Since 2022, the Ukrainian crisis has had a huge impact on the global natural gas industry. Natural gas supply is in short supply and prices are rising. The market is extremely sensitive and fragile to geopolitical risks. In the first half of the year, the consumption growth rate of the global natural gas market slowed down significantly, and the decline in Russian production offset the production growth in other regions. It is expected that the global natural gas supply and demand will decline to varying degrees throughout the year, and the tight supply situation in the market will intensify.
In the first half of the year, the prices of major natural gas markets in the world hit new highs repeatedly, with the average value reaching 2 to 4 times that of the same period last year. The natural gas market faces more uncertainties in the second half of the year. It is expected that the global gas prices will remain collectively within the historically high range during the year. The price linkage in the global natural gas market is increasing. In particular, natural gas prices in Europe and Asia are driven and pushed up by each other, and Europe has gradually become the main premium market.
The global pipeline gas trade volume has dropped sharply, and the growth of natural gas trade is mainly driven by LNG. The United States has become the largest LNG exporter in the first half of the year. The flow of natural gas trade has undergone profound adjustments. More natural gas from the United States has flowed to Europe, and natural gas supply from Russia has accelerated to Asia, and African natural gas has gradually become a new increase in the market. More and more buyers are looking for long-term contracts to lock in long-term stable low-priced gas sources, and the right to speak in the seller’s market has been further enhanced. Most of the newly signed long-term suppliers of LNG are American companies, whose pricing is mostly linked to the price of Henry Hub in the United States, and the destination is more flexible, which increases the liquidity of the natural gas market to a certain extent.
The advantages and challenges of natural gas in the global energy transition coexist. In the context of climate change, the global trend of carbon reduction and emission reduction provides a large growth space for natural gas consumption. However, the reduction in natural gas supply caused by the Ukraine crisis has increased the use of coal. In the short term, natural gas faces the challenge of coal substitution. my country’s natural gas production rate is relatively high, which is bound to be affected by the shortage of natural gas resources and rising prices in the international market. Facing the complex and ever-changing international situation and the arduous and arduous task of domestic reform, development and stability, we should strengthen the coordination with natural gas producing countries and other aspects to ensure the safety of import channels while promoting the steady increase of natural gas production and improving storage and transportation capacity based on the domestic market. Unobstructed, fully guarantee energy security under open conditions.
1. Global natural gas supply and demand
(1) The growth rate of natural gas demand has slowed down significantly
Since 2022, factors such as geopolitical influences, high LNG spot prices, and relatively warm weather have put pressure on the growth of natural gas demand. It is expected that global natural gas demand will decline by 0.5% for the whole year, and demand will grow slowly in the next few years with great uncertainty.
The “World Energy Statistical Yearbook 2022” released by BP shows that the global natural gas consumption in 2021 has exceeded the pre-epidemic level in 2019, reaching 4,037.5 billion cubic meters, a year-on-year increase of 5.3%. This is the first time that global natural gas consumption has exceeded 4 trillion cubic meters rice, but its share in primary consumption remained unchanged at 24% year-on-year. In 2021, the United States will consume 826.7 billion cubic meters of natural gas, and Europe will consume 571.1 billion cubic meters, ranking the top two. While China and Russia’s natural gas consumption will increase by more than 12% year-on-year, and they are the two countries with the fastest growth in natural gas consumption in the world.
Since 2022, factors such as geopolitical influence, high LNG spot prices, and relatively warm weather have put pressure on the growth of natural gas demand, and the growth rate of consumption in the global natural gas market has slowed down significantly. Specifically:
In the European market, gas use in the industrial and power sectors fell sharply, hit by high temperatures and record high gas prices. According to the International Energy Agency, natural gas consumption in Europe fell by more than 10% year-on-year in the first half of the year. In response to high gas prices and shortage of pipeline gas supply, the governments of Germany, Italy and the Netherlands have announced a series of measures, including demand-side management, adoption of energy-saving measures, incentives to reduce industrial natural gas consumption, and increased coal-fired power generation, etc., to reduce natural gas Consumption. On July 26, the EU reached an agreement on an emergency plan to reduce natural gas consumption, and member states agreed to reduce natural gas consumption by 15% between August 1, 2022 and March 31, 2023. At present, there is a strong demand for injection storage in Europe, and countries are doing their best to reserve enough natural gas for the winter in the second half of the year. According to the EU’s previous plan, by November 1, 2022, the natural gas reserves of EU member states should not be less than 80% of the full gas storage capacity; by November 1, 2023, the natural gas reserves of each country should not be lower than the full capacity 90% of the volume.
