This sixth issue of Global Gas Security Review shows that security of supply remains a central issue for the gas markets, because the combination of the recovery in economic activity, the drop in the availability of liquefied natural gas (LNG) and a succession of events Severe weather has put great pressure on the global gas system and driven down market prices. new heights. The prospect of a continued recovery prompted the gradual return of contracting activity and investment decisions in 2021 that would ensure sufficient supply in the medium term, while the need for a transition to gases low-carbon emissions opens up new challenges for longer-term security of supply.
Gas prices rallied as market fundamentals tightened due to strong demand and unexpected supply bottlenecks
Gas year 2021/22 open on October 1st with record gas spot prices in Europe and Asia and below average storage inventory levels for the upcoming heating season. The tightening of gas markets over the past few months is the result of a combination of robust demand growth as economies recover from the 2020 lockdowns, a succession of extreme weather events that generated consumption of additional gas and tighter-than-expected supply as a series of blackouts hampered gas production and export capacity.
High natural gas prices are also having knock-on effects in electricity markets, pushing prices higher and promoting fuel substitution to coal and oil, which also impacts higher levels. CO2 emissions and local pollution.
The IEA is closely monitoring developments in the global gas market and issued a statement at the end of September as part of its ongoing dialogue with stakeholders on the security of energy supply.
Cold winter and dry summer put enormous pressure on the gas supply system
Cold weather last January in Northeast Asia – coupled with reduced LNG availability – led to localized fuel shortages and an unprecedented spike in LNG spot prices. This was followed in February by winter storm Uri which hit North America, with extremely cold temperatures leading to increased heat and power requirements and well freezes hampering production, leading to power outages in several US states and Mexico. Over the following months, several hydropower-rich power markets, including Brazil, California and Turkey, faced severe droughts that led to greater reliance on electricity generation. gas-fired electricity and further tightened the summer gas market.
This succession of events highlights the interdependence between the security of natural gas and electricity supply, a link that seems stronger than ever. The new IEA’s Electricity Security Event Scale Assessment, published in its latest Electricity Market Report, shows that recent weather events triggered power outages in a number of markets where the availability of gas supply was also an issue. Texas’ energy crisis in February was given the highest ranking on the scale – the largest gas-producing US state and where fuel plays a dominant role in power generation.
LNG trading continued to be an important source of flexibility amid volatile demand, although capacity cuts were high in 2020 and remained high in 2021, contributing to market stress and fluctuations prices.
Underground gas storage capacity played a pivotal role in providing cross-regional flexibility during the January cold spell, meeting Europe’s additional needs while allowing arbitrage of LNG cargoes to Asia. This episode also highlighted the lack of storage capacity in the major Asian markets and their induced dependence on imported flexibility; additional measures to improve storage development and management have been announced in Japan, Korea and China since then.
LNG contracts are slowly resuming
While flexible LNG trading has been a key factor in adapting to the sharp drop in demand and recovery in 2020, the LNG contracting business has tended to show a higher share of contracts fixed-destination and long-term than in previous years. This can be partially attributed to less activity by portfolio players, as well as a motivation to limit risk in an exceptionally volatile price environment.
LNG contracting activity was down nearly 30% year-over-year (year-on-year) in 2020 (or 45% from its 2018 peak), while activity from 2021 to date shows some potential for recovery. Final Investment Decisions (FIDs) are also down from their record high of 2019, with a North American project sanctioned in 2020, plus Qatar’s major expansion plan confirmed in early 2021. These new investments, added to the wave of FID taken before 2020, should therefore prove sufficient to satisfy the additional demand for LNG in the years to come.
Transition to low-carbon gases brings new security of supply challenges
Achieving a goal of net zero emissions by 2050 involves the massive deployment of low carbon gases in order to decarbonize the current gas system. This deployment must be supported by policies put in place in the short or medium term to prepare for such a massive transition for gas systems and industry. In this regard, policy makers should consider the new security of supply challenges that may arise during this transition.
Future gas systems will be more complex and decentralized, and will involve two-way networks. Maintaining harmonized quality standards is likely to become more difficult due to the diversity of low carbon gas supply sources and the current lack of harmonization of hydrogen blending thresholds for the transition period . The potential for flexibility could be limited by the operational specifications of low-carbon gas production. Regulators should therefore adopt a cautious and scalable market design approach to ensure security of supply in a transitioning gas system.