Gas demand could peak sooner than thought, research shows

The buildout of LNG infrastructure faces increasing financial risk as global gas demand could peak before 2030 and enter into decline, according to new data.

The 2022 gas supply shock stemming from the war in Ukraine led to a spike in prices, and in response, a “new global gas market is taking shape,” the International Energy Agency (IEA) said in a July report. Europe scrambled to replace Russian gas, making LNG a “new baseload” source of power. A flurry of investment poured into new LNG export terminals, many located on the U.S. Gulf Coast, and a handful received a greenlight for construction.

The IEA credited “the growing flexibility and liquidity of the global LNG market” as “crucial” to the response to the energy crunch last year.

But even as the crisis incentivized new gas supply — and led to record profits for major energy companies — it has simultaneously inflicted significant long-term damage on the gas industry. Despite oft-repeated claims that more gas is needed to enhance energy security, demand forecasts are now shakier than they once were.

The IEA sharply downgraded its global gas demand projections for the period between 2020 and 2024, lowering its demand figure by 40 percent compared to a prior assessment published before Russia’s invasion of Ukraine.

“Europe alone accounts for more than half of this downward revision,” the IEA wrote. “This reflects more stringent energy efficiency standards, the accelerated deployment of renewables and quicker electrification of heat, as well as a reduced role of natural gas in industry.”

The IEA lays out several scenarios for gas demand through the end of the decade, with gas demand trajectories ranging from a plateau to a significant decline.

“Even under the most conservative, business as usual, IEA scenario (STEPS), gas demand will peak by 2030,” Maria Pastukhova, a Berlin-based senior policy advisor at E3G, a climate change think tank, told Gas Outlook. “The demand has not risen past the 2021 peak so far, but it’s still unclear to what extent this may be permanent and lock in a much earlier peak.”

In 2022 alone, gas demand in the EU fell by 13 percent, as painfully high prices forced cutbacks and broader efficiency measures took hold. In another key market, the United States, demand for gas could decline by 12 percent over the course of this decade as a result of the Inflation Reduction Act, which will funnel hundreds of billions of dollars into renewable energy.

Pastukhova added that if the EU fully implements its RePowerEU plan — a €210 billion energy efficiency and clean energy strategy rolled out in the wake of the war in Ukraine — Europe’s gas demand would fall in half by 2030.

“It looks very certain that the EU can reduce demand by a third at the very least given its legislative framework and extrapolating recent demand trends,” Pastukhova said.

But gas demand is still at risk of remaining too high this decade, threatening climate targets. In order to align with the Paris Agreement, gas demand would need to decline by 19 percent by 2030, according to E3G.

Kathrin Henneberger, a member of Germany’s Bundestag, says the buildout of LNG import infrastructure in Europe is both a financial risk and a threat to climate targets.

“In Germany, we are planning too many LNG terminals. There will be an overcapacity,” Henneberger told Gas Outlook. “The first mistake was to depend on gas from Russia. The second mistake is to, instead of changing our whole energy system, build this long-term infrastructure and to have long-term contracts.”

“I’m afraid with that, we are losing the goal of our climate targets,” Henneberger said. “It’s a false solution to depend on fossil fuels anymore.”

Uncertain pace of demand growth in Asia

As gas demand faces declines in both the U.S. and the European Union, the gas industry has pinned its hopes for growth on Asia. But Asian markets have proven to be highly price-sensitive when it comes to LNG.

Globally, gas demand contracted by 1.5 percent in 2022, and “the bulk of the demand reduction was concentrated in key Asian and European import markets,” the IEA noted, with preliminary data showing the downward trend continuing into the first half of 2023. Gas demand is expected to return to growth this year and next, with 80 percent of the increase coming from the Asia Pacific region.

But longer-term, the forecasts are highly uncertain, and the recent contraction in gas demand in Asia seemed to pierce the narrative that the region was in the midst of an inexorable expansion for many years to come. That reevaluation of growth prospects has even come from the gas industry itself.

In a recent report, the International Gas Union (IGU), an industry trade association for international gas companies, noted a murkier future for gas demand following the war in Ukraine and increasingly stringent climate policy.

“[W]hile the energy crisis triggered by the conflict has mainly driven balances in favor of new LNG supplies, higher prices have led to price-induced demand risk in addition to prevailing policy-driven long-term demand risk under the low-carbon emissions trend,” the IGU wrote in their annual report published in July.

The IGU went on to note that high LNG prices have pushed developing countries in Asia, including Bangladesh and Pakistan, away from procuring LNG cargoes. That dynamic was on display in late July, when Pakistan decided against buying costly LNG for early 2024 because it was too expensive.

“This poses a risk for future LNG demand in Asia that previously had been expected to be a key region for LNG demand growth in the coming decades,” the IGU wrote, referring to several Asian countries deciding to look for alternatives to LNG.

“Overall, last year’s shift in LNG balances has driven a spike in LNG contracting activity and LNG project approvals, but uncertainty looms, triggered by the doubts over the long-term role of natural gas in key importing markets,” the IGU concluded.

Meanwhile, larger countries are also looking for alternatives to gas. Japan, one of the world’s largest importers, is restarting more nuclear power plants shuttered after the 2011 Fukushima disaster. More nuclear power, along with efficiency, renewable energy, and favourable weather, could cut Japan’s gas use by nearly 10 percent this year.

China is another major source of LNG demand, but it is increasingly shifting to renewable energy.

“Renewables in China are both used to meet new demand and replace much of the anticipated coal-to-gas switch in the power sector, with coal-fired power generation shifting to renewables instead,” Pastukhova from E3G said.

Much of the recent change comes back to the war in Ukraine and the subsequent price spike for gas, which has upended the fuel’s future. Even though it resulted in short-term profits for gas producers and exporters, extreme volatility has likely inflicted long-term damage on gas demand.

“The war and ensuing energy market disruptions have hastened the transition away from gas,” Pastukhova said. “Due to gas price spikes and supply shortages on the global market, importers have introduced far-reaching policies that will structurally reduce gas demand this decade.”