Economic Statecraft
Global Gas Market: A New State of Aggregation

The changes that have begun in the global gas market fit into the process of transformation of the entire system of international relations and international trade. This will result in a new structure emerging for the global gas market and a possible adjustment of the positions of key gas producers and consumers on a number of energy development issues, writes Evgeny Tipailov, Executive Director of the Institute for Problems of Interdependence.

The three-year period of 2020-2022 has transformed the landscape of the global gas market. 2020 was marked by a global recession and a decrease in gas consumption due to widespread anti-COVID restrictions. In 2021, there was a “perfect storm” of a price crisis in the EU gas market. In 2022, the galloping increase in gas prices in the EU continued against the backdrop of Russia’s Special Military Operation in Ukraine. Unfriendly countries imposed sanctions on the Russian Federation, and the Russian Federation took countermeasures. As a result, Russian gas supplies to the EU were significantly curtailed. In September 2022, the Nord Stream 1 and Nord Stream 2 gas pipelines were destroyed in a terrorist attack.
The restructuring of the world gas market has begun (both in the regional and global dimensions), which will take years and lead to accelerated growth in the share of LNG in the world natural gas trade. It will be characterised by the following key features.

Competition between natural gas producers for market share (primarily in Europe and Asia) will sharpen dramatically. The main struggle will unfold between the United States/Australia (as allies within the AUKUS military-political alliance) on the one hand, and Russia/Qatar/Malaysia/Nigeria and a number of other countries (as representatives of the so-called “world majority”) on the other. At the same time, the destruction of the Nord Streams (which the United States carefully coordinated with the support of European satellites) clearly marked a game without rules (except for terrorist methods of competitive struggle) and the chaos of international energy cooperation in the short and medium term.

Nord Stream 1-2 Gas Pipelines
4 pipelines from Russia to Europe pass through the Baltic Sea. The combined design capacity of Nord Stream 1 and Nord Stream 2 is 110 billion cubic meters of gas per year.

Against this background, the problem of protecting critical energy infrastructure and energy security in general has evolved. This may have an impact both on gas prices (driving growth), the adjustment of supply contracts (increase in the number of long-term contracts and changes in pricing mechanisms), and on the renewal of old contracts (Gas Exporting Countries Forum). It also affects the search for new formats and areas of cooperation between non-Western gas producers in connection with the undermining of international confidence in Western market participants.

Competition between key gas importers (mainly the EU and the Asia-Pacific countries (China, India, etc.) for new LNG volumes will increase in order to meet domestic demand along with pipeline gas imports. At the same time, at least for the next 2-3 years, the European and Asian gas markets will change places: the European market will become premium, and the Asian market will be compensatory. This is due to the following circumstances.

In 2022, imports of Russian pipeline gas to the EU dropped sharply. Depending on the geopolitical situation in 2023, its further reduction is possible (to 15-20 billion cubic meters). The EU, in addition, made the political decision to maximise the replacement of Russian natural gas. At the same time, no new significant LNG capacities are expected to be introduced in the next 2-3 years (by the end of 2023, about 25 billion cubic meters of additional LNG will enter the world market) that can satisfy the expected level of global demand amid falling EU imports of Russian pipeline gas. Finally, the Asian market may show a modest increase in demand for LNG due to the increased use of gas-replacing energy sources, a slow recovery in industrial production, and still-ongoing anti-COVID restrictions in certain Asian countries.

Another trend for the next few years may be significant volatility and high gas prices in the global gas market. The main drivers for this will be:

  • Ongoing geopolitical instability (provoked, among other things, to keep high LNG prices in order to pay off new LNG projects in the US and Australia),
  • Economic growth and the recovery of industrial production (moderate growth will suffice) in the face of a shortage of gas supply,
  • Insufficient new LNG capacity;
  • A further reduction in the volume of deliveries of Russian pipeline gas to the EU,
  • An increase in the number of long-term contracts, and a change in the commercial structure of contracts (with the parallel application of three pricing models: linking prices to oil prices, the US Henry Hub index and prices on trading floors) as tools to reduce commercial risks and ensure the security of supply and demand,
  • The introduction of higher carbon neutrality standards and requirements for produced LNG,
  • The insufficient filling of underground gas storage facilities (UGS) in the EU,
  • Adverse weather conditions in the autumn and winter periods.
European UGS facilities have good occupancy due to the abnormally warm winter of 2022/2023: as of mid-February 2023, an almost record level of gas occupancy for this time was noted — about 70 billion cubic meters. However, if Russian gas supplies to the EU will continue to decline in 2023 and the Asian economy shows even slight growth, then the EU may miss at least 10-15 billion cubic meters of gas. Under such a scenario, gas prices in the EU will inevitably rise.

The active transformation of the gas logistics structure will continue. In the coming years, there will be a global reorientation of routes: for example, from West to East for Russian pipeline gas, the active use of the Northern Sea Route for Russian LNG supplies, or an increase in transatlantic shipments of the US LNG to the EU while reducing supplies to Asia. The ways of delivering natural gas will also change (with an increase in the share of LNG in the balance of world gas trade, there will be a shift in supplies from pipeline transportation in favour of supplies by gas carriers).

This logistical reconfiguration will have a multiplier effect. As part of the aforementioned competition, a race against time has actually begun for the accelerated implementation of gas transmission pipeline projects in new directions (Power of Siberia-2) and the creation of new regional distribution hubs such as the gas hub project in Turkey. The sides are engaged in the construction of gas carriers, regasification terminals for receiving LNG, and ground infrastructure for its further distribution.

This natural gas delivery activity mediates the further tightening of sanctions and the expansion of counter-measures between market participants. The main goal of this will be the struggle for control of, and access to, the technologies necessary for the implementation of these projects.

Finally, the transition of the global gas market to a new state may have an unexpected impact on the global climate agenda. In particular, we should expect that gas will begin to strengthen its position as a transit and low-carbon energy source, ending all previous discussions about the role of natural gas in the “energy transition”. The importance of “blue hydrogen” as a transitional and relatively “green” alternative to other types of hydrogen will increase. The West can accordingly adjust its “green agenda” regulations.

All of this will be connected primarily with the strengthening of the status of the US as one of the largest producers and suppliers of LNG, the deepening of the EU’s energy dependence on the US, as well as the toughening of the position of the countries of the “world majority” in relation to certain mechanisms for achieving carbon neutrality within the international climate agenda.

In general, the changes that have begun in the global gas market fit into the process of transformation of the entire system of international relations and international trade. This will result in a new structure emerging for the global gas market and a possible adjustment of the positions of key gas producers and consumers on a number of energy development issues, including a radical revision of certain aspects of Russian energy policy and approaches to gas diplomacy.
Economic Statecraft
'Geopolitics of Chaos' in the Energy Sector
On October 10, the Valdai Club hosted an expert discussion titled “Explosions at Nord Streams: The Geopolitics of Interrupted Energy Ties”, dedicated to the state of gas cooperation between Russia and foreign countries. The moderator was Ivan Timofeev, Programme Director of the Valdai Discussion Club.

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