Global gas markets are in upheaval

Obstructed globalization

Compared to coal and oil, natural gas is a relatively new fuel, a mixture of hydrocarbon and non-hydrocarbon gases trapped in the formation and previously used as an associated product of oil and coal. With the increasing demand for natural gas and the continuous expansion of related development processes and uses, natural gas has gradually become an independent energy product and an important industrial raw material.

Due to the characteristics of low carbon emissions and high calorific value at the same time, in the process of promoting energy transformation and reducing carbon emissions in the world's major economies, natural gas has become an important transition energy from the era of fossil energy to the era of renewable energy, and occupies an increasingly important proportion in the energy structure of the world's major economies.

At present, the world's main natural gas producing regions are North America, Central Asia-Russia, the Middle East and the Asia-Pacific region, which are also the main natural gas consumption regions. However, due to the imbalance of natural gas production and consumption, Western Europe and Northeast Asia have become the main natural gas import regions, and the United States, Central Asia, Australia, Qatar and other places have become the main natural gas export regions.

North America, the Middle East, Russia-Central Asia, and the Asia-Pacific region are the world's major natural gas producers. Image credit: BP

Due to the high dependence on pipeline transportation, natural gas in the initial stage of emergence showed a clear regional, focusing on the supply of countries and regions near the origin. The technology of LNG, the manufacture of LNG carriers and the reduction of transportation costs have made the global trade of natural gas gradually prosperous, and the natural gas market has gradually changed from regionalization to globalization, and the market trend and price transmission between regions are strengthening.

Trends of major global natural gas trade in 2021. Image credit: BP

Natural gas prices and trade are influenced not only by actual supply and demand, but also by inter-governmental negotiations, infrastructure construction, financial policies, and international oil prices. Like other energy products, natural gas has strong political attributes and can be used as a political "weapon".

Since 2021, under the combined action of multiple factors, commodities led by energy products have begun to rise sharply, and an "energy crisis" has swept the world. In the first quarter of this year, the outbreak of the conflict between Russia and Ukraine further amplified the volatility of the energy market, and the European Union and the United States officially announced that they would part ways with Russian energy products.

The globalisation of the gas market is about to be cut short here in the EU and Russia.

Brexit

Through long-term and large-scale coal, oil, and gas deals, the EU is already deeply tied to Russia in the energy sector. In previous decades, gas had been an important tool for Russia to beat Europe.

As an important way of Russian gas pipeline to Europe, Ukraine has reduced Russia's gas transmission to Europe several times before, and pulled Europe into the water many times in the "Russian-Ukrainian gas struggle". This series of disputes directly led to Russia began to build a gas pipeline that bypasses Ukraine, and EU countries began to pay more attention to the construction of natural gas storage facilities and LNG terminals.

With the outbreak of the conflict between Russia and Ukraine, the European Union has made up its mind to completely cut ties with Russia, and the first thing they have to get through is this winter.

The bombing of the Nord Stream 1 and 2 pipelines in the Baltic Sea in late September also shook the world. Despite accusations from the European Union, the United States and Russia, and investigations by investigators, the incident remains a Rashomon mystery.

Looking back more than a month later, the symbolism of the event seems to be stronger. With only one of Russia's five main pipelines pumping gas to Europe, the Soyuz pipeline through Ukraine, still operating, the impact of the Nord Stream bombing seems to have been quickly forgotten. Whether the pipeline is sound or not, the EU is determined to wean itself off Russian energy altogether, and it is only a matter of time.

Share of EU gas imports by source (value). Image credit: Eurostat

According to data released by the European Union, in the past five years, despite the increasing proportion of renewable energy, Europe's energy consumption is still 57% to 60% of fossil energy, and the vast majority of them rely on imports. Among them, the proportion of natural gas imports is as high as 90%, of which Russian gas imports in 2021 accounted for 45% of the total imports of the EU, compared with an average of about 40% in the previous years.

In March this year, the European Commission issued an energy independence plan, which plans to accelerate the development of renewable natural gas by diversifying natural gas imports, and reduce the use of natural gas in heating and power generation, so as to reduce dependence on imported natural gas from Russia. Since the second half of the year, Europe has been preparing for the withdrawal of Russian gas, so it has supplemented the purchase of gas storage resources and LNG in advance, and has also been calling on all walks of life to reduce the use of natural gas resources.

Under the active sanctions and Russian countermeasures, the European Union has received a significant reduction in the amount of Russian natural gas, the United States has increased gas aid to Europe, Europe will look for natural gas to the Middle East, North Africa and Central Asia and other places.