In the Asian market, high gas prices suppressed the import demand of Japan and South Korea to a certain extent. In addition, in order to earn the price difference, Japan and South Korea resold some of the LNG purchased from the United States, Australia and other countries to Europe, causing their natural gas Imports were lower than expected. Compared with Japan and South Korea, the demand for natural gas in emerging economies such as Southeast Asia and South Asia is more significantly suppressed by high prices. Coupled with the depreciation of their currencies against the US dollar, these countries are even less able to afford high-priced LNG. Moreover, the process of energy transformation in Asia is relatively slow, and it is easier to switch to coal and other fossil energy sources for substitution, which also restrains part of the natural gas consumption demand in Asia. According to data from the International Energy Agency, South Korea’s natural gas consumption in the first three months of this year increased by only 1% year-on-year, Japan’s natural gas consumption in the first four months fell by 3% year-on-year, and India’s natural gas consumption in the first five months fell by 2.7% year-on-year. Right now, Asian countries are entering the peak of gas consumption for power generation, and it is expected that the demand for injection storage will continue to rise in the later stage.
In the North American market, since the beginning of this year, the demand for raw material gas in the United States has been strong. After entering May, due to the high temperature weather, the demand for power generation gas in most parts of the United States has increased. In the first half of the year, U.S. natural gas consumption rose nearly 5% year-on-year, according to the International Energy Agency. The U.S. Energy Information Administration recently stated that due to the increase in demand for natural gas in the industrial sector due to economic recovery, the continued phase-out of coal power has increased the demand for natural gas in the power sector, and the high temperature this summer has led to an increase in cooling demand. Volume will increase by 3% year-on-year.
The quarterly report on the natural gas market released by the International Energy Agency on July 5 pointed out that in the second half of 2021, the natural gas market supply will tighten, and the Ukraine crisis that broke out this year has further exacerbated this situation, which has put natural gas demand under enormous pressure. It is estimated that the global natural gas demand will drop by 0.5% in 2022, and the demand will grow slowly in the next few years with great uncertainty. By 2025, the global natural gas demand will only increase by 140 billion cubic meters compared with 2021, while the demand in 2021 will only increase by 140 billion cubic meters. The increment reached 175 billion cubic meters. The IEA’s growth forecast for natural gas demand through 2024 has been revised down by 60% from its previous forecast, given a weaker global economy and a smaller energy transition from coal or oil to natural gas.
By sector, natural gas demand from the industrial sector remains the strongest segment of global natural gas demand growth, accounting for about 60% of the total increase in natural gas demand between 2021 and 2025. However, the uncertainty surrounding natural gas demand in the industrial sector is high, as industrial activity is particularly sensitive to energy and raw material prices.
In terms of regions, the growth of global natural gas demand is relatively concentrated geographically. Asia-Pacific as a whole will account for nearly half of the total increase in gas demand to 2025, followed by the Middle East at one-third. These two regions accounted for nearly 80% of the increase in demand. North America and Africa contributed less to demand growth, Central and South America and Eurasia generally stagnated in gas demand growth, while Europe saw a sharp decline in gas demand. The International Energy Agency’s forecast for the growth outlook of global natural gas demand further highlights the huge role of the Asian region and the industrial sector in medium-term demand growth.
Global natural gas demand trends from 2015 to 2025
(2) Natural gas supply tension intensifies
Since 2022, due to the rapid reduction of pipeline gas supply to Europe, Russia’s natural gas production has dropped by more than 10%. It is expected that the decline in Russian production will offset the production growth in other regions. Global natural gas production will decline slightly year-on-year this year. The production growth in the next few years will be concentrated in North America and the Middle East, but the growth will still be limited.
According to BP data, global natural gas production in 2021 has also exceeded the level before the epidemic in 2019, reaching 4,036.9 billion cubic meters, a year-on-year increase of 4.8%. The natural gas output of the United States is 934.2 billion cubic meters, and that of Russia is 701.7 billion cubic meters, ranking the top two in the world. Turkmenistan’s natural gas production increased by 41.9% year-on-year, and Algeria’s increased by 24.1% year-on-year, with production reaching more than 100 billion cubic meters, while natural gas production in Europe as a whole decreased by 3.5% year-on-year to 210.4 billion cubic meters.
Since 2022, Russia’s pipeline gas supply to Europe has been rapidly reduced, resulting in tight supply in the natural gas market. The United States is constrained by production capacity and other issues. The growth space for exports within the year is limited, and the tight supply situation in the market has further intensified. Specifically:
In the United States, in March, the United States and the European Union signed an agreement. According to the agreement, the United States will supply an additional 15 billion cubic meters of LNG to the European Union this year. By 2030, the annual supply of LNG from the United States to the European Union will increase to 50 billion cubic meters. With the release of policy signals, U.S. LNG producers have accelerated their pace of construction. As of the end of June, the two LNG projects that have been put into production in the world this year are located in the United States, namely the Calcasieu Pass LNG project of Venture Global and the sixth production line of the Sabine Pass LNG project of Cheniere Energy. According to data from the U.S. Energy Information Administration, throughout the first half of the year, the average peak capacity utilization rate of seven U.S. LNG export facilities reached 87%. As of July 2022, U.S. LNG liquefaction capacity averages 11.4 billion cubic feet per day, with a short-term peak capacity of 13.9 billion cubic feet per day. It should be noted that the fire and explosion accident at the Freeport LNG facility in June had a certain impact on US LNG exports. Freeport shut down production capacity of 15 million tons per year, accounting for about 20% of the total US LNG export capacity. The Freeport LNG facility is expected to resume partial liquefaction operations in early October and return to full production by the end of the year. Constrained by production capacity and domestic supply issues, the US LNG export volume may only reach 11.9 billion cubic feet per day in 2022.
