China is buying more gas and that is a problem for Europe | Interior

Europe had just become accustomed to steadily falling gas prices. And the outlook seemed bright. The gas storage facilities were already well filled and the demand for gas remained limited. Ideal conditions for a low gas price. At the end of May, the European gas price fell below the limit of 24 euros per megawatt hour (mWh) for the first time in two years. This put us far from the more than 300 euros per megawatt hour recorded last summer.

The question is whether it will stay that way. On Monday, the price jumped to 29.36 euros per megawatt hour. In the meantime, it has dropped somewhat, but the gas price is still higher than before Monday.

There are several reasons for the sudden price increase. For example, a large Norwegian gas field is shut down for maintenance work. This means that less Norwegian gas is coming to Europe. “But such maintenance is planned long in advance, so it cannot come as a surprise,” says Cyril Widdershoven, an independent energy expert.

However, Widdershoven points to the increased demand from Asia as the main cause of the price increase. And demand continues to pick up. China thinks it’s a good time to buy more.” Countries such as Japan and Korea are also entering the gas market.

This mainly concerns LNG, liquefied natural gas. “That is a global market. If a party pays a dollar more per megawatt hour, it is already lucrative to transport the gas there,” says Widdershoven.

That turned out to be the case, because American LNG ships have been heading to Asia with their cargo in recent days. There are two reasons for the increase in demand from the Far East. First of all, it is already unusually warm. This means that a lot of electricity is used for the air conditioning. And electricity is partly generated in gas-fired power plants.

In addition, growth is picking up, which means that more gas will be consumed anyway. The demand is therefore structurally increasing and that is a problem for Europe. We have few long-term contracts for the purchase of LNG. “That means we have to buy gas on the spot market. And prices on the spot market respond immediately to supply and demand,” explains Widdershoven. As demand rises, so does the price. A problem that you do not have with long-term contracts, which have fixed price agreements.

“I don’t understand why Europe stopped agreeing to long-term contracts when the price fell,” says Widdershoven. Because the scarcity on the gas market is far from over, according to the energy expert. “It will certainly take until 2026 before there is sufficient capacity to meet the demand for LNG.”

Europe’s hesitation in concluding contracts for ten or twenty years is understandable. The intention is to get rid of the gas as quickly as possible, in connection with the climate. But for the time being, Europe is still largely dependent on gas for its energy supply.

Until 2026, Europe will therefore have to compete with Asia for the scarce LNG. Europe is at a disadvantage because Asian countries have already purchased a large part of their gas needs through long-term contracts.

Widdershoven expects structurally higher gas prices, up to 75 euros per mWh. “And it is possible that countries such as Pakistan and Bangladesh have no money at all to purchase LNG from Qatar. Then there will be extra LNG on the market, which can lower the price somewhat.” In a favorable scenario with a mild winter, the price may be lower.

It is difficult for consumers to choose whether or not to conclude a multi-year energy contract. If the winter is mild again and Qatar can supply extra LNG, there is a good chance that the price will fall again. But with a harsh winter and high prices, it was wise to fix the price in advance. It is therefore a matter of choosing certainty in the longer term or hoping for a favorable scenario with falling prices again.

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