spike following the Russia-Ukraine war and disruption of gas trade between the largest buyer and seller. The impact has also caused global scarcity with LNG supplies meant for other regions getting directed to Europe. However, things could get even worse with onset of winters in Europe and greater demand for gas. Here is a look at the changed dynamics of natural gas market based on an International Energy Agency (IEA) report and its longer-term implications.<\/p>\n
Europe\u2019s consumption of natural gas stood at over 600 bcm (billion cubic meter) in 2021 as per IEA. The magnitude of this number becomes clearer when compared with the fact that India’s annual gas consumption stands at just about 30-35 bcm. Europe imports nearly 60% of total consumption almost 80% of which is supplied by Russia. Europe\u2019s dependence on Russian gas has increased over the last decade with phasing out of coal and nuclear based power plants. It is pertinent to note that Europe had decided to phase out its nuclear power plants following Fukushima disaster in 2012. (Is Europe prone to Knee-jerk reaction?). Russia accounted for 30% of Europe\u2019s total gas consumption in 2009 which rose to 47% by 2019. The dependence has become stronger because of ease of supply through a number of gas pipelines which is significantly cheaper than LNG mode of supply.<\/p>\n
The Russia-Ukraine war has created havoc with Russia reducing its supplies and Europe\u2019s resolve to eliminate its dependence on Russia. As per IEA, Russia\u2019s gas supplies to European has declined by almost half during Jan-Sept\u201922 and for Q3\u201922, the supply was lower by as much as 70% y-o-y. Russia\u2019s share in Europe gas consumption is projected to come down to 25% in 2022, lowest in more than a decade. This is targeted to be reduced to less than 10% by 2025. It may not even be possible to resume supplies quickly in an unforeseeable situation of a truce as the key gas pipelines have been damaged.<\/p>\n
The problem has got compounded as it has disturbed the global LNG (Liquified Natural Gas) market. Natural gas is transported either through pipelines or as LNG over longer distance where laying a pipeline is not feasible, physically or economically. (India had initiated TAPI – Turkmenistan, Afghanistan, Pakistan, India – gas pipeline several decades ago which remains stuck due to geo-political reasons). The LNG route entails higher cost of around $3-5 per mbtu. Yet, share of LNG in total trade has risen from about 20% to almost half over last two decades due to \u00a0several advantages over other forms of energy.<\/p>\n
To make up for the shortfall, Europe has increased its procurement through LNG, up from about 65 bcm to 110 bcm during Jan-Aug\u201922, increase of as much as 65% y-o-y. This implies annualized procurement of 165 bcm for FY22. The situation is even worse for India with gas burn for power generation dropping by almost 30%. Europe is also trying to tighten its belt in terms of reducing the consumption. Gas consumption is estimated to be 11% lower than previous year. Residential and commercial demand fell by over 20% whereas power generation demand decreased by an estimated 15%. According to Fertilizers Europe report cited by IEA, 70% of European fertiliser production capacity had been curtailed by the end of Aug\u201922. The Asia Pacific region is bearing the brunt of Europe\u2019s aggressive procurement suffering a decline of 7% in supplies and of course, much higher prices. As a result, power generation through natural gas fell by 9% in China in 2022 till Aug\u201922 despite an overall 4% increase in electricity demand.<\/p>\n
While the quantum of supplies is one aspect of the upheaval, the bigger challenge is the unprecedented increase in prices. TTF (Title Transfer Facility) prices, the benchmark index for European gas, reached over $55 per MBtu in Q3, double that in Q2 and more than eight times their five-year average! Prices had spiked to as much as $99 per MBtu on 26th<\/sup> Aug\u201922. The scramble for LNG has led to sharp increase in Asian LNG spot prices also which rose to $45 per Mbtu. The onset of winter when gas demand is even higher in Europe means the prices would continue to remain high for the next few months. Interestingly, price increase in US – a gas surplus nation – still remain controlled. The benchmark US prices stood at $8 per MBtu in Q3, their highest level since 2008 but still one-seventh the price in Europe.<\/p>\n Even as the natural gas market appears to be in deep trouble at the moment, it could bring succour to consumers like India and China in the medium term. With decline in supplies to Europe which accounted for 60% of its gas exports, Russia is projected to produce 15% less gas in 2022. It certainly won\u2019t let its capacity lie idle and would look for newer markets. This, however, would require investments in building newer LNG capacity at both supplier and consumer end and may take some years.<\/p>\n","protected":false},"excerpt":{"rendered":" Natural gas prices have seen unprecedented spike following the Russia-Ukraine war and disruption of gas trade between the largest buyer and seller. The impact has also caused global scarcity with LNG supplies meant for other regions getting directed to Europe. However, things could get even worse with onset of winters in Europe and greater demand […]<\/p>\n","protected":false},"author":8,"featured_media":18417,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[858,859],"tags":[],"class_list":["post-18412","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-industry","category-international","membership-content","access-restricted"],"yoast_head":"\n