IEEJ：December © IEEJ 2021
Special Bulletin
A Japanese Perspective on the International Energy Landscape (564)
December 22, 2021

European Gas Prices Up to Record Highs amid Concern over Russian SupplyKen Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
European natural gas price hikes have remained unabated. On December 21, Europeanbenchmark gas prices shot up to record highs. The British NPB (National Balancing Point) pricewent up by $10.75 per million British thermal units or 22% from the previous day to $59.84/MMBtu
and the Dutch TTF (Title Transfer Facility) price by $11.13/MMBtu or 23% to $59.67/MMBtu. On acalorie basis, the price levels amount to an oil price of some $360 per barrel, indicating alarmingly
high levels.
European gas prices continued an uptrend from the beginning of the year and haveaccelerated the uptrend since autumn. The NBP price rose beyond $40/MMBtu to a new high in
October and fell back slightly. Gas prices were then expected to stabilize. In the second half ofNovember, however, European gas prices resumed their spikes. Since early December, they havecontinued to rewrite record highs.
In Europe, gas inventories plunged due to low temperatures early this year, with demand
for gas for power generation remaining robust, leading to a need for additional gas procurement.
However, constraints on the expansion of (1) liquefied natural gas procurement and (2) Russian
pipeline gas supply have forced the supply-demand balance to tighten, pushing up prices. In Asia
known as the center of the global LNG market, LNG demand has grown steadily as symbolized by arapid increase in China’s LNG imports. Despite an increase in U.S. LNG supply, additional supply inAsia remained insufficient, leading the LNG supply-demand balance to tighten. Asian LNG spotprices temporarily topped $50/MMBtu. In such situation, it has not been easy for Europe to makeadditional LNG procurement. Europe’s additional LNG procurement has been expected to further
push up LNG spot prices.
Regarding Russian pipeline gas supply, there were complicated developments involving
international politics and business interests. From the political or geopolitical viewpoint, someEuropean policy makers criticized Russia for failing to fully meet their request for additional gas
supply or attempting to exploit the failure as a bargaining chip for carrying out negotiations on itspending Nord Stream 2 pipeline project to its advantage. Russian gas company Gazprom for its partcontinued to assert that it was fully meeting long-term contracts with European customers and saw
no commercial problems. Europe and Russia in this context thus differed and exchanged accusations
over the additional gas supply. While Russia continued to provide Europe with gas in line withlong-term contracts, no progress was seen in Russia’s response to Europe’s request for additional gassupply. This was a background element to the high European gas price hikes until October.
European gas price hikes reaccelerated in December as the two constraints on additional
gas supply remain unsolved were combined with a seasonal increase in demand for gas for heating,as well as growing military tensions between Russia and Ukraine that were expected to affect1

IEEJ：December © IEEJ 2021
Russian gas exports to Europe. The steep gas price hike of more than $10/MMBtu on December 21came as concern over Russian gas supply grew on a reported decline in Russian gas supply toEurope through major pipelines and a reported reverse gas flow to Russia. The gas flow change wasinterpreted in various ways. Some analysts noted that Russian gas demand was increasing due tocolder-than-expected weather.
The shutdown of some French nuclear power plants, robust gas demand, low temperaturesand low inventories have been coupled with perceived insecurity over Russian gas supply to bringabout the latest gas price spike. The situation could deteriorate further if winter temperatures arelower than usual or cold waves come. If Europe attempts to procure LNG even at high prices, AsianLNG spot prices may rise further, leading gas and LNG prices to accelerate their hikes globally.
In Europe, the prolonged suspension of some wind farms and electricity supply capacity
shortages have been cited as factors behind the tightening electricity supply-demand balance andelectricity price hikes since autumn. In addition, fuel procurement and price hike problems havebeen recognized as important factors. The gas price hikes are likely to lead to electricity price spikes,
threatening overall energy security in Europe. If gas supply interruptions come in the middle ofwinter, the situation may deteriorate and become critical.
Asia or Japan should not view the European gas price hikes as someone else’s problem.
Most of Asian LNG procurement is based on long-term contracts with prices indexed to crude oilprices. This means that LNG spot price spikes do not necessarily lead to any steep rise in overall
LNG procurement costs in Asia in general. However, abnormal LNG spot price hikes have thepotential to make additional LNG procurement difficult. If additional procurement is required forsome reason, procurers may have to pay very high prices. Based on experiences with temporary
LNG spot price hikes last January, Japan has maintained more LNG inventories than earlier.
However, any serious cold wave or unforeseen development could cause a tighter LNG
supply-demand balance, prompting Japan to implement additional LNG procurement.
Crude oil prices have risen back above $70 per barrel after falling below the level on
growing concern over the new COVID-19 variant named Omicron. Depending on crude oil pricehikes, future LNG procurement costs could increase. In Japan, electricity spot prices on thewholesale electricity exchange that assumes more importance have been linked closely to LNG
prices, indicating that future crude oil and LNG spot price hikes could bring about wholesale
electricity price increases, which may have not only macroeconomic impacts including electricity
and energy cost hikes in Japan and Asia but also microeconomic impacts including various
electricity market players’ electricity procurement cost hikes and competitive conditions among
various market players.
How European gas prices would change in the future is difficult to foresee due to various
uncertainties regarding temperatures and geopolitical factors related to Russia. Toward the end of2021, we will have to keep a close watch on the European energy security issue, growinginteractions between European and Asian gas and LNG markets and the future course of the Asian
LNG market. Given that these points exert great impacts on Japan’s stable energy supply, Japanese
government and business world should monitor market conditions and enhance efforts to securestable energy supply.

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