January 2016-June 2022 US LNG Project Exports
In 2021, the Federal Energy Regulatory Commission and the U.S. Department of Energy approved 10 new projects, as well as capacity expansions at three existing projects in Cameron, Freeport, and Corpus Christi. The U.S. Energy Information Administration optimistically predicts that if these projects can be put into operation before 2030, the U.S. liquefaction capacity will reach 410 billion cubic meters per year, much larger than the LNG export volume in 10 years. However, according to the analysis, considering factors such as the lack of long-term cooperation guarantee, rising project construction costs, and declining resource availability, there is uncertainty about whether the above-mentioned approved new projects can be put into production as scheduled.
In Russian , since the outbreak of the Ukraine crisis, the West has imposed large-scale sanctions on Russia. As an anti-sanction measure, Russia’s “ruble settlement order” targeting “unfriendly” countries and regions will come into effect on April 1, 2022. At present, Gazprom (Gazprom) has successively suspended gas supply to European countries such as Poland, Bulgaria, Finland, Denmark, and the Netherlands that are in arrears of natural gas payments and refuse to settle in rubles. As of July 27, the current largest cross-border pipeline “Beixi No. 1”, which transports natural gas from Russia to Europe, has dropped to 20% of its full capacity.
According to data released by Gazprom on July 15, since the beginning of this year, Russia’s natural gas production has totaled 249.7 billion cubic meters, a year-on-year decrease of 10.4%; exports have reached 71.9 billion cubic meters, a decrease of 33.1%. The International Energy Agency expects Russian gas production to fall by more than 12% in 2022 due to falling domestic demand and rapidly curtailing pipeline gas supplies to Europe. Russian natural gas production will recover at a rate of 1% per year in the next few years due to insufficient growth potential due to lower export expectations, but by 2025, total production will still be 10% below 2021 levels.
In Europe, Norway, the Netherlands and the United Kingdom are the most important gas producing countries. In 2021, the three countries’ natural gas production accounted for 78.47% of Europe’s natural gas production in that year. Since the Ukraine crisis, Norway, the Netherlands and the United Kingdom have accelerated the pace of developing new natural gas resources in order to increase the amount of resources that can be mastered in the region. For example, the United Kingdom and the Netherlands have approved new development projects in the North Sea in June 2022, and Norway has also Three development projects were approved in July. It is understood that the three countries are expected to increase natural gas production capacity by 10 billion cubic meters per year. However, in view of the fact that the proven natural gas reserves have been depleted year after year, the new gas sources available for large-scale development in the three countries in the future will be relatively limited.
In Africa, recently, BP, Eni, Statener, Shell, ExxonMobil and other European and American oil and gas giants have adjusted their investment strategies in Africa, restarted or accelerated the previously shelved upstream natural gas development projects and LNG projects. According to Rystad Energy’s research data, it is expected that by 2030, the natural gas production of the entire African continent will increase from 260 billion cubic meters in 2022 to 335 billion cubic meters. If oil and gas producers expand their investment, this production target may be reached by 2025 . By the late 2030s, Africa’s peak gas production could reach 470 billion cubic meters, equivalent to 75% of Russia’s 2022 gas production.
In the Middle East, the liquefaction capacity utilization rate of Qatar, a major LNG supplier, has reached 100%, and there will be no new capacity additions this year. In mid-to-late June, Qatar Energy signed agreements intensively with a number of international energy giants to jointly develop the first phase of the North Oil and Gas Field Expansion Project: four liquefaction production lines (a total of 32.6 million tons per year) are planned to be built at a cost of 28.75 billion The US$ North Oil and Gas Field East Project (NFE) is expected to begin production by the end of 2025. The second phase of the project, the North Field South Project (NFS), contains two additional liquefaction trains. After full production, Qatar’s total LNG production capacity will increase from the current 77 million tons per year to 126 million tons per year by 2027. Qatar’s “Qatar Economic Outlook” report released in February this year predicts that with the gradual commissioning of the North Oil and Gas Field, Qatar is expected to become the world’s largest LNG exporter in 2026.
