including Gas Market Highlights 2022

Record high gas prices and volatility weighed on hub liquidity in 2022 Natural gas hubs enable market participants to trade gas in open, competitive gas markets. Traded products typically range from short-term contracts (e.g., within-day, day-ahead and week-ahead) to products with a delivery horizon several years ahead. Short-term contracts are usually underpinned by physical delivery obligations and are crucial for short-term physical balancing. Products with a longer delivery horizon play an important role in allowing midstream utilities to optimise their portfolios and manage risk. Hub liquidity ensures that demand from market participants is matched by supply in a time- and cost-efficient manner without causing significant price changes. Greater liquidity improves allocation efficiency and supply security and enables price discovery. One metric used to assess liquidity is the churn rate, which indicates how many times a unit of gas has been exchanged before being delivered to end consumers. Markets with a churn rate above 10 are generally considered to be liquid.

Churn rates continued to decline across all key natural gas markets

The value of global LNG trade surged to an all-time high in 2022, amid soaring spot gas prices Despite rising by a mere 5.5% in volumetric terms, the value of global LNG trade doubled in 2022 to an all-time high of USD 450 billion. The global energy and gas crisis triggered by Russia’s invasion of Ukraine drove up spot gas prices and LNG import bills to record levels across key Asian and European markets. Gas and LNG producers’ record profits could support additional investment in reducing the emissions intensity of gas value chains, enhancing methane capture efforts and diversifying economic structures to adapt to the new global energy economy that is emerging. LNG played a critical role in mitigating the impact of Russia’s deep cuts in piped gas supply to the European Union and was instrumental in avoiding gas supply shortages in 2022. The stiff competition for flexible LNG cargoes between Asia and Europe provided strong upward pressure on hub and LNG spot prices throughout the year. In Europe month-ahead prices on the TTF averaged over USD 40/MBtu in 2022, almost eight times their fiveyear average between 2016 and 2020. In Asia LNG spot prices followed suit, averaging at USD 34/MBtu over the year, more than five times their five-year average between 2016 and 2020. Consequently, the estimated value of LNG traded under spot mechanisms – more than doubled to over USD 230 billion.

The European Union adopted a Joint Gas Purchasing Mechanism in 2022

European gas demand recorded its steepest drop in history in 2022… Natural gas consumption in OECD Europe fell by an estimated 13% (over 70 bcm) in 2022 – its steepest decline in absolute terms in history. Record high gas prices led to an unprecedented reduction in gas demand in industry, while milder weather conditions weighed on distribution network-related demand. Over 40% of the reduction in annual demand was concentrated in Q4, when natural gas consumption fell by an estimated 20% (33 bcm) y-o-y. Distribution network-related demand fell by 15% (34 bcm) in 2022, accounting for almost half of the total reduction in OECD Europe’s gas consumption. Milder weather conditions weighed on space heating requirements, while record high prices incentivised fuelswitching, energy efficiency measures and conservation efforts in the residential and commercial sectors. Q4 2022 saw distribution network-related demand fall by an estimated 20% y-o-y. Unseasonably mild temperatures in October and the first half of November delayed the start of the European heating season by almost a month and led to a steep 30% y-o-y reduction in distribution network-related demand during these months. The short-lived cold spell in the first half of December temporarily increased residential and commercial demand to above 2021 levels, although it was insufficient to reverse the overall demand trend.

…declining by over 70 bcm in 2022 amid mild weather and demand reduction in industry

Asian gas demand came under pressure in 2022; recovery in 2023 is expected to be modest Asia’s gas consumption decreased by an estimated 2% in 2022 as a result of high LNG prices, Covid-related disruptions in China and mild weather during most of the year in Northeast Asia. This represents a sharp reversal from 2021, when gas demand rose by a robust 7% as the region’s economies recovered from the Covidrelated shock of 2020. Asian gas demand is projected to return to modest growth of around 3% in 2023 thanks to the lifting of China’s zero-Covid policy, an assumption of normalising weather and the modest recovery of India’s and Emerging Asia’s gas consumption after steep declines in 2022. China’s gas consumption decreased by nearly 1% in 2022 according to the latest data from the Chongqing Petroleum and Gas Exchange; the NDRC reported a 1.7% drop for the same period. Last year’s demand decline was the combined result of slowing economic growth, price-driven demand destruction and widespread lockdowns under China’s strict zero-Covid policy. It represented the first annual decline in Chinese gas consumption in four decades. The biggest drop in demand came from the power sector, where record growth in renewable output and a robust increase in coalfired generation squeezed gas-fired plants in the electricity mix. Combined consumption in industry and the energy sector registered a small decline as a result of high prices and Covid-related disruptions, while the city gas segment experienced modest expansion thanks to growing gas penetration and weather effects (with heating degree days nationwide up by 16% and cooling degree days up by 1% compared with 2021). In 2023 China’s gas consumption is projected to see a nearly 7% rebound, led by the industrial sector. The 2023 demand increase is fuelled by the expected recovery of economic activity following the easing of Covid-19 lockdown restrictions and China’s diminishing exposure to high and volatile spot LNG prices thanks to its newly signed LNG contracts. These offer LNG at an average price of less than USD 15/MBtu, substantially lower than recent prices on the spot market. According to our database, about 13 bcm of new LNG contracts are scheduled to start delivering in 2023 alone.

