The benchmark European TTF gas market averaged €125/MWh in the October 2021–September 2022 gas year, far above the long-run average, eroding the competitiveness of European industry and placing a large burden on households. Moreover, the sharp increase has been replicated across the price curve, with the Calendar Year 2025 contract averaging just under €80/MWh since the beginning of Q3 2022, highlighting market expectations for a structural increase in the price of gas in Europe.
This increase ultimately reflects the inability of the European gas market to balance at palatable prices following the sharp drop in Russian gas receipts since the invasion of Ukraine, with inflexibility exhibited on both the supply and demand sides. Drivers of this inflexibility are by now well-established—a sharp decline in domestic production, a lull in global LNG capacity additions and a reduction in coal generation capacity, which would historically ease the burden on gas-fired power generation.
The lack of flexibility on both sides of the supply-demand balance has forced European gas prices higher to incentivise its marginal elements: reducing consumption domestically by eroding the economics of gas-intensive industry, but also forcing demand destruction in competitor LNG markets with a lower ability to bear high import costs. The rally across longer-dated tenors reflects the assumption that Russian gas flow will not normalise in the near term, but also that limited LNG capacity additions are expected until the mid-2020s.
In the near-term, replacing lost Russian gas volumes therefore implies a continuation of the current pricing regime—outcompeting potential buyers of LNG, but also keeping domestic demand low via price-induced demand reductions. Moreover, competition for limited flexible LNG volumes may step up from 2023, with a resurgent post-zero-Covid China driving Asian demand higher.
The volumetric gap in Europe’s energy balance left by Russian gas has driven substantial interest in new LNG projects, particularly in the US. Indeed, several projects that were languishing in pandemic-era purgatory have enjoyed new commercial momentum. This is not just narrative-driven optimism: a wide arbitrage has opened between longer-dated TTF and Henry Hub contracts, with the Cal 2025 differential averaging $17/mn Btu in the second half of 2022.
Based on current and projected FIDs, global LNG supply will increase substantially in the coming years. US LNG export capacity is slated to increase by c.30bn m³/yr between 2022 and 2026 in a conservative assumption, with the potential for an additional 25bn m³/yr if marginal projects are sanctioned. Qatar’s North Field expansion project will see export capacity increase by 60bn m³/yr, likely from 2027.
By comparison, Russia exported 112bn m³ of gas to Northwest Europe in 2019, with imports having dropped by 47bn m³ year-on-year as of October. New LNG export capacity is therefore greater than the full volume of pre-invasion Russian gas exports to Northwest Europe. Historically, LNG capacity additions have required a structural demand pulse to clear the market—Japanese LNG demand stepped up significantly post-Fukushima, while China’s clean air policies resulted in a major gasification drive in the 2017–19 period. This time around, the new generation of LNG projects is clearly targeting European demand to underpin investment.
However, Europe’s newfound LNG requirements are likely to be on shaky ground. While European policymakers have turned to high-cost LNG as a short-term solution to backstop the drop in Russian gas exports, the long-term solution to Europe’s energy dilemma is ultimately seen as an accelerated transition away from gas. By 2030, the European Commission estimates total gas demand in the EU at 158bn m³ under the RepowerEU plan, down from 373bn m³ in 2020.
The 57pc demand reduction target is an acceleration of the previous 27pc reduction proposed under the pre-invasion ‘Fit for 55’ targets. While gas demand savings under RepowerEU are ultimately likely to be optimistic, the direction of travel is clear: Europe’s future gas demand is likely to weaken substantially in the next decade.
Beyond Europe, several other trends will likely drive LNG demand lower in several key markets. Japanese import requirements are forecast to decline as more incremental nuclear capacity returns to service, in part accelerated by the ongoing energy crisis. China’s future LNG import requirements could also decline substantially amid Russia’s broader pivot to the east—while Power of Siberia 1 should ramp up to its full capacity of 38bn m³/yr by 2026–27 (from 10bn m³ in 2021), the slated Power of Siberia 2 project could ship an additional 50bn m³/yr by 2030, reducing Chinese LNG import requirements, albeit with the offset of forecasts of increasing demand.
With a lower call on LNG from high-income demand centres and a pulse of new supply capacity, the global gas market could well return to the 2019–20 regime of oversupply and lower prices post-2026. Flexible LNG cargoes will subsequently price into low-income markets to clear, most notably South and Southeast Asia. However, recent price levels and heightened volatility have undercut willingness from emerging market economies to lock in exposure to gas markets.
The IEA’s recently released 2022 World Energy Outlook (WEO) outlines this theme clearly, with gas demand a gargantuan 750bn m³ lower in 2050 than previously expected in the 2021 WEO, with South and Southeast Asian markets seeing significantly lower consumption than previously modelled. Ultimately, high global gas prices, while driving investment in new supply in the near term, are effectively moderating demand in the longer term. As such, securing demand for uncontracted gas post-2026 will almost become as critical as securing supply will be between 2022–25.
To summarise, the golden age of gas has given way to the golden age of gas prices, which will ultimately imperil the longer-term demand outlook for the commodity.
Joel Hancock is the vice president of commodities research at the financial institution, Natixis.
This article is part of our special Outlook 2023 report, which features predictions and expectations from the energy industry on key trends in the year ahead. Click here to read the full report.