IEEJ：October 2019○ｃIEEJ 2019
Special Bulletin
A Japanese Perspective on the International Energy Landscape (451)

October 25, 2019

Challenges in Natural Gas/LNG Market Viewed from Europe
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanOn October 21 to 24, I participated in conferences in London and Oxford to discuss thefuture international energy situation and relevant challenges. Among various topics I discussed withother participants in the conferences, the discussions focused on the outlook and challenges of theglobal natural gas/LNG market. In the following, I would like to summarize particularly impressive
arguments made mainly by European energy policy planners, natural gas/LNG industry stakeholders
and experts at the conferences.
First, Russian natural gas supply to Europe via Ukraine has become a very importantmatter of concern to European natural gas/LNG market stakeholders, attracting their great attention.
Russia is the largest natural gas supplier to Europe, using pipeline routes including those via Ukraine.
Supply via Ukraine had been dominantly important for Europe. Since supply via Ukraine was halted
due to the 2009 gas conflict, however, Europe has tried to diversify pipeline routes and gas suppliers
to enhance its gas supply security. Given Europe’s geopolitical relations with Russia as well as its
concerns over energy security, however, Russian gas transit via Ukraine is still significant for Europe.
As the present contract for Russian gas transit via Ukraine is set to expire at the end of this year, how
to treat the contract from the start of the next year has become a great matter of interest.
Given arguments at the London and Oxford conferences, Ukraine and the European Union
that hope to maintain a large-scale, long-term contract for Russian gas transit via Ukraine havewidely differed with Russia that wants no such contract. Any solution to their difference or acompromise would be difficult due to Russia’s discontent with the so-called Stockholm ruling on
Ukraine’s gas debt, Russia’s complicated geopolitical relations with the European Union andUkraine, and Russia’s domestic situation involving Gazprom. This issue, though failing to attract
attention in Japan, is an urgent one for Europe, as indicated at the conferences. Many stakeholders at
the conferences indicated that some supply disruption could arise early next year in the absence ofany fundamental solution to the difference. It was also pointed out that a short-term contract orarrangement instead of a long-term one could be agreed on. If any short-term supply disruption
comes in winter, however, it may become a serious problem that would shake gas supply security
and the geopolitical situation. A dominant view at the conferences was that record European gas
inventories under the present market uncertainties, Europe-wide gas infrastructure development andEurope’s potential LNG import expansion would prevent any great confusion regarding gas supply
and demand in Europe, excluding some Balkan countries having difficulties in finding alternativegas suppliers, unless it is very cold. However, uncertainties about the three parties’ talks toward theyear-end and the possibility of some supply disruption would destabilize European gas prices. If any
supply disruption affects the European market, it may spill over to global natural gas/LNG supply
and demand. Therefore, future developments would be worthy of attention.
1

Second, the decarbonization of gas attracting attention in Europe was controversial at theconferences. As many major European countries have come up with very ambitious greenhouse gas
emission reduction plans including those seeking “net zero” emissions, they are arguing that natural
gas as one of the fossil fuels should be decarbonized for enhancing climate change countermeasuresand promoting specific initiatives. The decarbonization of gas would require a transition fromnatural gas to biomethane, synthetic methane or hydrogen. Attracting interest regarding hydrogen isan option to achieve CO2-free hydrogen by producing hydrogen from natural gas and subjecting
subsequent CO2 emissions to CCS (Carbon Collection and Storage). As any gas decarbonization
option is technologically, economically and socially difficult to adopt on a Europe-wide basis and as
gas decarbonization initiatives have just started, there are great uncertainties. For any case in which
an option is realized to successfully decarbonize gas, it is difficult to estimate how much the option
would cost and how energy prices to be paid by consumers would be affected. From a different
viewpoint, it is conceivable that if the European gas market is decarbonized, it may have a uniqueposition in the global gas market and to be isolated from the global gas market. I feel that we may
have to consider implications of such development for the global gas/LNG market’s flexibility andEurope’s gas supply security.
If the European gas market is decarbonized and has an extremely unique position, theAsian LNG market may grow even more important for business portfolios of gas industry
stakeholders in the world. However, it was pointed out that nongovernment organizations calling forenhancing climate change countermeasures have recently complained that LNG consumes massive
energy in the liquefaction phase and is accompanied by gas flare in the upstream production sector,indicating problems with climate change. In this regard, it was argued that in response to suchcomplaint, LNG industry stakeholders would have to prepare and publish reliable certificates on
GHG emissions for each LNG project based on its total supply chain.
Third, global gas industry stakeholders’ hopes on and interest in the Asian LNG market’sgrowth and development are growing more and more, as noted above. Particularly, they indicatedhigh interest in the Chinese market that has driven LNG market growth in recent years. Although
Chinese LNG demand maintains double-digit growth, an economic growth slowdown, thedeceleration of switching from coal to gas and the potential expansion of non-LNG gas supply
options indicate great uncertainties about future LNG demand expansion. The degree of Chinese
LNG demand growth would greatly influence the LNG market supply-demand balance and continueto attract global interest. Given that Southeast and South Asian emerging LNG consuming countries
as well as China are expected to expand their demand in the future, participants in the conferences
vividly discussed the issues related to the affordability of LNG prices. They questioned if current
low spot LNG prices could secure future investment while stimulating demand, as did the IEEJ
Outlook 2020. All stakeholders must make constructive arguments and initiatives to soundly develop
the Asian LNG market.
Finally, it was pointed out that LNG buyers and sellers could activate their arguments andnegotiations in consideration of the recently remarkable deviation between long-term contract andspot LNG prices in Asia. Gas market stakeholders in the world will remain conscious of and discussand negotiate desirable, realistic and promising pricing mechanisms for the Asia market as a very
important issue.
Contact: report@tky.ieej.or.jp
The back issues are available at the following URL
http://eneken.ieej.or.jp/en/special_bulletin.html
2