Thought piece by Jacob Mandel, Senior Research Associate for Global Energy Markets
As we pass the one-year anniversary of Russia’s invasion of Ukraine, it is impossible to ignore the outsized impact that the ensuing war has had on global energy markets. Europe has been forced to rethink its energy sector and reprioritise security of supply, in a scramble to replace low-cost, formerly dependable fossil fuel imports from Russia with higher-priced alternatives. This is particularly true of gas.
Before the war, Russia was the largest supplier of natural gas to Europe, at times accounting for over a third of the region’s gas demand. But over the past year, as Russia has cut its gas exports to Europe in retaliation to sanctions, its customers have been forced to chart a new path, one likely to reshape Europe’s gas market for the foreseeable future.
Despite sharp reductions in Russian supply, Europe has shown little interest in increasing domestic gas output. Existing production capacity has been maximised, both in Norway and the UK’s North Sea. However, other countries have resisted exploiting or re-committing to potential sources of additional supply that could help offset the loss of Russian imports. The Netherlands has barely budged on its giant Groningen gas field, which is still set to shut down by October 2023, although there is a possibility it could run a year longer if Europe suffers a gas shortage this year. Romania’s Neptun Deep Black Sea field is still awaiting a Final Investment Decision, despite years of delays. There are few other options to turn to within Europe, forcing gas consumers to turn abroad.
Post-invasion, liquefied natural gas (LNG) has become the indispensable guarantor of Europe’s energy needs, complementing steady and reliable deliveries from European suppliers, but exposing them to the whims of a global marketplace. In the decades to come, Europe will have to rely far more on LNG for its gas needs than ever before, with the US and other suppliers replacing much cheaper Russian pipeline gas. Aurora projects that LNG could meet up to 40% of Europe’s gas needs in 2030, up from a pre-war forecast of 27%. Our latest projection still accounts for some Russian gas coming to Europe—a complete exit from Russian gas could lift Europe’s reliance on LNG even further, to nearly 50% in 2030. A significant share of Europe’s LNG would come from the US, with Norway accounting for most of the region’s pipeline gas supply.
This increased reliance on LNG would lift the cost of gas for European consumers, particularly in the next few years, as European importers would have to compete with buyers elsewhere for limited supply and marginal LNG molecules would end up setting the price more often than not. Before the invasion, European gas was typically priced at a large discount to the cost of LNG in other regions—this discount would likely narrow or disappear completely as Europe’s reliance on LNG increases and European gas prices rise to attract cargoes that consumers would not have needed otherwise, putting an end to the cheaper gas that has allowed European heavy industry to flourish.
While much of Europe’s gas-intensive industry will likely return to operations, after price spikes shut down or slowed production last year, some factories may remain closed. A structurally higher cost of gas and power could make European industry less competitive than it would have been had cheap Russian gas continued to flow to Europe. Fertilizer, steel, and other manufacturers may find it more profitable to move production to locations with competitive cost advantages, especially in terms of fuel. The recent decision by German chemical producer BASF to shut down some of its production lines and cut thousands of jobs is likely to be more of a warning than an aberration.
Aurora forecasts that energy prices will fall closer to historic norms as more LNG enters the global marketplace in 2026 and 2027. Massive export facility expansions are pending in the US and Qatar over the next few years, which will help satisfy higher global demand for LNG. And European demand will slow in the long term, as the region moves to decarbonise its power-sector, industry, and households.
Other regions will likely find it hard to compete with Europe and northeast Asia for more expensive gas in the next few years. Pakistan has already announced that it will shift its long-term plans away from imported fuels, including LNG, turning instead to domestic coal, renewables, and nuclear—cheaper and more-dependable alternatives that are expected to remain relatively unaffected by international demand and potential price spikes. Other countries in south Asia, Latin America, and Africa could face similar difficulties caused by high-priced LNG.