The International Energy Agency predicts that the decline in Russian production in 2022 will offset the production growth in other regions, and global natural gas production will decline slightly year-on-year. The production growth in the next few years will be concentrated in North America and the Middle East, but the growth will still be limited.
2. Global natural gas prices
(1) Natural gas prices are at record highs
In the first half of 2022, the prices of the world’s major natural gas markets hit new highs repeatedly, with an average value of 2 to 4 times that of the same period last year. In the second half of the year, the price of natural gas in Europe will likely continue to soar, and other consumer markets will not be immune to it alone. It is expected that global gas prices will remain collectively within the historically high range within the year.
In 2021, natural gas prices in North America, Europe, and Asia will all rise sharply, hitting new highs since 2014. Among them, the price of Henry Hub in the United States will nearly double, the price of TTF in Europe will increase by 4 times, and the price of JKM in Asia will increase by 3 times. The skyrocketing price of natural gas is the result of multiple long-term and short-term factors. The first is the mismatch between supply and demand in market fundamentals. On the supply side, the recurrence of the epidemic has prevented the capacity gap from being fully recovered; on the demand side, major economies have entered the economic recovery channel, driving the continuous growth of energy consumption demand. Second, climatic factors, especially extreme climatic factors, further exacerbate the contradiction between supply and demand. Thirdly, with the low-carbon transformation of global energy, a large number of energy companies have reduced traditional energy-related businesses, and carbon emission control has become increasingly stringent, which has aggravated the structural contradictions of the energy system to a certain extent.
In the first half of 2022, the Ukraine crisis brought unprecedented volatility to the global natural gas market. With the further intensification of supply tension, the competition for LNG supply in Eurasia has intensified, which has continuously supported the rise of natural gas prices in Europe and Asia and set new historical records. In the United States, LNG exports remained strong and domestic electricity demand in the United States rose sharply, while production recovery was slow, driving natural gas prices to fluctuate upwards, which was at a high level compared with the same period in previous years. The price of major natural gas markets in the world has repeatedly hit new highs, and the average value has reached 2 to 4 times that of the same period last year.
According to the data, in March this year, the European TTF price was close to 70 US dollars per million British thermal units; from April to May, the TTF price fell; $50/MMBtu. Asian spot prices have also followed suit. In March this year, the price of JKM in Asia exceeded US$50/MMBtu; the price fell in April-May; it began to rise in June, and was close to US$40/MMBtu by the end of June. Throughout the first half of the year, the average price of TTF was US$30.94 per million British thermal units, and the price of JKM in Asia has also remained high, with an average price of US$29.50 per million British thermal units during the same period.
According to the U.S. Energy Information Administration, from July 2021 to June 2022, the average monthly spot price of Henry Hub natural gas in the United States will almost double, rising from $3.84 per million British thermal units in July 2021 to 2022. $7.70/MMBtu in June. In May 2022, the inflation-adjusted monthly average reached a 12-month high of $8.17/MMBtu, the highest price since November 2008.
Natural gas prices in global markets since June 2021
Entering the second half of 2022, on the supply side, the suspension of production after the Freeport explosion in the United States is expected to continue until October, and Russia’s gas transmission to Europe through pipelines such as “Beixi No. 1” continues to decline; on the demand side, the hot weather in the third quarter The demand for gas and electricity will be boosted. The fourth quarter will be the heating peak period, and the uncertainty of climate factors will stimulate the demand for stockpiling of some buyers. The demand for inventory in Eurasia is obvious, and inter-regional competition will further intensify. In view of the above price-bullish factors, there is a high probability that natural gas prices in Europe will continue to rise, accompanied by greater volatility. With the high gas prices in Europe, it is difficult for other consumer markets to survive alone. It is expected that the global gas prices will remain collectively within the historically high range within this year.
In the next few years, global natural gas prices, especially LNG spot prices, will most likely remain high even if they will not hit historical highs again. Shell said that if Russia’s pipeline gas supply to Europe in 2021 is converted into LNG equivalent, plus the amount of LNG transported to Europe in 2021, the total scale will be about 200 million tons, which is half of the current global LNG trade volume. It is difficult for Europe to replace Russian natural gas in the short term, and it will have to wait until around 2026 at the earliest, when a large number of new production capacity will be put into operation in the United States and Qatar, and more LNG will enter the market. But competition for limited LNG resources in Europe and Asia will inevitably keep prices high until new supplies enter the market in 2026.
(2) Natural gas market price linkage is enhanced
The price linkage in the global natural gas market is increasing, and local market price fluctuations and supply-demand imbalances will affect other regions. On the one hand, with the further increase of US LNG exports, the linkage between US natural gas market prices and global gas prices has been strengthened. On the other hand, in the face of tight supply in the natural gas market, European and Asian buyers compete for LNG supply, and natural gas prices in Europe and Asia push up each other, and the linkage effect is more obvious than before. In addition, with the sharp rise in gas prices in Europe, the “Asian premium” is gradually turning into a “European premium”.