Dutch TTF gas futures, the European benchmark, have seen sharp rises and falls over the past two years. Photo credit: ICE

Gas prices in Europe, which hit historic highs in August, have fallen sharply as temperatures lag, natural gas reserves are plentiful and LNG imports are piling up. Due to the lack of storage space, there is even a phenomenon of negative gas prices in Europe recently.

Shenwan Hongyuan Research report data show that as of November 10, the natural gas inventories of EU countries were 1066.21 terawatt hours, reaching 95.39% of the total inventory. Shenwan Hongyuan analysis team pointed out that although the inventory level of EU countries is very high, the actual gas storage capacity and winter supply capacity of member states vary greatly. This year, Russian gas supply has declined sharply, and the lack of increase in winter imports, in the context of the EU's overall gas supply tightening, the interconnection of natural gas between countries, especially the orderly distribution of gas at peak times, to avoid the imbalance between local supply and demand will become the next important challenge facing the EU.

Qin Yan, chief power and carbon analyst at the Oxford Institute of Energy Research, told the 21st Century Business Herald that the temperature in Europe in October was higher than the historical normal value, and the beginning of November was still warm, so the demand for heating declined, and the energy crisis was temporarily flat, but this is just an image, and winter will eventually come.

Qin Yan said that the current gas storage is still enough until February, but if there is a cold winter or a failure of pipeline gas such as Norway and North Africa, then by the end of January and February next year, Europe will face a very serious gas supply challenge.

"Weather is currently an important factor affecting the winter supply situation in Europe, including temperature and wind power output; In addition, the ability of the French nuclear power units to come online after the completion of the original overhaul schedule is also an important factor affecting the Western European electricity and gas markets." Qin Yan said.

The International Energy Agency (IEA) has warned that if Russia completely stops pipeline gas deliveries to Europe and LNG demand in the Chinese market continues to rise, the EU will face a shortage of 30 billion cubic meters of gas next summer.

For some gas exporters in the Middle East and North Africa, partial trade with Asian countries has also limited the flow of gas from these regions to Europe. It can be expected that with the arrival of winter in the Northern Hemisphere, competition for LNG resources between Northeast Asia and Europe will be inevitable.

Us' lying to win '

In the case of the gradual withdrawal of Russian natural gas from the EU market, the United States has become the biggest winner in this round of natural gas market adjustment.

According to data from China Gas Information Terminal, 15 European countries purchased 72.93 million tons of LNG resources in 2021; As of August 15 this year, the 15 countries in Europe have received 73.1 million tons of LNG resources, which means that the above countries have completed the LNG reception of last year in only 8.5 months.

In the first 10 months of this year, the United States shipped 575 LNG carriers to the 15 European countries, LNG exports reached 40.52 million tons, accounting for 42% of the total LNG imports of the 15 European countries.

In 2021, the United States exported less than 10 million tons of LNG, and in the first two months of this year, the United States exported 13.32 million tons of LNG, more than the whole of last year. In the first 10 months of this year, the United States exported about 59.85 million tons of LNG, a more than five-fold increase from all of 2021.

Australia, Qatar and the United States are the world's top three LNG exporters in 2021. Image credit: BP

From the price point of view, the European natural gas market price compared with the US market premium is obvious, the cost of European natural gas import compared with the Russia-Ukraine conflict has risen sharply, American natural gas producers and exporters have benefited from it, and Europe has become the "pick up man" of high price LNG resources in the United States.

The US used to import huge amounts of natural gas for domestic consumption, but the shale oil and gas revolution has rewritten the US energy landscape, turning the country from an importer into an exporter as domestic production has soared.

According to the BP Statistical Review of World Energy 2022, the world's top three LNG exporters in 2021 are Australia, Qatar and the United States. However, according to the U.S. Energy Information Administration (EIA), citing data from the International Gas Association, the United States has become the world's largest LNG exporter in the first half of this year.

The EIA noted that the continued growth in U.S. LNG exports is mainly due to increased LNG export capacity, higher international natural gas and LNG prices, and increased global demand, especially in Europe.

In the domestic market, the recent price of natural gas in the United States has also continued to rise. The price of Henry Hub, a key US natural gas benchmark, has surged this year to its highest level in years, according to S&P Global Platts. EIA recently predicted that natural gas prices at Henry Hub would rise 54% this winter from a year ago to an average of $7.26 / mmBtu.

S&p Global Platts pointed out that U.S. natural gas consumers will also face higher energy bills than in previous years, but because of restrictions on the ability of the United States to export LNG, U.S. consumers will not face as exaggerated energy prices as European consumers.

Russian conspiracy

After more than half a year of sanctions and counter-sanctions, Russian gas shipments to the EU have dropped significantly. Some analysts point out that the EU is still unable to completely leave Russia's gas resources. In spite of this, Russia, which has hit a wall in the west, has shifted its goal to the process of "eastward" and "southward".

