Global gas crisis is the world's first and it will get much worse

Consumers have developed tools to tackle an oil crisis since the 1970s, but nothing of the sort exists for gas

There have been global oil supply crises — in 1973–74, 1978–80 and 1990, all triggered by events in the Middle East. There has never been a worldwide natural gas crisis. Now we are in the midst of one — not near the beginning of the end, but probably at the end of the beginning. It is bound to get much worse from here.

There have, of course, been regional gas shocks before, usually because of weather or natural disasters such as Japan’s nuclear shutdown after the 2011 Fukushima accident (leadi

ng to a revolution in LNG trading), and some related to cut-offs for political reasons, for instance Russia-Ukraine in 2006 and 2009, and Egyptian exports to Jordan and Israel after the 2011 revolution that toppled Hosni Mubarak.

There could not have been a global gas crisis before because the market became globalised only in the last decade. For most of this time, gas prices in the world’s key consuming areas — North America, Europe and East Asia — were historically low. Investment dried up, even before prices slumped further during the pandemic in 2020. The Netherlands decided to shut down its giant Groningen field over earth tremors, removing a key source of flexible supply in Europe.

LNG export capacity still grew robustly up to 2020, driven by Australia, Russia and the US, but this was the result of projects approved earlier. Most projections saw the market becoming tight by the mid-2020s.

Three factors turned a medium-term price squeeze into an immediate crisis. First was Beijing’s decision in 2017 to replace coal with gas in home heating and industry, to clean up its smoggy air. This recreated the early-2000s oil and metals “China shock” in the gas market. This year, China overtook Japan as the world’s biggest LNG importer.

Second was the heavy spending by governments across the world to promote recovery from the coronavirus pandemic. LNG prices hit record lows during the Covid-19 lockdowns in 2020, but then resurged to all-time highs in early 2021 with some technical interruptions to supply, and high demand because of stimulus and unfavourable weather.

And third was Russia’s war in Ukraine, which is making the tight pre-war European gas market even more fraught.

The US and UK have already banned the import of gas from Russia. The EU has put coal under interdict, will consider stopping oil purchases, and will try to cut its use of Russian gas by two-thirds by the end of this year, and entirely well before 2030.

Oil and coal can mostly be redirected to other buyers; gas relies on fixed pipelines. Eighty-three per cent of Russian gas exports go by pipeline and, of that, 85 per cent is directed to Europe. Plans to send more [gas] to China will be lengthy, expensive and much less profitable. New Russian LNG projects were also a key part of anticipated future supply; they will now be long-delayed by lack of access to finance and technology, and buyer reluctance.

Since the start of the war, Russian gas flows to Europe have actually increased. The continent pays an estimated $700 million per day for Russian oil, $400m for gas and $22m for coal. If Brussels imposes an outright ban on Russian gas, or taxes, tariffs or escrow accounts to cut the flow of revenue, the Kremlin would likely retaliate.

In fact, Russian President Vladimir Putin already pre-emptively demanded that “unfriendly” countries pay their gas bills in roubles. This could be an opening gambit to start cutting supplies, or a divide-and-rule tactic. Battlefield losses will cause the Kremlin to try to open new fronts. This gas shock is going to get much worse.

Readmore: https://www.thenationalnews.com/business/comment/2022/04/11/global-gas-crisis-is-the-worlds-first-and-it-will-get-much-worse/