●The linkage between natural gas prices in the US market and global gas prices has increased significantly
For a long time, the natural gas market in North America has been relatively closed, and price changes are mainly dominated by the supply and demand structure in the region, and are less affected by other regions. In recent years, the price difference between the Asian LNG spot market and the European natural gas market has gradually narrowed, but the North American natural gas market is still self-contained. Since the Ukraine crisis, with the further increase of US LNG exports, the linkage between the North American natural gas market and the European and Asian markets has increased, and the linkage between its market price and global gas prices has also increased. The US LNG export price is mainly linked to the Henry Hub price. While the US LNG export is growing, the Henry Hub price increasingly reflects the international natural gas supply and demand situation. In the long run, it may further narrow the gap with the European TTF and Asia-Pacific JKM prices. This year, the United States suffered from cold spring and hot summer, and its domestic demand and exports both increased. In early June, the price of Henry Hub once exceeded the high of 9 US dollars per million British thermal units.
●The linkage effect of natural gas prices in the Eurasian spot market is more obvious
Since the autumn of 2021, in the face of tight supply in the global natural gas market and the expectation of cold winter weather in the northern hemisphere, major European and Asian consuming countries have stepped up their purchases of LNG. The global LNG market has formed a situation of competing gas sources, and the natural gas prices in the two regions have shown a pattern of mutual traction and mutual push up. Entering 2022, the demand for LNG supply in Europe will further increase, while the global LNG supply capacity has limited room for improvement, and the competition among Eurasian buyers for LNG supply will become more intense. As the price of natural gas in Europe continues to soar, the price of natural gas in Asia also catches up with the trend, showing almost the same trend as that in Europe, and the linkage effect between the European and Asian markets is more obvious than before.
●Natural gas market shifts from Asian premium to European premium
Historically, affected by various factors such as pricing methods, transportation costs, and energy consumption structure, natural gas prices in Asia have always been higher than those in Europe, resulting in a premium in Asia. However, since the winter of 2021, Europe’s strong demand for LNG has driven regional natural gas prices to rise rapidly, fluctuate violently, and continue to be higher than Asian gas prices. Europe has become the main premium market. For LNG spot traders, the European market with higher gas prices is more attractive than the Asian market. In March 2022, the highest spot price of TTF in Europe exceeded US$77/MMBtu, and the highest spot price of JKM in Asia in the same period exceeded US$50/MMBtu, with a significant premium in European prices. Considering the progress of energy independence in Europe and changes in the regional natural gas supply situation, European gas prices are likely to run at high levels in the next few years, and the natural gas model that has always been at a premium in Asia may change to a premium in Europe.
(3) Market volatility shifts from oil price to gas price
In the process of rising energy prices in 2021, gas prices will have more dominant components. In the recent violent fluctuations in energy prices such as oil prices and gas prices, gas prices have a larger fluctuation range than oil prices. From the perspective of financial markets, market volatility is shifting from oil prices to gas prices.
In 2021, when global energy supply is in short supply and energy prices are skyrocketing, gas prices will be more dominant. While gas prices are rising, coal and crude oil prices are also rising. In the interaction of various energy prices, a notable feature is that the leading role of oil prices has weakened, while the leading role of natural gas prices has increased significantly.
Entering 2022, the Ukrainian crisis has exacerbated the previous tight balance between supply and demand in the energy market, which will continue to impact oil and gas supply and disrupt international oil and gas prices. At the same time, rising oil and gas prices have led to an increase in global coal demand, and the gap between coal supply and demand has further widened. Especially in recent months, energy prices such as oil prices and gas prices have fluctuated violently. In mid-June, the price difference between North American natural gas and European natural gas quickly entered a narrow and converging range to a wildly expanding range, while international crude oil prices fell after May. Gradually stabilized and showed a slight downward trend. Recent trends in energy prices show that market volatility has shifted from oil to gas.
3. Global natural gas trade
(1) Growth of natural gas trade slows down
Since 2022, due to Russia’s sharp reduction in pipeline gas exports to Europe, the global pipeline gas trade volume has declined. EU LNG imports rose 60% year-on-year, the highest level so far, and the United States became the largest LNG exporter in the first half of the year. In the next few years, the growth of global natural gas trade will mainly be driven by LNG, and the growth of LNG trade will continue to be dominated by European demand and North American supply.
