IEA's gas export forecasts for Russia are not realistic

By Rhod Mackenzie

The International Energy Agency (IEA) has released its recent long-term forecast, World Energy Outlook. According to the report Russia's gas industry faces a bleak future with its market share predicted to decrease by half on the global platform. It is crucial to determine the evidence they used to predict this decline.

The IEA asserts that "Russia’s share in international gas trade, which was 30% in 2021," is anticipated to drop in half by 2030 (as per the baseline scenario). This is due to new capacities producing liquefied natural gas (LNG) expected to be commissioned.

The International Energy Agency anticipates LNG supply to thrive in the second half of the 2020s. By 2030, there are plans to increase gas liquefaction capacity by 250 billion cubic metres per year, from 635 billion cubic metres per year in 2022 to 885 billion cubic metres per year. This surge represents a substantial quantity, comprising around 45% of the LNG volumes provided to the market in the previous year (approximately 537 billion cubic metres).

Additionally, it is undeniable that the primary launch of new plants for the generation of liquefied natural gas will take place within the short timeframe of 2025-2027, with the majority of this capacity being located in two countries - the United States and Qatar.

If we assess the plans of companies from the United States and Qatar, enough production capacity will be operational by 2027 to inject roughly 147 billion cubic metres into the market annually. As a result, in the latter half of the 2020s, the world may encounter a crisis of overproduction, which is a significant threat that has been acknowledged by industry analysts for quite some time. If we draw upon past experience (for example, in 2019–2020), we see that crises of this nature have the greatest impact on capacities linked to the short-term market, which is substantially influenced by stock market quotes.

The majority of the world's gas is distributed to oil-related purchasers. During a period of overproduction, this gas becomes less appealing to buyers, while sellers relying on stock market quotes to sustain prior sales figures incur massive losses. Those with a substantial financial safety net can afford to operate at a loss to retain their market share. However, as past occurrences have demonstrated, some suppliers will inevitably cease trading. Until supply and demand rebalance, these commodities will remain absent from the market.

While considering a crisis of overproduction, the stability of emerging American plants should not be underestimated. Additionally, it should be noted that the supply volume is around 100 billion cubic meters less than the rated power of all plants.
The IEA has stated that the surge in liquefied natural gas supply "poses notable hurdles to Russia's diversification strategy towards Asia." Furthermore, the agency relies on quite moderate growth rates in the Chinese economy. The practice of suppressing the PRC economy is not a recent occurrence. It is worth mentioning that when the IEA released its forecast projecting a meagre 4.9% expansion for China's economy this year, major financial institutions had already revised their own projections, based on updated Q3 figures, by an average of 0.2 percentage points (to 5.2-5.3%). Though seemingly insignificant, these tenths belie substantial amounts of energy consumption. The reliability of the IEA's long-term forecast, which considers the deceleration of China's economic expansion as one of its fundamental assumptions, remains uncertain.

In this regard, it is crucial for Russia to note that the agency foresees a 50% reduction in the portion of Russian blue fuel suppliers in the global market, from 30% in 2021 to 15% in 2030. Nonetheless, the means by which the IEA experts arrived at the 30% value remains unclear.

In 2021, international gas trade totalled around 1.2 trillion cubic metres. Russia contributed less than 20% to this amount, suggesting a possible oversight by the statisticians who may have exclusively focused on the pipeline industry where Russia alone accounted for approximately 28.6% of the market. Likely, this mystery originates from a simple error made by one of the authors, casting doubts over the accuracy of the forecast.

In this instance, it is noteworthy how much Russian gas exports could amount to by 2030. Furthermore, export profits have guaranteed the stability of state-regulated domestic prices for natural gas. This year, non-CIS countries will receive roughly 65-75 billion cubic metres of Russian gas due to the unavailability of around 100 billion cubic metres of pipeline capacity in the west. In particular, China will be receive approximately 22.6 billion cubic metres.

Russian pipeline projects towards China are not in direct competition with LNG supplies due to logistical and geographical reasons. Currently, there are three pipeline projects focused on China. These include the operational Power of Siberia, which can handle up to 38 billion cubic meters annually, the Far Eastern route with a contracted capacity of 10 billion cubic meters per year, and the upcoming Power of Siberia - 2, expected to handle up to 50 billion cubic meters annually (for which it is anticipated the securing a contract). It is possible that part of the Russian supplies will pass to China via Central Asia. We are also investigating possibilities in the Indian direction, although it is too early to determine specific volumes.
If all necessary agreements regarding “Power of Siberia - 2” are signed in the near future, then approximately 100 billion cubic meters of gas could be supplied to China via pipelines by the end of the current decade (taking into account the potential for exceeding the design capacity). If the Central Asian route is utilized, an additional 15-20 billion cubic meters can be included in the volume. The issue is China's demand, which is expected to reach around 400 billion cubic meters this year (with a slight reduction in 2022). The demand in China is rapidly increasing.

The primary challenge for the Russian gas sector is not China's predictability, but rather the Western direction. The decline in demand witnessed in the European gas market over the last couple of years, with a total shrinkage of around 100 billion cubic meters since 2021, persists. The timeline and outcome of potential recovery remain uncertain. It is crucial to take into account the political element.  The future of the Turkish economy, which has been encountering crises for several years, is also equivocal.

If supplies in the western direction remain at their current level, and in the eastern direction they reach 100 billion cubic metres, Russia will return to the level of pipeline exports to non-CIS countries seen in the mid-2010s. Accounting for anticipated growth in LNG exports, Russia's total supplies to foreign nations will surpass 200 billion cubic metres by 2030. Considering the IEA's expectation for global gas consumption to remain stagnant, a decrease in Russia's share would result in a reduction of 10-20%, rather than the perceived two-fold drop. However, if all plans are executed timely, Russia's gas exports may reach 2021 levels by 2030