How Natural Gas Market Integration Can Help Increase Energy Security

IMF Blog, May 23, 2023

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Natural gas moves mainly by pipeline, creating a partially fragmented global market with regional price differences.
Unlike crude oil, which tends to trade at a single price in most places, natural gas prices can differ dramatically across regions because of the complex infrastructure needed to transport it.
Pipeline flows to Europe from Russia dropped by 80 percent since mid-2021 after Russia’s invasion of Ukraine, contributing to sharp regional price divergence.
LNG (liquefied natural gas) requires conversion into a compact form about 600 times smaller by volume than in its gas form for sea or road transport, adding technological and infrastructural constraints.

Russia’s invasion of Ukraine sent Europe’s gas prices up 14-fold to a record level in August 2022; LNG prices globally saw a similar jump.
LNG prices in the United States merely tripled, remaining several times below Europe and Asia.
European reliance on LNG to replace pipeline imports was facilitated by:
- Asian customers rerouting US LNG cargoes to Europe when Europe commanded a temporary price premium during the spring and summer of 2022.
- Long-term pricing formulas for contracts with US companies that usually use US prices, allowing Asian buyers to purchase more cheaply from the US and resell into the higher European spot market.
European LNG import capacity was not a binding constraint: import terminals had plenty of spare capacity before Russia’s invasion, and mobile floating storage regasification units expanded flexibility.

The United States surpassed Russia in 2012 as the world’s largest gas producer, driven by rising shale gas production and expansion of export terminals (the first US LNG export terminal opened in 2016).
Global LNG export capacity is fixed in the short-term because liquefaction, exporting, importing, and regasification facilities require major investment.
Sizable expansion projects already under construction in the United States, Africa, the Middle East, and elsewhere are likely to increase global LNG export capacity by 14 percent by 2025.
Other planned projects could bring export capacity to around 1 trillion cubic meters, roughly a quarter of last year’s global gas consumption.
Typical financing and construction hurdles for new terminals:
- Companies need 15- to 20-year contracts to obtain bank financing for construction.
- Terminals usually cost $10 billion to $15 billion and take two to four years to complete.
- Timelines are less certain for projects without long-term sales contracts, and some may never be built.

Expanded LNG export capacity for the United States and other producers may be crucial to creating truly global gas markets that are balanced across regions.
Greater market integration allows prices to stimulate demand and supply responses in larger, more integrated markets, helping to buffer global energy markets against supply shocks.
As advanced economies increase reliance on weather-dependent renewable energy from wind and solar, critical periods of increased demand for supplemental natural gas are likely to occur; integrated global gas markets and necessary infrastructure enable more resilient responses to such episodic demands.

How Natural Gas Market Integration Can Help Increase Energy Security — Rachel Brasier, Andrea Pescatori, Martin Stuermer; May 23, 2023