According to BP data, the total volume of global LNG trade in 2021 will be 516.2 billion cubic meters, and the total volume of pipeline gas trade will be 505.6 billion cubic meters, which are roughly the same. In terms of LNG, the global LNG supply will increase by 26 billion cubic meters in 2021, an increase of 5.6%, which is the lowest value since 2015 except for 2020. The 34 bcm increase in U.S. LNG supply accounted for almost all of the increase in global LNG supply and also offset declines in supplies from other Atlantic Basin gas exporters. In terms of pipeline gas, Algeria and Azerbaijan contributed the most to the growth of pipeline gas supply. The supply of pipeline gas from the two countries to Europe increased by 13 billion cubic meters and 6 billion cubic meters respectively. While Russia’s pipeline gas supplies to Europe remained stable at 167 bcm, its exports to EU countries fell by 12 bcm, or 8.2%. In 2021, China surpassed Japan to become the world’s largest LNG importer, accounting for nearly 60% of the global LNG demand increase.
Since 2022, due to Russia’s sharp reduction in pipeline gas exports to Europe, the global pipeline gas trade volume has declined. In order to make up for the reduction in Russian supply, European countries have stepped up imports of LNG. Morgan Stanley said European countries accounted for nearly a third of global LNG exports in recent times. According to data from the International Energy Agency, in the first half of the year, EU LNG imports increased by 60% year-on-year, the highest level so far. The data show that the United States will become the largest LNG exporter in the first half of 2022. Compared with the second half of 2021, U.S. LNG exports in the first half of this year increased by 12% to 11.2 billion cubic feet per day. The increase in LNG export capacity, the rise in international natural gas prices, and the increase in global natural gas demand, especially from Europe, are the main reasons for the continued growth of US LNG exports.
The International Energy Agency said that considering the limited growth of global liquefaction capacity in the next few years and the reduction of pipeline gas imports from Russia in Europe, the global natural gas trade is expected to grow by an average of 1.2% per year by 2025, compared with an average annual growth rate of 4.3% between 2017 and 2021. The growth rate of global natural gas trade has slowed down significantly. Specifically, by 2025, global LNG trade will grow at an average annual rate of 4%, and the growth of LNG trade will continue to be dominated by European demand and North American supply; by 2025, global pipeline gas trade will decline at an average annual rate of 1.9%, and Russia’s pipeline gas exports to Europe will Compared to 2021 levels will be halved.
Global Natural Gas Trade Growth Market 2021-2025
(2) Changes in the flow of natural gas trade
In order to cope with the supply shortage and fill the low natural gas inventory, European countries have increased their natural gas purchases through various channels. U.S. LNG has become the main spot source to make up for the gas supply gap in Europe, followed by the Middle East and Africa, which has gained new export opportunities after the Ukraine crisis. After Russia cut its natural gas supply to Europe, it accelerated the eastward movement of natural gas exports.
●U.S. natural gas flows to Europe
Since the supply of LNG exporting countries such as Qatar and Australia is mainly locked in advance by Asian buyers in the form of long-term agreements, the surplus supply of goods that can be exported to Europe is relatively limited. Therefore, US LNG has become the main spot source for European regions to make up for the gas supply gap since the Ukraine crisis. . According to data from Rystad Energy, in the first half of 2022, European countries’ LNG imports from the United States increased by 147.91% compared with the same period in 2021. Meanwhile, German and British buyers have signed new long-term agreements with U.S. LNG suppliers. The International Energy Agency said on June 30 that due to Russia’s reduction of natural gas supplies to Europe in early June and the EU’s large purchases of LNG, US LNG exports to Europe in June exceeded Russia’s pipeline gas exports to Europe for the first time in history.
●Russia’s natural gas supply is accelerating to Asia
In fact, as early as the 2020 edition of the national energy strategy, the Russian government proposed that special attention should be paid to strengthening the construction of natural gas transportation infrastructure in East Siberia and the Far East, and diversifying energy exports through the Asia-Pacific. The implementation of projects such as “Power of Siberia” has realized the diversification of Russia’s energy exports to a certain extent. After Russia cut its natural gas supply to Europe, its gas source is facing a difficult problem. Currently, Russia is speeding up its natural gas export focus to Asia. In early 2022, China and Russia signed an agreement on the purchase and sale of natural gas in the Far East. The annual pipeline gas output from Russia to China will increase by 10 billion cubic meters, and together with the gas transmission volume of the “Power of Siberia” pipeline, the total gas supply to China will reach 48 billion cubic meters per year. In addition, China and Russia are actively promoting the “Power of Siberia 2” natural gas pipeline project that transits through Mongolia.
●Africa, the Middle East and other places increase the supply of natural gas to Europe
Africa and the Middle East are the main regions outside the United States that could increase LNG supply to Europe. Since 2022, many European countries have sought gas sources in places such as Africa and the Middle East. For example, Algeria, Italy’s second largest supplier of pipeline gas, has signed an agreement with Italy to increase the supply of 9 billion cubic meters of natural gas each year; the EU has signed a tripartite agreement on natural gas cooperation with Egypt and Israel to realize Israel’s supply of natural gas to the EU through Egypt; Germany has been Seeking to secure natural gas supplies from Senegal, etc. It is noteworthy that African natural gas has gradually become a new variable in the natural gas market. Taking into account the advantages of the distance between Europe and Africa, as well as the existing natural gas pipeline facilities from North Africa to Europe and the long-standing natural gas supply relationship, Africa is expected to become a strong competitor for the replacement of European natural gas supply in the future.
