When Russian forces mounted their invasion of Ukraine in February 2022, it was clear immediately that the consequent dislocations in the global energy sector would be profound. This was most obvious with respect to Western and Central Europe, with their heavy dependence on imports of Russian natural gas, crude oil, and petroleum products. Replacing Russia’s import volumes initially seemed a very daunting task, particularly with regard to natural gas, where so much European industry and power generation capacity had been built on the assumption that Russian supplies were secure. The outcome for Europe over the ensuing two years has been better than most expected, however, with the flexibility provided by liquefied natural gas (LNG) regasification terminals allowing new supplies to come into Europe, mainly from the world’s new top exporter of LNG, the United States, albeit at higher prices. 

This scramble for natural gas supplies has come largely at the expense of Asian spot buyers. With oil, most Russian supplies were diverted to other markets in response to U.S. and European embargoes under a partially effective U.S.-backed “price cap” mechanism. However, much of the Russian natural gas supply destined for Europe previously had nowhere to go, so volumes overall were curtailed. While there was a substantial amount of new LNG liquefaction capacity under construction, there was no real reserve of unused “spare capacity” such as that which exists with oil production. 

Most of the LNG volumes are also sold under long-term contracts, sometimes subject to “destination clauses” which prohibit resale in another region and much priced with a linkage to oil prices, with the amount of flexible “spot” supply much smaller but having grown as a share of the overall LNG market in recent years. The market cleared by a price-driven rerouting of spot volumes toward Europe, some of which was facilitated by weaker-than-expected natural gas demand in China since 2022 due to slowing economic growth, and some of which benefited from Qatar temporarily waiving destination requirements, but much of which inflicted significant pain elsewhere, spreading out the economic damage from the war in Ukraine.

One of the companies most exposed to the shock was the Korea Electric Power Corporation (KEPCO), South Korea’s state-owned electric utility. Hit by drastically high spot LNG prices and oil-linked prices on term contracts driven up by crude oil’s rise past $100 per barrel during part of 2022, KEPCO incurred massive losses in 2022 and 2023, responding mainly by borrowing—with its debt running up to $154 billion by mid-year. After initially shielding consumers with its ability to borrow at low rates as a government-backed entity and some asset sales, KEPCO raised rates three times in 2023 and returned to small net profits in the second half of the year. However, the debt burden is still a significant drag on the company, with interest rates rising.

Japanese utilities also suffered price shocks but were more insulated due to their smaller reliance on spot cargoes and the reduction in overall LNG imports as the country’s fleet of nuclear reactors has restarted in recent years, steadily lowering LNG imports. However, a few of the smaller-volume and financially weaker LNG consumers were hit extremely hard without the means to shield their consumers from the impact. India saw its LNG import volume decline by 15 percent in FY 2022-23. Pakistan and Bangladesh reduced their LNG imports by 19 percent and 10 percent, respectively, in 2022, and the volumes they had purchased on the spot market largely disappeared. This even led to a surge in blackouts during peak demand periods in Bangladesh as peak generating capacity was curtailed effectively.

One of the lessons from the market experience in 2022 is the immense value of a flexible U.S. supply. While it did not provide spare capacity, most of it is free to be resold by its buyers in response to price signals, of which a number of off-takers—largely Chinese companies—took advantage. Much of the other existing LNG supply, particularly from Qatar, is governed by destination clauses, which limit this flexibility. 

Since the Biden administration has paused new LNG export capacity approvals for non-FTA countries, which are required to attract financing for the projects, the trend toward a more consumer-driven LNG market with more flexible contract terms has been interrupted. Qatar is likely to regain its place as a top global supplier by the end of its current expansion program for the North Field in 2030, with Qatar at a market share of around 25 percent of global supply. The lag in U.S. supply additions could weaken the pressure for more flexible contract terms, which had proven useful in 2022 for redirecting supply to Europe so quickly.

Greg Priddy is a Senior Fellow for the Middle East at the Center for the National Interest. Follow him on X: @GregPriddy1.

Image: Shutterstock.com.