Seasonal natural gas and LNG prices are soaring in Europe and Asia. What does this mean for long-term energy security?

At a glance

Gas & LNG Market Insights – October 2024, Rystad Energy, Oct. 21, 2024.

Natural gas provides some 23 per cent of the world’s energy. A report from independent research company Rystad Energy, which notes its use will likely persist through the energy transition, looks at recent trends and shifts in the global gas and liquefied natural gas (LNG) markets and how they impact price and supply.

Gas prices tend to rise as the northern hemisphere approaches winter due to increased demand for heating. This market review anticipates a bullish winter given the U.S. National Oceanic and Atmospheric Adminstration has predicted a high likelihood for a La Niña winter (a climate phenomenon that brings below-average temperatures in the North, although recent forecasts suggest it may be weak or late), combined with insufficient gas production in Egypt and Brazil due to droughts. Geopolitical tensions, such as the Russian invasion of Ukraine and conflict in the Middle East, can also raise costs for importers. The report says European gas prices have also risen due to maintenance-related supply reductions in Norway and Algeria. Strong gas demand in Asia means prices remain elevated compared to last year.

Key findings

• European pipeline imports drop 22.2 per cent in September: Planned maintenance in Norway and Algeria led to a 22.2 per cent decrease in European gas pipeline imports, increasing reliance on LNG supplies.
• Asian LNG prices dip slightly while demand remains strong: Asian spot LNG prices fell from $13.8 to $13.1 per metric million British thermal unit (MMBtu), yet import demand from China and Japan remains robust as winter approaches.
• China’s gas demand rises 10.5 per cent year-on-year in August: Driven by city gas use and transportation, China’s gas demand surged from 3.6 per cent in 2Q to nine per cent in July and 10.5 per cent in August, heightening LNG import needs amid rising domestic consumption.
• US Henry Hub gas prices surge 32 per cent in September: Henry Hub prices increased from $2.2 to $2.9 per MMBtu, driven by production curtailments due to extreme weather conditions in the Southeast and Midwest.
• Global LNG demand expected to outpace supply post-2030: A supply gap exceeding 140 million tonnes per annum (Mtpa) is anticipated by 2035.
• European LNG imports increase 7.9 per cent in September: LNG imports into Europe rose to 6.81 million tonnes. The second-largest contributor was Russia thanks to the absence of effective sanctions. 

Bigger picture

These insights are especially timely given seasonal demand increases and ongoing maintenance issues exposing supply vulnerabilities — also a longer-term risk to energy security. The decline in European pipeline imports, offset by rising dependence on LNG, highlights the susceptibility of gas-importing regions to price volatility and supply disruptions. Russia’s 16.4 per cent month-on-month and 44.6 per cent year-on-year increase of LNG deliveries to Europe also reveals that sanctions are ineffective.

The reliance on flexible LNG imports is likely to intensify in Europe and Asia, even as both continents increase the share of renewable sources in their energy mix. This can help to reduce emissions when it means moving away from other fossil fuels. China’s growing demand for LNG, for example, reflects the shift from coal to cleaner energy in urban and industrial sectors. Combined with the popularity of electric vehicles in China, this could herald a further decline in oil demand. Still, methane emissions from the natural gas industry threaten to push global warming beyond levels internationally agreed as safe.

The projected LNG supply gap of over 140 million tonnes by 2035 is another motivation to diversify energy sources. Energy security in most countries depends on innovation, advancements and investments in storage, energy efficiency, and renewable adoption. Steadily rising natural gas prices could have wide-ranging impacts on manufacturing, transportation and heating sectors, especially for regions heavily reliant on imports.

Challenges and opportunities

Key barriers to energy transition progress highlighted in this report:

• Volatile gas prices and seasonal demand spikes: Fluctuations in gas prices, particularly during winter or due to maintenance events, challenge countries’ reliance on a stable gas supply while transitioning to renewables.
• Dependence on limited pipeline infrastructure: Europe’s reliance on a few key pipelines from Norway and Algeria has resulted in supply disruptions during maintenance.
• Infrastructure gaps in emerging markets: Emerging economies like China and India, which are rapidly increasing LNG imports, face infrastructure limitations that hinder efficient gas distribution.
• Economic constraints on long-term clean energy projects: Investment in renewable infrastructure is delayed as immediate demand for gas dominates, particularly in regions with high seasonal heating needs.
• Delayed LNG project starts: Ongoing delays in launching new LNG projects, often due to complicated regulatory and investment frameworks, constrain global gas supply growth, increasing pressure on existing facilities.
• Geopolitical and regulatory hurdles: Political tensions and inconsistent regulatory standards complicate securing cross-border energy agreements.

To address these challenges, the report recommends:

• Expanding strategic reserves for energy security: Increasing gas storage capacity can stabilize supply during peak-demand periods. Policymakers should coordinate with energy companies to develop strategic reserves in high-demand regions like Europe and Asia and invest in flexible LNG infrastructure to mitigate price shocks.
• Innovative financing models for renewables and LNG infrastructure: New financing options, such as green bonds or public-private partnerships, can ease the economic burden on governments while funding cleaner infrastructure. Financial institutions and governments should develop innovative investment models to support renewable and LNG projects aligned with climate goals.
• Enhanced LNG terminal and regasification capacity: Expanding LNG terminals and regasification facilities can improve global distribution and meet short-term demand surges. Governments and industry stakeholders should prioritize the development of LNG infrastructure, particularly in Asia and Europe.
• Integrating renewables with gas infrastructure: Combining gas with renewables like wind and solar can provide grid stability while reducing emissions during the transition. Policymakers should support infrastructure projects that effectively utilize both resources.
• Research and development in energy storage technologies: Investing in advanced energy storage solutions can reduce gas demand and offer stable renewable energy access. Industries and governments should fund R&D for energy storage technologies as alternatives to gas during peak demand periods.
• International collaboration on supply chain resilience: Global partnerships focused on diversifying supply chains could stabilize the LNG market amid geopolitical issues. Establishing multinational agreements on LNG supply routes, storage, and shipping standards can enhance market resilience against political and economic pressures.

In their own words

A supply gap exceeding 140 million tonnes per annum (Mtpa) is anticipated by 2035, with increased demand forecasted for China, Brazil, and Egypt.

Gas & LNG Market Insights – October 2024, Rystad Energy, Oct. 22, 2024.

Final thoughts

Natural gas, especially LNG, remains central to ensuring energy security for many countries worldwide. But gas prices are high and look likely to keep rising. This fossil fuel is important for facilitating the global transition to net-zero emissions in the medium to long term as renewable energy sources expand due to seasonal intermittency. A more in-depth analysis of emerging renewable technologies and energy storage solutions could enhance understanding of how to further reduce dependence on natural gas over time. Advancements in energy storage and cross-regional renewable energy integration are necessary for ensuring energy security and dealing with fluctuations in energy demand and supply. This should be a key takeaway for stakeholders aiming to meet energy demands and sustainability goals while looking beyond the use of natural gas as a temporary transition fuel.

Download the full report originally published by Rystad Energy on Oct. 21, 2024.