The International Energy International Energy Agency (IEA) explains how international co-operation can enhance flexibility mechanisms along gas and LNG value chains.
According to IEA, Europe’s role as a balancing market is set to decline, while China’s influence on global LNG flows is set to rise. Steep cuts in Russian gas supply reduced Europe’s ability to optimise between flexible piped gas flows and LNG imports and hence largely eroded Europe’s role as a balancing market.
China’s role as a balancing market is expected to increase over the medium term, especially when considering the country’s active role in securing LNG contracts. Nevertheless, China is unlikely to have the same balancing role as Europe had in the past due to its limited underground storage capacity, less flexibility in piped import contracts and low liquidity of domestic gas hubs.
As explained by IEA, collaboration between responsible producers and consumers is needed on several key issues. One significant area is improving the liquidity of the global LNG market. The flexibility and liquidity of this market were vital in addressing the gas supply shock of 2022. According to the IEA’s internal LNG contract database, the share of destination-free LNG contracts increased from 30% in 2016 to 47% in 2023, with expectations to rise to 52% by 2027 as destination-fixed contracts expire.
Intergovernmental agreements can help facilitate this shift by removing existing destination restrictions and easing regulations on reloading. A recent example of such cooperation is the LNG reserve agreement between Japan and Thailand, which aims to enhance regional gas supply security through improved destination flexibility.
Additionally, utilizing flexible commercial solutions, such as LNG contracts with cancellation clauses and seasonal flexibility options, can further enhance market liquidity.
Another key recommendation is to enhance the availability and deliverability of underground gas storage, particularly by integrating Ukraine’s gas storage system into the European and global gas markets. With a storage capacity of approximately 30 bcm, Ukraine can significantly bolster gas supply security amid Europe’s increased reliance on global LNG.
In 2023, Ukrtransgaz, the operator of the storage system, received successful certification under EU Storage Regulation, offering up to 10 bcm of storage capacity to European market participants. This capacity could also attract interest from global LNG players, especially those engaged in Central and Eastern Europe.
Finally, the development of voluntary gas reserves mechanisms—whether physical or virtual—can further enhance gas supply security and stabilize prices. Carefully crafted gas reserves mechanisms can contribute to greater gas supply security and price stability in the market.
