A growing gas supply gap : a closer look at Europe and Asia gas balances over the 2000-2020 period

The causes of the ongoing natural gas shortage across Europe have already been well commented. But putting aside short-term drivers (post-covid economic recovery, weather events leading to a higher storage usage or higher LNG imports, temporary production and transit issues, etc..) a look at the trend in both European and Asian gas balances over the past twenty years gives a clear view on a structurally growing supply gap in these regions leading to a stronger dependency on imports.

The demand trend is also instructive in a way that Europe gas consumption is more or less stable since 2000. Why is that?

First, we need to remind that several European countries used to be self-sufficient in terms of gas supply, and even net exporters of natural gas in 2000 for the UK and the Netherlands. These resources previously pushed the development of extensive distribution networks notably for residential and commercial heating which are still intensively used despite some energy efficiency adjustments, explaining why residential gas demand remains steady (with some variations depending on the winter intensity).

More recently, the sharp increase in EUA prices drove coal-fired power plants out of the merit order to the benefit of gas-fired plants, leading to a significant increase in gas demand for power generation over the past few years (which was quickly switched back to coal over the past few months given the extreme gas supply tightness).

On the supply side, the structural fall in natural gas production accelerated over the past few years with the relatively quick shutdown of production at the Groningen gas field in the Netherlands planned for 2022. This supply gas was mostly filled by Russian gas and LNG imports with a globally negative correlation between these flows (notably with a significant drop in Russian gas imports during the Qatari LNG bubble in 2010 and the US LNG wave last year).

In Asia, gas demand growth is strong, driven by industrial and power demand and also some coal-to-gas switch to reduce air pollution in major cities. Production is increasing but at a much slower pace than demand, leading to a growing dependency on LNG imports which amounts to almost half of total gas supply. Pipeline imports remain limited so far in the overall supply picture given the geographical positioning of some of the biggest gas consumers of the region, notably Japan. It should be noted that the overall storage capacity is more limited than Europe, leading to a bigger dependency on spot LNG imports to cope with peak demand periods.

As a consequence, the battle for flexible LNG volumes to fill storages before the start of the heating season is currently raging and Chinese officials set the tone : top energy firms have to secure supply at “all cost” as “blackouts won’t be tolerated”… fueling again the bullish spiral in global gas prices.