Risks of another energy crisis this winter, says IEF Secretary General

As we gather for the first day of Gastech Singapore, we are all keenly aware that global energy markets are under enormous strain from a series of shocks and crises unlike anything seen since the 1970s. After years during which policymakers focused largely on accelerating their net zero ambitions to tackle climate change, today energy security has re-emerged as an urgent priority for many governments as they seek to secure reliable and affordable energy in this unsettling new geopolitical era.

Oil and gas prices have come off their highs of 2022, partly due to fears of a recession. But market fundamentals tightened considerably during the first half of 2023 and there are significant risks of another energy crisis this winter. Looking specifically at global gas, markets are balanced but fragile. The events of the past couple of years have shown how globally intertwined gas markets are. A disruption in any part of the world has a reverberating effect.

This was demonstrated by Russia’s reduction of pipeline flows to Europe, which caused prices to soar globally and priced out countries in Southeast Asia. Just recently, the threat of a potential strike in Australia could put 10% of global LNG exports at risk. And while all of Australia’s LNG goes to Asia, the threat of a strike caused European gas futures to spike. US LNG exports have nearly doubled since 2019 and the United States is expected to become the largest LNG exporter this year, surpassing Qatar and Australia.

Yet, US export capacity is highly concentrated in the Gulf Coast and could face vulnerabilities in case of a severe hurricane season. Nearly 65% of US LNG exports have been heading to Europe. US was the second largest gas provider to Europe, only behind pipeline gas from Norway. A mild winter helped Europe curb gas demand last year, but there is no promise of a repeat this year.

Lockdowns and lower economic growth led to a contraction in Chinese gas demand in 2022, but it has bounced back in 2023. China’s LNG imports were up by approximately 10% in the first eight months of 2023. China re-directed contracted volumes in 2022, which benefited Europe, but this is less likely to happen this year as China’s domestic demand is recovering.

Gas consuming countries have demonstrated more appetite for long-term LNG contracts, with more than 81 MTPA of new contracts signed in 2022, equivalent to about 20% of the market. The average duration was more than 19 years in 2022, up from an average of 14.7 years for contracts signed between 2017 and 2021.

So major consumers have taken steps to enhance energy security in gas supply, but high prices and volatility are sending us a signal to increase investment. We ignore these market signals at our peril. Europe avoided a widespread industrial shutdown last year thanks to a mild winter and unprecedented bidding up for global LNG supplies, but this was not without consequences for the rest of the world.

Import-dependent economies of Asia are paying a high price for energy supply, and many of the emerging economies in the Global South are facing a future without access to imported gas at all.
High energy prices and volatility caused by underinvestment have disastrous effects on households all over the world, hitting the poorest people the hardest. Underinvestment in new supply threatens energy security and actually stalls progress on climate goals by undermining public support for green policies and increasing reliance on cheaper carbon-intensive options.

So, it is becoming clear that we must not see the energy transition as a cliff edge or a reason to halt investment in new long-term supplies, but as a complex, multidimensional process where different countries have different starting points, priorities and trajectories. And importantly, we must recognise the need to provide stable, secure and affordable energy supplies for the continued wellbeing of people all over the world.

We need to manage the transition over a period of decades. We must press forward with decarbonisation, but also maintain secure and affordable supplies of hydrocarbons to support growth and enable the Global South to improve living standards with access to modern energy services.

Only by adopting a multidimensional approach to the transition, giving due priority to energy security, affordability and increased access, can we successfully navigate the most treacherous energy market conditions witnessed for 50 years.