IEEJ：December ©IEEJ 2022
Special Bulletin
A Japanese Perspective on the International Energy Landscape (616)

December 23, 2022

Talks in U.S. on LNG Market Outlook and Challenges
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
Last week, I visited the United States to talk with energy policy and industry stakeholders
and experts on a short to long-term outlook and challenges for the gas/LNG market. As internationalenergy markets as a whole have been greatly shaken since the emergence of the Ukraine crisis, theEuropean gas market has featured the most severe developments such as price spikes, the tightening
supply-demand balance and destabilization, seriously affecting the global LNG market. The Dutch
Title Transfer Facility (TTF) price, or the European benchmark for natural gas, skyrocketed to some$100 per million British thermal units in late August as a substantial fall in Russian pipeline gas
exports, the main traditional gas supply source for the European market, led to a tighter
supply-demand balance and concerns about potentially serious gas shortages. Spot prices of LNG,
which used to make up for the Russian supply fall, soared in line with European gas prices, hittinghighs close to $70/MMBtu. Later, European gas and spot LNG prices fell back from highs andrestored stability. But they have remained as high as $30-40/MMBtu.
The biggest issue for 2023 and 2024 is whether European gas and LNG markets will face atighter supply-demand balance and destabilization again. While the markets have restored stability,
no optimism can be warranted for the immediate future for several reasons. One reason is that
European gas inventories, which increased to a full capacity level briefly, will decline toconsiderably low levels next spring and fail to be accumulated through Russian pipeline gas exports.
Other reasons include potential additional falls in Russian pipeline gas and LNG supply, unexpecteddisruptions to supply from other countries and potential gas demand growth in China after a plunge
in 2022. The European gas market will stay on a tightrope, being vulnerable to a tightening
supply-demand balance. After the substantial decline in Russian gas supply accounting for a quarterof global gas exports, countries may race to obtain gas supply including LNG. The global gas/LNG
market will thus remain unstable and vulnerable.
Any harsh race to obtain gas/LNG supply may push up prices even beyond the highs
recorded in 2022. This may deal a severe blow to the European economy and exert spillover impacts
on other gas consuming and importing economies. While the European Union has agreed tointroduce a gas-price cap system, how the system would work still remains uncertain along with its
effects. Price hikes may make it difficult to buy or import gas in low-income developing countries,
leading to constraints on energy supply. Gas/LNG price spikes may lead these countries to depend
more on relatively cheaper coal, resulting in an increase in CO2 emissions as another spill-overeffect.
To prevent such adverse impacts, relevant countries must be aware that the avoidance ofany disorderly, exclusionary zero-sum game race to obtain gas supply would serve global interests,
1

IEEJ：December ©IEEJ 2022
must reaffirm the significance of their cooperation in coping with crises, and must refrain fromtaking excessively selfish actions. To these ends, they should reduce gas and electricity consumption
and utilize all effective alternative energy sources. At the same time, they should secure gas andLNG investment to expand the reduced supply. Particularly, investment should be secured in LNG
seen as a key alternative gas supply source to maintain and stabilize market order, although LNG
investment takes some time before leading to supply expansion. In this sense, Europe should beencouraged to reconsider its recent attitude of striving to secure supply while being reluctant toincrease investment.
The gas/LNG market also has various challenges for the medium to long term. First, howgas/LNG demand would change over the medium to long term is uncertain. If priority is given todecarbonization goals and geopolitical issues, gas/LNG demand may be expected to decline
substantially. However, market realities indicate that global gas/LNG demand will expand. The IEEJ
Outlook 2023, our latest long-term global energy outlook, shows that gas/LNG demand willcontinue to increase mainly in Asia until 2050 even in the Advanced Technologies Scenario wherefossil fuel demand will be suppressed under climate change and energy security measures. As far as
gas/LNG demand increases in the future, investment must be secured and implemented to meet theincrease in demand and stabilize the market.
My talks in the United States allowed me to reaffirm that the abovementioned different
gas/LNG demand projections lead to different views about the roles of gas/LNG. Those who givepriority to decarbonization and see gas/LNG as part of fossil fuels argue that even Asia, featuring
growing energy demand and coal’s large share of energy consumption, should promote a leapfrog
transition from coal to renewable energy instead of LNG investment. However, most of the experts
with whom I talked during my recent U.S. visit argued that Asia should promote a transition fromcoal to gas/LNG first before decarbonizing gas/LNG (using blue hydrogen/ammonia and syntheticfuels), while accelerating energy efficiency improvement and spreading renewable and nuclear
energy. Such step-by-step approach would be effective and efficient, they said. An interesting
opinion was that the transition from coal to gas represents the “low hanging fruit” approach that iseffective as the first step toward decarbonization as indicated by the U.S. experiences under the shalerevolution.
As a matter of course, the United States has successfully taken advantage of the low
hanging fruit approach thanks to the shale revolution, which dramatically lowered gas prices. The
current high gas/LNG prices are impeding the promotion of gas/LNG consumption. In this respect,
my talks with U.S. experts focused on how long gas/LNG prices would remain high. While it isdifficult to forecast future prices, it is unrealistic to assume that the gas/LNG supply-demand balance
would remain tight over a long time. As indicated by the international energy market history, theprinciple that high prices themselves are the most effective cure for healing high prices may work.
Regarding investment to meet a long-term uptrend in LNG demand, many of my discussion partners
pointed out that long-term commitments to link LNG supply to demand would be important for
responding to uncertainties and preventing investment to be “stranded assets”. In respect tolong-term commitments to buy LNG, there are various uncertainties, including those about market
liberalization in gas-importing countries. An interesting argument made in the talks in the UnitedStates was that market players with high capacity to buy LNG and adjust supply would play a keyrole in launching new LNG supply projects and flexibly increase supply to Asia with growing
demand, while maintaining commitments to buy LNG over certain periods of time. As seen in2

IEEJ：December ©IEEJ 2022
energy markets frequently, needs lead to solutions. It is hoped that stakeholders’ concentration of
their wisdom will play a key role.
Contact: report@tky.ieej.or.jp
The back issues are available at the following URL
http://eneken.ieej.or.jp/en/special_bulletin.html

3