(3) Long-term associations are favored by buyers, and the seller’s market is consolidated
The supply and demand of the global natural gas market has entered into a tight balance. Market volatility and uncertainty, as well as concerns about energy security, have prompted more and more buyers to seek long-term contracts. In this process, the right to speak in the seller’s market has been further enhanced.
In 2020, due to the impact of the COVID-19 epidemic, the natural gas market is in a slump. Against the backdrop of severe oversupply in the market, short-term spot contracts are more popular, and the characteristics of a buyer’s market are obvious. Buyers adjust the long-term contract according to their own conditions and needs, negotiate price terms, and seek to reach a balance with the seller. Entering 2021, global natural gas supply is tight and demand is strong. As spot prices continue to fluctuate at high levels and the supply mismatch situation is difficult to alleviate in the short term, natural gas buyers tend to sign long-term contracts to stabilize supply and price fluctuation risks. LNG sellers The market is consolidated. In 2021, the supply of long-term contracts signed by buyers and sellers has climbed to a five-year high, and the number of long-term contracts has also increased significantly compared with the previous year. According to data from GlobalData, there will be 23 long-term LNG contracts signed globally in 2021, compared with 10 in 2020.
The trend has shown no signs of abating this year, with market uncertainty heightened and concerns over energy security heightened by wild spot price volatility and a deteriorating supply outlook. In order to lock in relatively low-priced gas sources, more and more buyers are eager to seek long-term contracts. In this process, the seller’s market power is further enhanced. Amid strong demand, suppliers are asking customers to pay higher prices for new long-term contracts. According to a report by the Oil & Gas Journal in the United States, the current 10-year LNG contract is about 75% more expensive than the same period in 2021. Data show that in 2022, the global signed LNG trade volume will be 35 million tons, of which 26 million tons will come from the United States. The United States accounted for less than one-third of the 72 million tons of long-term contracts signed last year.
(4) The pricing mechanism is more diversified and the delivery mode is more flexible
In the newly signed long-term LNG contracts, most of the suppliers are American companies, and these long-term contracts are basically linked to the benchmark price of the North American natural gas market, Henry Hub, and adopt the delivery mode of FOB terms, with no destination restrictions and flexible transshipment . This is also a new change in the price and trade terms of international natural gas trade in the past two years.
●Pricing model linked to Henry Hub
In terms of pricing mechanism, historically, the natural gas industry has mainly used long-term contracts linked to the oil price index. Especially in the case of relatively low international oil prices, most buyers in LNG long-term contracts tend to choose the pricing method linked to oil prices. However, with the rapid increase of global LNG supply, competition in the export market has intensified, and a variety of pricing mechanisms have been derived, such as gas-to-gas competitive pricing linked to gas prices in trading centers (such as Henry Hub in the United States, TTF in the United Kingdom, and NBP in the Netherlands). Nowadays, more and more LNG purchase and sale contracts are linked to Henry Hub, JKM, NBP, or adopt a mixed pricing method linked to oil prices and gas prices at the same time, and the international natural gas trade pricing mechanism is showing a trend of diversification.
When the United States exports LNG to Europe and the Asia-Pacific market on a large scale, the natural gas pricing mechanism in Europe and the Asia-Pacific has gradually changed, and more and more contracts are linked to Henry Hub. At present, the export share of US LNG will continue to grow, and the LNG pricing model linked to Henry Hub may significantly change the existing global natural gas pricing pattern.
Henry Hub prices are affected by factors such as climate, production capacity, and inventory in the United States, reflecting the domestic natural gas supply and demand situation in the United States. From historical data, compared with European TTF prices and Asian JKM prices, the price of Henry Hub in the United States is lower and the trend is stable. At the same time, the price of Henry Hub will also be affected by factors such as the adjustment of the US monetary policy and the operation of financial capital. The uncertainty of its future trend is gradually increasing, which will have a greater impact on the long-term association denominated in Henry Hub.
