Executive summary
A gradual rebalancing of natural gas markets Global gas markets moved towards a gradual rebalancing over the 2022/23 heating season, following the supply shock sparked by Russia’s invasion of Ukraine in February 2022. Spot gas prices across the key northeast Asian, North American and European markets dropped by close to 70% between mid-December and the end of the first quarter of 2023, while storage sites ended the heating season well above their five-year averages. The reduced market strains and relatively well stocked storage sites ahead of the summer are reasons for cautious optimism for supply security. However, this confluence of factors should not distract from the further measures needed to mitigate potential risks that could quickly renew market tensions and price volatility. The European and global gas markets suffered a major supply shock in 2022 when Russia sharply reduced its pipeline gas deliveries to the European Union – by 80% over the course of the year – and triggered a global energy crisis. Russia’s steep gas supply cuts led to a reconfiguration of global LNG flows, drove up natural gas prices to all-time highs both in Asia and Europe and necessitated a readjustment in gas demand.

Global gas supply is set to remain tight in 2023 amid lower Russian pipeline gas deliveries to Europe Global LNG supply is forecast to increase by a mere 4% (or over 20 bcm) in 2023. This would not be sufficient to offset the expected reduction in Russia’s piped gas supplies to Europe. The United States is projected to account for over half of the global supply increase in 2023 and become the world’s largest LNG exporter. This growth will be supported primarily by the ramping up of the Calcasieu Pass LNG terminal and the restart of Freeport LNG, which returned to full service at the end of the first quarter of 2023. In addition to the United States, LNG supply from Africa and South and Central America is projected to increase by close to 10 bcm amid improving feed gas availability and the ramping up of the Coral South and Congo floating LNG plants. By contrast, Russia’s LNG output is expected to decline. Sakhalin-II LNG’s project operator announced in February 2023 that the plant will move away from the “peak load” strategy it has been pursuing in the last few years, while production from YAMAL LNG is expected to decline by 5% year-on-year in 2023.

Gas demand increased in North America during the winter, but is expected to contract in 2023 During the winter season of 2022/23 the United States saw an estimated 0.6% year-on-year (y-o-y) increase in its consumption of natural gas. As temperatures plummeted in December, the end of the year saw a dramatic rise in the demand for natural gas for commercial and residential heating. The first quarter of 2023, however, saw a significant reversal, with mild temperatures nearly reversing the increase in demand over the previous year’s winter season. Overall, natural gas consumption saw a 5.3% rise in 2022, driven by the use of natural gas for power generation. This was stimulated by the need for cooling, which can be attributed to high temperatures during the summer months. Furthermore, the retirement of coal-fired power plants and relatively high coal prices, along with lower than average coal stocks, caused coal consumption for power generation to decrease, leading to a switch in favour of natural gas for electricity generation. This resulted in natural gas accounting for 38.0% of the power mix on average during the winter period, or a 3 percentage point increase over the previous winter, while coal fell to 18.4%, a drop of 2.5 percentage points.

Not feeling the heat: Gas prices moderated significantly during the 2022/23 winter Unseasonably mild weather, lower gas demand and improving supply fundamentals weighed on spot gas prices across all key gas markets during the 2022/23 winter. By the end of Q1 2023, Asian spot LNG and European hub prices had fallen below their summer 2021 levels, albeit remaining well above their historic averages. In Europe, Title Transfer Facility (TTF) spot prices averaged USD 23/MBtu during the 2022/23 heating season – almost 30% below the levels experienced in the previous winter. Gas prices on the TTF declined by almost 70% between mid-December 2022 and the end of March 2023. Unseasonably mild weather conditions, lower-than-expected gas use, strong LNG supply and gas inventory levels standing well above their historic averages provided strong downward pressure on European gas prices. TTF spot prices averaged USD 17/MBtu in Q1 2023, a decline of 48% on the same period the year before, although remaining more than three times the historic average of the 2016-2020 period. The TTF retained a premium of USD 2.6/MBtu above the NBP hub in the United Kingdom. This incentivised continued gas exports from the United Kingdom to the European Union over the heating season, totalling at over 7 bcm. By the end of March 2023, TTF month-ahead prices had fallen to USD 13/MBtu, their lowest level since July 2021.

Japan: A first mover in the e-methane space Recognising the benefits of e-methane, Japan is considering methanation as a key component of its strategy to decarbonise its gas supply. The country’s 6th Strategic Energy Plan set a target for synthetic methane to comprise 1% of the gas supply in existing networks by 2030, increasing to 90% by 2050. Japan aims to reduce e-methane costs to JPY 120 per normal cubic metre (Nm3) (USD 25/MBtu) by 2030, and down further to JPY 50/Nm3 (USD 10/MBtu) by 2050. The country’s Strategic Energy Plan aims to ramp up annual emethane supply to 0.28 Mt (or 0.38 bcm/yr) by 2030 and 25 Mt (or 34 bcm/yr) by 2050. This amount excludes direct hydrogen, biogas and other direct uses of non-fossil fuels. The strategy highlights the importance of a closer co-operation between the various stakeholders on the supply and the demand side in decarbonising gas. To foster the development of e-methane, a Public-Private Council for the Promotion of Methanation was established in June 2021.

In addition to domestic demonstration projects, Japanese utilities and trading houses have started jointly exploring the feasibility of developing e-methane supply chains with LNG exporting countries. While no binding agreements have been reached yet, these recent project proposals could potentially enable 0.4 Mt/yr (or 0.55 bcm/yr) of e-methane imports into Japan by2030 This would equate to around 0.6% of Japan’s natural gas consumption in 2022. Projects include the agreement between Tokyo Gas, Osaka Gas, Toho Gas and Mitsubishi Corporation to conduct a feasibility study of the production of e-methane at the Cameron LNG terminal in the United States. The companies’ intention is to export 130 000 t/yr of synthetic methane by 2030. Similarly, Osaka Gas, Tallgrass Energy and Green Plains agreed in December 2022 to conduct a joint feasibility study on synthetic methane production. The firms aim to produce up to 200 000 t/yr of synthetic methane by 2030 and export it to Japan from the Freeport LNG export terminal in the United States. Most recently, Osaka Gas Australia and Santos agreed in March 2023 on pre- front end engineering and design work for a demonstration-scale project to produce e-methane from low-emission hydrogen in Australia. The two companies aim to reach a final investment decision in 2026 and export about 60 000 tonnes of e-methane annually by 2030.

Source:http://IEA