The global natural gas market began 2022 with expectations of modest demand growth, but that all changed with Russia’s invasion of Ukraine on 24 February. In addition to representing a massive human tragedy, the invasion triggered a major energy supply crisis, with broad repercussions for the global economy and energy outlook.

Russia’s invasion of Ukraine redefines global natural gas markets

The high price and tight supply environment that built up during the second half of 2021 further intensified following Russia’s invasion of Ukraine, leading to fuel switching and demand destruction. Today’s record prices and supply disruptions are damaging the reputation of natural gas as a reliable and affordable energy source, casting uncertainty on its prospects, particularly in developing countries where it had been expected to play a growing role in meeting rising energy demand and energy transition goals.

Global gas consumption is forecast to contract slightly in 2022, with limited growth over the next three years, resulting in a total increase of about 140 bcm between 2021 and 2025. That is less than half the 370 bcm increase seen in the previous five years and well short of the exceptional jump in demand of close to 175 bcm seen in 2021.The Asia Pacific region and the industrial sector are the main engines of growth, accounting for 50% and 60% of the growth to 2025 respectively, although both are subject to downward risks from high prices and potentially lower economic growth.

The European Union’s commitment to speed up the phase-out of Russian imports – historically its largest supplier – is transforming Europe’s gas market, with repercussions for global gas dynamics. The IEA’s 10-Point Plan to Reduce the European Union’s Reliance on Russian Natural Gas identified measures to reduce gas imports from Russia by over one-third within a year, and the European Commission’s REPowerEU Plan aims at a complete phase-out well before the end of the decade. This report’s base case assumes Russian pipeline gas exports to the EU will fall by over 55% between 2021 and 2025; we also consider an accelerated case in which Russian pipeline gas exports to the EU fall by over 75% compared to 2021. The huge uncertainties in this area are amplified by the possibility that Russia will further restrict its export flows unilaterally, as it has done already in 2022 to certain countries.

Tighter for longer?

Europe’s surging demand for LNG to replace Russian pipeline gas supply has led to an exceptionally tight global market. Record high European gas prices have turned the continent into a premium market for LNG, drawing deliveries from other regions, and resulting in supply tensions and demand destruction in several markets. Europe’s LNG needs are expected to outpace supply capacity additions in 2022, and to account for more than 60% of the net growth in global LNG trade through 2025.

LNG liquefaction capacity additions are set to slow down significantly over the forecast’s horizon, raising the risk of prolonged tight market conditions. This results from a combination of curtailed investment decisions during the period of lower oil and gas prices throughout the mid-2010s, and construction delays stemming from Covid-19 lockdowns (additional final investment decisions for LNG liquefaction capacity taken over the last year will come to fruition only after the end of our forecast period). Global LNG trade is forecast to grow at an annual average rate of just under 4% during 2021-2025, well below the 7% rate recorded over the previous five years. Long-distance pipeline trade is set to decline by an average 1.9% per year, principally driven by declining Russian flows to Europe.

The scaling up of low-carbon gas production and methane abatement can help ease supply pressure while reducing emissions. We forecast biomethane production to double through 2025, with further upside potential if additional policy measures are quickly implemented. Low-carbon hydrogen development also continues to gain traction, principally driven by Europe’s strong portfolio of projects. The IEA’s Global Methane Tracker shows that leaks from oil, gas and coal operations in 2021, if captured and used, could have brought an additional 180 bcm of gas to market – more than the projected consumption increase to 2025.

Slower natural gas demand growth does not mean a faster energy transition

In our base case, global natural gas demand grows at an average of 0.8% per year through 2025, a marked slowdown on the previous edition of this report. However, about four-fifths of the downward revision is the consequences of slower economic activity, and from reduced coal- and oil-to-gas switching as high gas prices delay conversion plans. The joint impact of efficiency and substitution of gas only accounts for one-fifth of the difference. Mature gas markets account collectively for over 55% of the downward revision, with Europe taking a large share of this difference.

Additional energy transition policies would need to be implemented in mature markets to further accelerate the decline of gas consumption. Such measures would also ease pressure on prices globally and help price-sensitive emerging markets access supplies that can contribute to delivering short-term improvements in carbon intensity and air quality by quickening their move away from coal.