IEEJ：July ©IEEJ 2023
Special Bulletin
A Japanese Perspective on the International Energy Landscape (646)

July 21, 2023

Enhancing Natural Gas/LNG Supply Security
Ken Koyama, PhD
Chief Economist, Senior Managing Director
The Institute of Energy Economics, JapanThe year 2022 was an unusually turbulent year for the international energy market
compared to recent past decades. Russia's military invasion of Ukraine sparked a full-fledged
confrontation between the Western bloc and Russia. The Western bloc imposed an embargo onRussian energy, while the Russian pipeline gas supply to Europe was dramatically reduced. As aresult, energy exports from Russia, the world's largest exporter of fossil fuels, became the biggest
risk factor in energy supply. In this way, energy prices in the international market skyrocketed allat once. In particular, gas prices in Europe soared to unprecedented levels. As noted in “A Japanese
Perspective on the International Energy Landscape (645),” the 2022 average Dutch TTF (TitleTransfer Facility) price, a European natural gas benchmark, reached an all-time high of $37.48 permillion British thermal units ($210 per barrel of crude oil equivalent). Temporarily, the TTF price hit
an abnormal high of about $100/MMBtu (close to $600 per barrel of crude oil equivalent).
Factors behind the steep gas price hike included Europe's heavy dependence on Russiangas, Russia's pipeline gas supply to Europe plummeting to about one-fifth of normal levels, and thefact that no country in the global gas/LNG market possessed significant surplus production capacity
like that of Saudi Arabia in the oil market. Global gas supply was shrinking as a decline in gas
supply from Russia failed to be covered by any other country. Europe’s loss of Russian gas led gas
market players to fear that physical shortages where Europe would fail to procure gas even if
wanting to do so could arise towards the winter, rattling the market. While the energy crisis under
the Ukraine crisis led to higher prices and supply insecurity for all energy sources, the biggest
problem was the European gas crisis.
However, the impact of the European gas crisis was not limited to Europe. Driven byconcern about gas shortages, Europe stepped up its desperate actions to avoid the shortages. It took
all possible measures, including thorough energy conservation and the use of coal and nuclear energy.
As for crucial alternative gas procurement, Europe made desperate efforts to secure and expand LNG
imports, including those from the United States. Europe rapidly expanded its U.S. LNG procurementby taking full advantage of the inherent flexibility of U.S. LNG supply. Europe thus became thelargest importer of U.S. LNG and overtook Japan and China to take the position of the world'slargest LNG-importing region. The impact of Europe’s LNG procurement expansion was significant,exerting great pressure on the global pipeline gas and LNG market, where overall supply shrank due
to the decline in Russian gas supply. The pressure led to the abovementioned abnormally high prices.
While Europe was desperate and able to purchase LNG even at higher prices, it became difficult for
low-income countries to purchase higher-priced LNG and gas. Asian and other developing countries
faced electricity supply declines through fuel shortages for gas-fired power plants and a CO2
emission increase through switching to coal-fired power generation to avoid electricity supply falls.
In this sense, the European gas crisis was accompanied by serious global challenges regarding
gas/LNG procurement.
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Half a century ago, in 1973, the world was exposed to the enormous impact of the first oilcrisis. As the Fourth Middle East War broke out, Arab oil-producing countries used oil as a weapon,
threatening to cut oil supply in order to exert pressure on Japan and other major developed countries.
At the same time, the Organization of the Petroleum Exporting Countries raised crude oil prices
significantly. Driven by price hikes and concern about physical oil shortages, major oil consuming
countries took exclusionary oil procurement actions. Thus, oil-consuming countries’ collaborationand cooperation collapsed, demonstrating the great impact of the Arab oil embargo. Reflecting on
the collapse of cooperation, developed countries began to implement full-scale energy security
policies in response to the oil crisis. In addition, they established the International Energy Agency torebuild and strengthen their cooperation.
While the oil crisis of 50 years ago was precisely related to supply in the international oilmarket, the problem under the Ukraine War can be positioned as a crisis of instability in gas/LNG
supply, as well as a crisis of the overall international energy market. Efforts to diversify energy
sources after the oil crisis have greatly expanded the use of gas/LNG, making gas/LNG one of themost important energy sources in Japan and the rest of the world. It goes without saying that
securing a stable gas/LNG supply has become increasingly important. Based on the experience ofthe Ukraine crisis, a stable gas/LNG supply has taken on an even greater urgency and importance.
One of the issues that has attracted a great deal of attention in response to the emergenceof the challenge of stable gas/LNG supply under the ongoing crisis is the importance of securing
sufficient supply capacity. As Russia's pipeline gas supply has declined sharply in a manner to cut
global supply, it is essential to secure sufficient supply capacity in order to avoid competition
through exclusionary procurement actions and stabilize overall supply and demand. Given thatEurope rushed to procure LNG while remaining cautious/negative about gas/LNG investment, thechallenge remained difficult to resolve. However, an important milestone in this regard came as theconclusion at the Group of Seven Hiroshima Summit that investment in the gas sector can beappropriate, if implemented in a manner consistent with climate objectives, with consideration given
to the Global South. An important point of the conclusion was that the appropriateness of investment
was related not only to responses to the current gas crisis but also to the medium to long-term
viewpoint of securing stable future supply and demand.
Furthermore, various efforts and initiatives to stabilize the LNG market and enhance LNG
supply security were announced at the LNG Producer-Consumer Conference 2023 held on July 19,
indicating that such efforts and initiatives would be materialized and enhanced further in the future.
The LNG Producer-Consumer Conference has been aimed at stabilizing and developing the LNG
market by promoting dialogue between LNG suppliers and consumers. For the first time, the IEA,
along with the Japanese Ministry of Economy, Trade and Industry and the Asia-Pacific Energy
Research Center, participated in the last meeting as a cosponsor and played an important role.
With regard to stockpiles, inventories, and buffer functions that are expected to play animportant role in responding to supply interruption, a sudden tight supply-demand balance andimbalances in the LNG market, it was argued at the conference that measures to increase themarket’s flexibility and resilience should be explored through underground natural gas storage usedmainly in Europe and the United States, Japanese and Singaporean initiatives to secure surplus LNG
supply, and the enhancement of LNG and gas procurement contract flexibility and other flexible
mechanism including swap trading, based on the characteristics of LNG and the gas market. In order2

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to secure investment from the medium to long-term perspective, gas/LNG investment should beconsistent with decarbonization initiatives. In this respect, Japan’s JERA Co. and Korea GasCorporation, which are leading LNG importers in Japan and South Korea, announced an initiative tocooperate in promoting the reduction of emissions of methane as one of the key greenhouse gases inLNG value chains. In response, Japanese, U.S., European, Australian, South Korean, and othergovernments issued a joint statement to welcome the initiative. In addition, Nippon Export andInvestment Insurance announced new support measures to strengthen LNG liquidity. Variousmeasures and initiatives became achievements at the conference. Conference participants agreed toseek the enhancement of the IEA’s role in gas supply security at its ministerial meeting in February
2024. In the year to mark its 50th anniversary, the IEA established in response to the oil crisis isreaching a turning point to deepen and expand its role in gas supply security. I would like to pay
attention to future progress in relevant specific initiatives.

Contact: report@tky.ieej.or.jp
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