●Delivery term of FOB
In terms of delivery mode, in the traditional international natural gas trade, the LNG long-term contract is mainly based on DES (Delivery on Board at Destination Port). Under the DES clause, the buyer needs to specify the destination port of LNG transportation. Since the destination port is locked, it is difficult to resell it. Under the constraints of high liquidated damages, the supplier’s breach of contract is not common. Driven by prices, the terms of natural gas trade have changed, and many new long-term LNG contracts have changed from DES to FOB (Free on Board). Under the FOB clause, the right to choose the destination is given to the buyer, that is to say, after the buyer buys the gas, he can choose the delivery destination independently, so it is easier to resell. This has resulted in gradual improvements in buyers’ transshipment rights, greater flexibility in destinations for natural gas trade, and greater liquidity in the natural gas market. In the past two years in the United States, a large number of long-term LNG contracts with FOB terms have entered the market, and this part of the gas volume can be flexibly resold in the market. With Europe facing a huge demand gap and the market gradually shifting to a European premium, more flexible LNG gas sources from the United States flowed to Europe, which to a certain extent accelerated the change in the flow of global natural gas trade.
4. Thought
(1) The advantages and challenges of natural gas in the global energy transition
In the context of climate change, in the short to medium term, the pressure to reduce emissions has driven the energy policies of various countries to lean towards the use of clean energy. The global trend of carbon reduction and emission reduction will provide a large growth space for natural gas consumption. Especially in the process of low-carbon transformation of the global energy system, in the face of extreme climate impacts, the instability and intermittency of renewable energy have gradually become prominent, and natural gas can increase output and flexibly adjust peaks. actual realistic choice. According to BP data, the outbreak of the new crown epidemic in 2020 will have a huge impact on the energy market. Global natural gas consumption will decrease by 81 billion cubic meters, a decrease of 2.3%. % record high.
However, starting from the third quarter of 2021, as gas prices soared, natural gas began to face the challenge of replacing coal, and the proportion of natural gas in primary energy consumption throughout the year did not increase year-on-year. The reduction in natural gas supply caused by the Ukrainian crisis this year has increased the use of coal, and many countries have restarted retired coal power units or increased the utilization rate of existing coal-fired power plants. The International Energy Agency stated that natural gas should play an important role in meeting rising energy demand and achieving energy transition goals. However, the current record high gas prices and the risk of supply disruption are damaging the image of natural gas as a reliable and affordable energy source. , and make its development prospects face great uncertainty.
(2) Facing the challenge of energy security and ensuring the safe and stable supply of natural gas
The Ukrainian crisis has had a huge impact on the entire energy market. International oil and natural gas resources are in short supply and prices have risen. The energy market has become extremely sensitive and vulnerable to geopolitical risks. my country’s oil and natural gas have a relatively high proportion of external mining, which is bound to be affected. “The job of energy must be in our own hands.” This is an inevitable choice in the face of the current complex and ever-changing world situation. Specific to the field of natural gas, on the one hand, domestic exploration and development efforts should be further enhanced to promote the continuous and steady increase in natural gas production; on the other hand, the construction of energy storage and transportation capacity should be strengthened to improve the elasticity and resilience of natural gas supply. As of 2021, my country’s natural gas production has increased by more than 10 billion cubic meters for five consecutive years. Since my country accelerated the construction of a natural gas production, supply, storage and marketing system in 2018, the scale of gas storage has rapidly increased, doubling in more than three years. It is estimated that by the end of the “14th Five-Year Plan”, my country’s natural gas storage capacity is expected to double on the basis of 2021, and the coordinated and stable development of natural gas and the level of safe and stable supply will reach a new level. The “14th Five-Year Plan” Modern Energy System Plan pointed out that by 2025, the annual domestic natural gas production will reach more than 230 billion cubic meters, and the gas storage capacity will reach 55 billion to 60 billion cubic meters.
(3) Enhance international trade operation capabilities to ensure energy security under open conditions
Data show that in 2021, my country’s LNG buyers will sign 27 new long-term contracts, with the contract volume reaching 28.13 million tons per year, a record high. Signing long-term contracts with overseas LNG suppliers is of great significance for stabilizing my country’s gas supply. In addition, my country’s pipeline import capacity continues to expand. In the first six months of this year, my country imported 74.4 billion cubic meters of natural gas, which played an active role in ensuring domestic energy supply. In the second half of this year, the international natural gas market will face more uncertainties, including whether Europe can complete inventory replenishment before winter as planned, Asia’s spot purchases, whether Russia will cut off more natural gas supplies to Europe, and Europe and Asia this winter. degree of cold etc. It is expected that supply and demand will continue to tighten, and gas prices will continue to run at a high level. The “14th Five-Year Plan” Modern Energy System Plan proposes to enhance import diversification and security assurance capabilities, consolidate and expand mutually beneficial and win-win cooperation with oil and gas and other energy resource exporting countries, and enhance oil and gas international trade operations capabilities. For our country, there is a complex and changeable external environment on the one hand, and the arduous and arduous task of domestic reform, development and stability. While relying on self-protection for the core needs of oil and gas, it is necessary to strengthen cooperation with relevant energy producers, consumers and other countries. Coordinate with relevant parties, strive to ensure the safe and stable operation of oil and gas import channels, and make every effort to ensure energy security under open conditions.
