The UK is trying to make sure households and businesses have enough energy this winter by embracing international markets buoyed by booming US liquefied natural gas (LNG) supply, and reinstating retired storage capabilities. However the impact of Russia's recent decision to change off its Nord Stream 1 pipeline has proven that Countries in europe are still greatly subject to alterations in global gas market demand and supply.
Such events will probably continue to cause gas price volatility until more supply is available, that could take a minimum of three years. Indeed, a current dip in European gas prices is likely to be temporary.
Avoiding a significant gas supply emergency this winter will require the continuing flow of some Russian gas to Europe, lower-than-average Asian demand for LNG, and mild weather. But prices will even rely on how European neighbours respond to any emergency.
In 2023, natural gas taken into account 42% of the UK's primary energy consumption and generated 40% of their electricity. It also heats over 80% of households, and it is an important raw material and supply of heat for industry.
Even though cheaper renewable sources provide 60% of the country's energy, the UK market is structured so that electricity costs are currently set through the priciest unit produced, that is gas.
The government can perform little to address the price of gas. The UK gets around half of its annual gas supply from the own North Sea reserves, but relies on global markets for that rest. As a result, gas consumers in the united kingdom experience global market forces of supply and demand.
The global rise of LNG
International trade in gas currently relies on two forms of transportation: natural gas pipelines and ships carrying LNG. Previously, trade was regional and dominated by pipelines, however the LNG sector has grown by 57% during the last decade, developing a globally connected market.
Last year LNG accounted for 51% of internationally traded gas, up from 41% a decade ago. Today, 19 countries export and 44 import LNG.
Production of LNG is pricey and sophisticated. It involves a multi-billion dollar logistics of liquefaction plants (where the gas is cooled to liquefy it making it simpler to transport), as well as specialist ships and regasification terminals to offload and store the LNG before it is changed into gas for power generation or injection into a domestic pipeline system.
Australia (21%), Qatar (21%) and also the US (18%) are the top three global LNG producers, while Asia makes up about 73% of global LNG demand. China consumes 21.3%, accompanied by Japan (20%) and Columbia (12.6%). In 2023, Europe soaked up 21.0% and the UK 2.9% of total LNG trade.
Some of those global buyers and sellers strike long-term contracts that can span decades and include a destination clause requiring cargoes be sent to a particular market.
But the growing demand for LNG has seen a rise in shorter-term (4 years or less), more flexible contracts that permit cargoes to change path to give you the markets in which costs are higher. “Spot markets” for LNG are even shorter term, with cargoes delivered within 3 months from the transaction date.
While Asian buyers like Japan tend to purchase LNG with long-term contracts, Europe sources most of its LNG via short-term contracts and the spot market. This enables it to benefit from lower prices once the global LNG market is well supplied, but exposes it to raised prices when supply is tight, like it is now.
Expanding supply would likely loosen the LNG market, but there's little prospect of a significant near-term increase in supply. In April 2023, 136 million tonnes per year of liquefaction capacity was being built or approved for development, compared to total production capacity of 459.5 million tonnes per year) in 2023.
But relatively little of this LNG will be available in the next couple of years, including projects in Russia that are now unlikely to complete because of sanctions. Recent US experience suggests it takes three to five years to build an LNG plant.
The supply and demand balance will change dramatically by 2028, therefore, when global LNG export capacity is likely to be 50% higher.
Russian restrictions
Of course pipelines can also transport natural gas, consider its invasion of Ukraine at the end of February 2023, Russian gas supplies to Europe have become increasingly volatile. After refusing to supply firms that didn't pay in Roubles, for instance, Russia then used various technicalities to restrict supply in the Nord Stream 2 pipeline to Germany, as well as Nord Stream Another recently.
The International Energy Agency expects Russia to satisfy 25% of EU gas demand in 2023, down from over 40% in 2023. There are fears that Russia stop supplies altogether.
To combat this, Europe is aiming to reduce its reliance upon gas, and Russian gas in particular. It's turned to LNG imports to fill storage for that coming winter. But, with limited LNG available, prices have skyrocketed.
Skyrocketing gas prices
Increased European demand complicates matters for the UK. While Russia only accounts for about 4% of UK gas imports, declining production from the North Sea means the nation now import about 50 % from the gas it consumes. Most imports originate from Norway, but LNG also plays a critical role.
And as the UK has sufficient terminal and pipeline capacity to import the gas it needs, it lacks significant storage. There are intends to reinstate Britain's Rough storage facility, which had been retired in 2023, but this will require time. Meanwhile, the UK must depend on shorter-term flexible contracts and the spot market, exposing consumers to greater price volatility.
How long will the crisis last?
The factors currently driving gas prices up will stay in position for several years and so the energy crisis is likely to continue for a minimum of this winter and next. This is reflected in the futures market, where traders can secure natural gas in a set price for delivery at some stage in the near future.
Reduced demand can help – whether via policy or economic decline – however the global LNG market will remain tight, and UK consumers will have to pay a high price for the gas they need.
Beyond 2025, a substantial rise in global LNG supply can help matters, energy efficiency will improve, and alternative causes of power generation may begin in the future online. However, at the moment, there is no relief around the corner for those influenced by the power crisis.
This article is republished in the Conversation. Browse the original article.