Widespread 2022 demand declines in Asia are set to be followed by an uneven recovery in 2023

The big unknown: LNG demand in China in 2023 China’s appetite for imported LNG ranks among the greatest uncertainties for 2023, not just for the global LNG market, but also for gas supply availability in Europe in the face of severely reduced pipeline gas flows to the continent from Russia. In 2022 net LNG imports into China dropped by an unprecedented 21% (22 bcm) compared with a 17% (16 bcm) increase in the previous year. This reduction played a crucial role in enabling a 63% (65 bcm) increase in LNG inflows into Europe to compensate for the lost Russian volumes. However, the 2022 collapse of Chinese LNG demand was precipitated by a unique set of factors – namely high spot LNG prices, slowing economic growth, and lockdowns under China’s strict zero-Covid policy – that are unlikely to be repeated in precisely the same combination in 2023. Our analysis indicates that a set of only moderately bearish assumptions on China’s total gas consumption, domestic production and pipeline gas imports could depress the country’s LNG demand by another 12% (10 bcm) in 2023, whereas a confluence of moderately bullish conditions could boost China’s LNG intake by 35% (30 bcm) to well above the previous peak in 2021. The total uncertainty range is about 40 bcm, with China’s 2023 net imports reaching 75 bcm at the low end and 115 bcm at the high end. This range is greater than the uncertainty associated with the potential loss of all remaining pipeline gas flows into Europe from Russia, which have averaged about 28 bcm on an annualised basis since deliveries via the Nord Stream 1 pipeline were cut off indefinitely at the end of August 2022.

China’s demand for LNG in 2023 presents 40 bcm of demand uncertainty for the global LNG
market

European countries set more ambitious hydrogen targets for the medium term Several European countries unveiled their hydrogen strategies and roadmaps in 2022. Others revised their hydrogen strategies, setting more ambitious deployment targets for the medium term. Austria published its National Hydrogen Strategy in June 2022. The strategy targets the installation of 1 GW of electrolyser capacity for the production of renewable hydrogen by 2030. For demand creation, the strategy focuses on hard-to-abate sectors, including energy-intensive industries. In Belgium the Federal Hydrogen Vision and Strategy was approved by the Council of Ministers in October 2021. An updated version was published in October 2022. The strategy focuses particularly on the importance of renewable hydrogen and its potential to decarbonise industry and transport. According to the updated version, total domestic demand for both hydrogen molecules and hydrogen derivatives is seen to increase to 125-200 TWh/yr by 2050.

Hydrogen strategies, roadmaps and papers published in Europe since 2022

Biomethane production grew by a record amount in 2022 2022 marked another record year for biomethane production growth. Global biomethane supply increased by an estimated 16% (or 1 bcm) in 2022 to close to 7 bcm. This was primarily driven by the European Union and the United States, together accounting for approximately 90% of incremental biomethane supply. The United States remains by far the largest biomethane-producing country in the world, a position it has held since 2019. The country’s biomethane output grew by an impressive 20% (close to 0.4 bcm) to reach 2 bcm in 2022, accounting for almost 30% of global biomethane output. It currently has over 250 operational biomethane facilities, with around 220 additional plants under construction or planned. Municipal solid waste remains the single largest source of feedstock, underpinning approximately 70% of total US biomethane production. Agricultural waste accounts for almost 20% of biomethane feedstock supply, while food waste and waste water account for the remaining 10%. Supply growth in 2022 was largely driven by biomethane facilities relying on agricultural waste as a feedstock. These plants alone accounted for over 55% of incremental biomethane supply in 2022, followed by facilities using municipal solid waste. It is estimated that around 90% of biomethane production facilities have grid injection capability, with the remaining 10% dedicated to on-site use. As for end use, approximately 90% of biomethane serves as a transport fuel, with the remaining 10% primarily used for power generation. The Renewable Natural Gas Incentive Act of 2022 was introduced in Congress in December 2022. The bill would create a ten-year USD 1 per gallon tax credit for sellers of renewable natural gas used for transport.

Global biomethane production reached close to 7 bcm in 2022

Source:http://IEA