Market flexibility is improving thanks to LNG and markets currently well supplied but gas security remains a concern

The IEA’s second Global Gas Security Review provides an extensive analysis of recent gas balancing issues and risks with related policy developments linked to security of supply – including the stressed situations in natural gas and power markets experienced by several southern Europe countries in the winter of 2016-2017; the diplomatic tensions between Qatar and some of its neighboring countries; and the supply risks posed by recent hurricanes on the United States energy system.

The report details how importing countries in mature and well-interconnected markets can still experience unexpected shocks that put strong pressure on the market. Even in the current low-price environment, suppliers are still exposed to low-probability but high-impact events that could have potentially serious consequences for global gas supplies.

“As recent events demonstrated, the security of natural gas supplies cannot be taken for granted even with the current low price environment and oversupplied market,” said Dr Fatih Birol, the IEA’s executive director. “From cold spells in southern Europe, to hurricanes in the Gulf of Mexico, to diplomatic tensions among Gulf countries, energy security is impossible to ignore.” 

The IEA published its first review of global gas security last year to identify and analyse critical elements of the market, such as physical production flexibility of the LNG infrastructure, and flexibility in contractual arrangements. This year’s edition updates these metrics and shows a continuing improvement in supply availability and contractual flexibility, which are expected to grow in the near future, along with diversification of market participants.

LNG contract flexibility appears as an important determinant of the resiliency of the global gas system. The report’s updated analysis of new signed contracts shows clear evidence of contractual structures becoming less rigid, a trend evidenced by the growing share of flexible destination contracts, as well as the decrease in contracts’ average duration.

The report also looks at how contract flexibility will develop over the next five years. Looking forward, the pool of legacy export contracts with fixed destination and long duration can be expected to shrink as these expire, and be replaced by more flexible contracts. The development of US exports emerges as a major source of additional contractual flexibility. Global portfolio players would play an increasing role and provide additional flexibility from their currently open selling positions.

To improve the risk assessment of importing countries, the report also introduces a new typology of LNG buyers as a tool to measure market exposure, and related security of supply issues. This typology also suggests a way to measure future LNG market evolution.