Russia is a natural gas powerhouse. According to bp statistics, in 2021, Russia's natural gas production of 701.7 billion cubic meters, after the United States 934.2 billion cubic meters, is the world's second largest natural gas producer. In 2021, Russia exported 396 billion cubic meters of LNG resources, ranking fourth in the world after Australia, Qatar and the United States.

Since late February this year, Russia and the European Union have continued to play games on energy issues, and the volume of Russian natural gas transported to Europe has declined significantly since the second half of the year.

According to Xinhua Finance reported on November 1, Gazprom released preliminary statistics showing that the company's natural gas production in the first 10 months was 334 billion cubic meters, down 18.6% year on year; Natural gas exports to non-CIS countries amounted to 91.2 billion cubic meters, a decrease of 67.6 billion cubic meters, or 42.6%, compared to the same period last year.

According to Gazprom, the decline in gas demand in EU countries has become a key factor in the reduction of global gas consumption. Gazprom estimates that in the first 10 months of this year, global natural gas consumption decreased by more than 40 billion cubic meters compared with the same period, and the natural gas consumption of EU countries decreased by about 36 billion cubic meters, accounting for 85%; UK gas consumption fell by 4 billion cubic meters year-on-year.

Russian pipeline gas to Europe will drop significantly in 2022. Image Credit: U.S. Energy Information Administration (EIA)

Although the EU is trying to wean itself off Russian energy dependence, the agency noted that Russian gas remains an important source of demand for the EU market. Data provided by energy analyst Rystad shows that in the first nine months of this year, Europe's total LNG imports to Russia reached 1.2 million tons, doubling on the basis of last year, with a total cargo value of between $1 billion and $2 billion.

Kaushal Ramesh, senior analyst for gas and liquefied gas at Rytad, said in an interview with the media that Russia is the fourth largest LNG producer in the world, currently accounting for about 15% of Europe's total LNG supply, and this proportion is expected to remain unchanged into next year.

Due to infrastructure construction, strong demand in Western Europe and other reasons, Russia has long focused on the European direction; With the diversification of energy supply in Europe, the deepening of sanctions against Russia in Europe and the United States, and the rise of market demand in East Asia, Russia, which has hit a wall in the west, has accelerated the pace of "south" and "east" of Russia Gas.

In October, Russia proposed to build a new gas supply hub in Turkey as a way to bring gas back to Europe. This decision fits Turkey's desire to increase its regional influence, but will the EU be willing to accept more Russian gas when the existing pipelines are no longer in use? Many experts questioned the legitimacy of the decision.

The natural gas cooperation between China and Russia has been in contact for a long time, but due to the price and the direction of the pipeline, the two sides did not formally sign a natural gas purchase and sale contract until 2014. In December 2019, the China-Russia East Route natural gas Pipeline was officially put into operation, opening a new chapter in China-Russia natural gas cooperation.

On the basis of the original cooperation, Russia plans to build another natural gas pipeline to China through Mongolia. According to Xinhua News Agency on September 17, during the Samarkand Summit of the Shanghai Cooperation Organization (SCO) in September this year, China, Mongolia and Russia confirmed the five-year extension of the Planning Outline for the Construction of the China-Mongolian-Russia Economic Corridor, officially launched the feasibility study on the upgrading and development of the middle line railway of the China-Mongolian-Russia Economic Corridor, and agreed to actively promote the laying of China-Russia natural gas pipeline through Mongolia.

Steady supply in China

Growth is the biggest feature of China's natural gas market in recent years.

From a world perspective, China's natural gas production is quite considerable, and there has been no "gas anxiety" for quite a long time. Since the beginning of the 21st century, with the rapid development of China's economy, the rapid increase of energy consumption, and the continuous improvement of environmental protection requirements, China's natural gas production and consumption are also growing, and the dependence on foreign natural gas is also rising.

At the same time, China also accelerated the introduction of overseas natural gas resources. At the end of 2009, the China-Central Asia Natural Gas Pipeline and its eastern West-East gas pipeline were completed. Starting from Turkmenistan, a Central Asian country rich in natural gas resources, China began to introduce overseas land pipeline natural gas on a large scale.

In 2006, when China imported its first shipment of overseas LNG resources, China's natural gas dependence was less than 2%. In 2019, China became the world's largest natural gas importer; By 2021, China has surpassed Japan to become the world's largest LNG importer, with its natural gas dependence reaching 45.5%.

At present, China has built four major natural gas import channels for Central Asia-China gas pipeline, China-Russia gas pipeline, China-Myanmar gas pipeline and LNG transportation on the Southeast Sea.