Market forces |
Jeremy Wilcox is managing director of the Energy Partnership, an independent Thailand-based energy and environment consulting firm 8/27 Sukhumvit Soi 8, Klongtoey, Bangkok 10110, Thailand | T: +66 2 653 1263 | Mobile: +66 860993375 | S: energypartnership
From crisis management to risk management
At the start of February, the expectation of new export capacity pushed the Asia LNG benchmark JKM December 2026 price down to $11/MMbtu; six weeks later the price had been lifted comfortably above $20/MMbtu and with the forward curve priced above $11 until January 2028. With QatarEnergy’s Ras Laffan LNG plant damaged and shut down, and with the company indicating potential force majeure declarations on long-term contracts with key buyers in Italy, Belgium, and South Korea, the buyer’s market that existed in February had shifted to a shortage management phase by the middle of March. The LNG outlook has shifted from an expected surplus to a severe supply crisis. While earlier 2026 forecasts predicted a ‘mega-wave’ of new supply to lower prices, military conflict in the Middle East has dramatically disrupted this trajectory. Although new capacity from the US Gulf Coast was expected to boost supply this year, outages in the Middle East and North Africa have moved the market into a short-term deficit. Total available supply for 2026 is now estimated at 443 million tons, essentially flat compared to 2025, as new US additions fail to offset Middle Eastern outages. The LNG risk that has driven up gas and power prices was not foreseen. The rising investment in new export capacity, primarily in the USA and Qatar, was seen as providing supply security to Europe following the end of Russian natural gas pipeline supply, and to Asia as countries look to meet growing power demand and to displace coal. Even at the start of the conflict the European Commission was sanguine on supply security, reasoning that unlike the suspension of Russian natural gas pipeline imports in 2022 there was no supply risk presented by LNG as buyers could secure cargoes from other sources. The reasoning
... the current crisis should serve as a warning that LNG is a risk, and needs effective mitigation.
LNG … will remain an important bridging fuel [as] back-up during periods of low … renewable supply.
is factually correct. Gas pipelines import dependency is generally considered a greater long-term security risk than LNG import dependence, primarily due to the physical inflexibility of pipelines, which creates rigid, long-term geopolitical vulnerabilities. However, in the short term, LNG dependence introduces higher risks of price volatility and vulnerability to global supply shocks, which is what we are currently seeing with the Europe gas benchmark TTF price rising to a three-year high. The European Commission response has been to urge member states to begin refilling gas reserves earlier than usual to avoid further price spikes, yet with summer at a premium to winter there is no economic incentive to inject gas into storage for withdrawal during the winter. Europe’s dependence on US LNG imports is also not playing out too well. With buyers in Europe reluctant to enter long-term LNG supply contracts, as it undermines the accelerated decarbonisation strategy, buyers face the risk of spot cargoes rerouting to Asia if the arbitrage is more favourable. Before the crisis, when buyers in Asia were taking most of their LNG from Qatar and the low price of JKM had closed the arbitrage window with US Gulf LNG, Europe was taking around two-thirds of US LNG export capacity. But the shutdown of Ras Laffan that lifted JKM has reopened the arbitrage window to Northeast Asia and has seen at least seven Europe cargoes reroute to Asia.
With no-one expecting the Middle East conflict to be prolonged, which should see the LNG risk unwind by the end of the year, it will inflict economic damage through rising inflation and possible recession; the current crisis should serve as a warning that LNG is a risk, and needs effective mitigation. Risk mitigation is best provided by avoiding over-reliance on a single supplier or region
10 | April 2026 |
www.modernpowersystems.com
as geographic diversity helps insulate against localised geopolitical instability or natural disasters. It is also prudent to combine long- term Sale and Purchase Agreements (SPAs), which provide baseline security, with spot market purchases to manage short-term fluctuations and demand spikes. Other risk mitigation measures include ‘diversion rights’ and ‘swap mechanisms’ in contracts to allow cargoes to be re-routed if local demand drops or supply routes are blocked: and ensuring that contracts have robust legal provisions to handle unexpected disruptions without incurring severe penalties.
But of course, the greatest mitigation against LNG risk is to reduce dependency by investing in renewable energy and storage to reduce the marginal dependence on imported gas for power. Unsurprisingly the renewable lobby has seized on the crisis to promote accelerated decarbonisation, and longer-term, the deployment of low carbon networks balancing renewables, nuclear and hydro will be a necessity as gas resources are depleted. In the interim, and certainly into the second half of this century, LNG will be needed to displace coal to provide baseload security as the renewable load is built out, and it will remain an important bridging fuel that provides back-up during periods of low intermittent renewable supply. Investing in renewable capacity provides longer-term LNG risk mitigation, but in the medium-term buyers need to accept the necessity of LNG and mitigate future risks by diversifying suppliers, securing long-term contracts with flexible terms, using spot market procurement to cover shortfalls, and increase on-site storage capacity to buffer against delivery delays and ensure continuity of supply.
… in the medium- term buyers need to accept the necessity of LNG …
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