IEEJ：May ©IEEJ 2023
Special Bulletin
A Japanese Perspective on the International Energy Landscape (638)

May 26, 2023

Has the European Natural Gas Crisis Ended?
Ken Koyama, PhD
Chief Economist, Senior Managing Director
The Institute of Energy Economics, JapanIn Paris on May 25, the Center on Global Energy Policy at the U.S. Columbia University
School of International and Public Affairs sponsored an international conference titled "Natural Gas
Roundtable: Looking beyond the Crisis and toward Decarbonizing the Gas Industry.” Some 40 people
participated in the conference, including government officials, business leaders and experts. Most ofthem physically attended the online and on-site hybrid meeting. They vigorously discussed issues
indicated by the title. In the following, I would like to discuss this report’s title, “Has the European
Natural Gas Crisis Ended?,” which represented the most impressive issue for me at the conference.
Since 2022, the European natural gas market has taken an unprecedentedly dramatic twist.
The Dutch title transfer price, TTF, known as the leading European benchmark price for gas, ranged
from $20 per million British thermal units to $30/MMBtu in early 2022, falling back from higher
levels in late 2021. In response to Russia’s invasion of Ukraine and a U.S. embargo on Russian energy
imports, the price shot up above $70/MMBtu on March 7, hitting the first peak. Later, however, theprice peaked as market players found out that the United States had not imported Russian gas orliquefied natural gas. The price still stayed as high as $30-50/MMBtu until late March.
As the gas market calmed down from April, the TTF price stayed around $30/MMBtu. Frommid-June, however, the price turned upward as concern about a tighter supply-demand balance
resurged on a decline in Russian pipeline gas supply to Europe. Concern about winter gas shortages
grew as a substantial fall in Russian pipeline gas supply to Europe, and sabotage at the Nord Stream
pipeline resulted in market perception of a very severe gas market outlook for the winter in Europe.
The European gas crisis reached a climax as the benchmark European gas price soared close to$100/MMBtu in late August.
The abnormal price spike and underlying concern about gas shortages led to desperate
efforts to address the potential shortages. Thorough energy-saving or gas-saving measures were taken,
while high gas prices forced plants to cut or suspend production. Gas consumption declined
substantially. Coal-fired power plants were tapped even at the risk of increasing CO2 emissions.
Renewable energy promotion was accelerated. The effective utilization of nuclear energy was also
promoted, as symbolized by Germany’s decision to postpone the closure of a nuclear power station.
As non-Russian gas supply was urgently required to meet gas demand, European countries
raced to additionally procure massive volumes of LNG. U.S. LNG supply, known for its expansion
and destination flexibility, rapidly increased in Europe, making the region the biggest buyer of U.S.
LNG. Such desperate efforts were combined with a warmer-than-normal 2022-2023 winter season toincrease European natural gas inventories and prevent winter gas shortages. In such supply-demandenvironment, European gas prices followed a downward trend. After temporary resurgences, the TTF
price slipped below $30/MMBtu in December and below $20/MMBtu in January 2023. Continuing a1

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downward trend, the price fell from the $15-20/MMBtu range to the $10-15/MMBtu range before
slipping below $10/MMBtu to a two-year low of less than $9/MMBtu on May 25.
Given such market conditions, the discussions at the Paris conference apparently indicatethat gas market participants seemed to dominantly believe that the European gas crisis ended thanks
to European efforts and that Europe should be confident of its successful efforts. I felt that Europe’s
natural gas perception transitioned from a strong sense of crisis and desperation seen in the second
half of last year to a sense of relief and confidence.
At the same time, however, other market participants apparently remained doubtful or waryof whether the crisis had gone. I do not view their doubt or wariness as groundless but believe that any
excessive optimism cannot be warranted. Gas prices have declined substantially, with the abnormallyhigh prices becoming a thing of the past. European natural gas inventories are sufficient. However,prices reflect the current supply and demand perceptions and forecasts, and they could change easily
and rapidly on an about-face in the supply and demand environment. Inventory levels may turn around
if the next winter is colder than normal. In responding to a winter gas demand rise, Europe can nolonger depend on Russia, which had been the most important gas supply source with flexibility for theregion.
Given that last year’s gas consumption decline was attributable to extremely high prices anda decrease in industrial operations, the price fall can be expected to trigger growth in demand. On thesupply side, it is important that LNG supply growth will be limited until 2025 or later. The Institute ofEnergy Economics, Japan, forecasts that the global LNG supply-demand balance in 2023 and 2024
will be tighter than in 2022. Unexpected interruptions to LNG or natural gas supply, which have comein the past several years, may occur.
Another destabilization factor is China’s LNG demand trend. In 2022, China’s LNG imports
decreased 20% from the previous year due to an economic slowdown under the COVID-19 pandemic
and high LNG prices. After replacing Japan as the world’s largest LNG importer in 2021, China
dramatically reduced LNG imports. Without the drop in China’s LNG imports, the European gas
supply-demand balance could have been even tighter, with price hikes being even steeper. Whetherand how China’s LNG imports would increase may have a great impact on the market supply-demandbalance and competition for LNG procurement. In fact, the future Chinese economy and LNG demand
are uncertain and difficult to forecast. The impact of a substantial increase in China’s LNG imports
may be enormous.
The spread of renewable energy as a substitute for natural gas will contribute to reducing
gas demand. As renewable energy expands its share of the power mix, however, the impact of
renewable energy’s supply intermittency problem will become greater and lead to additional gas
demand. Given such potential, it is a matter of concern to me that Europe has become confident of its
initiatives that prevented last winter’s crisis. Europe might have grown confident that it can rapidly
increase LNG procurement from the international market as necessary. Under such confidence, a drivefor decarbonization could become stronger than that for stable energy supply. In such a case, Europe
may become negative about investment in the gas sector and give greater priority to short-term
procurement than to long-term contracts. In the LNG market, the role of portfolio players who launch
LNG projects while satisfying short-term needs may become important. At the same time, great priceand supply-demand fluctuations may occur more easily. In this way, I feel that the European naturalgas market is plagued with various uncertainties and challenges. No optimism can be warranted about
the European market.

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