Russian gas is the lifeline of Europe.

Natural gas prices in Europe and Asia soared 10 times in a year, setting a record high. Like all perfect storms, this crisis is caused by increasing factors.

With the recovery of the global economy, demand has soared; after the long and cold winter last year, storage capacity was low; and there have been multiple supply interruptions, some planned and some not; and Russian pipeline natural gas has been below production capacity.

The supply of natural gas has also been pulled into the electricity market. The utilization rate of wind energy in Europe is low, and the utilization rate of hydropower in Brazil and China is low. Coal and carbon prices have risen to record highs.

I spoke with Massimo Di-Odoardo, head of global natural gas analysis, about some of the global impact.

Will Europe have enough natural gas this winter? 

It depends on how cold and how long our winter is. Our analysis shows that in normal winter, there is sufficient supply.

High prices will curb demand; production recovery in the United Kingdom and Norway and increased imports from Azerbaijan will drive pipeline supply; once Asian demand is met, new liquefied natural gas (LNG) production capacity, mainly in the United States, will increase to Europe by 7 billion cubic meters this winter ( bcm).

Assuming Russia is exporting at full capacity, Europe will store 29 bcm of natural gas by the end of March. This is lower than the five-year average, but much higher than the level indicated by current prices.

Warming up: European natural gas market soars to record highs

If Europe and Asia have cold winters, the system will creak. Increasing heating demand in Europe may increase by 20 bcm and Asia by 10.5 bcm, resulting in a decrease in the amount of LNG imports available in Europe. This will absorb all the remaining natural gas in European storage, and the price of natural gas may be much higher than what we currently see.

Russia may be able to supply additional natural gas through North Stream 2, depending on whether and when it is approved; or use its interruptible capacity through Ukraine-something that Russia has so far been reluctant to do.

The cold winter will make Europe completely dependent on the inflow of additional funds from Russia. In the next few months, this prospect will not help politicians in Europe and the UK get a good night’s sleep.

Is this crisis a one-off or a sign of structural change? 

Although the structural changes in the electricity and natural gas markets are deeper issues, they also contribute once.

The transition from coal-fired power generation in Europe means more reliance on natural gas for power flexibility; and Europe’s natural gas supply and flexibility, in turn, rely more and more on imported pipeline natural gas and liquefied natural gas.

First, with the shutdown of the Groningen gas field offshore the Netherlands, Europe's own flexible natural gas resources have gradually decreased in the past decade. The UK also chose to close its largest storage facility, Rough, in 2017.

Secondly, after buyers exchanged upward flexibility for spot indexation, not only did Russian pipeline capacity decrease, but long-term contracts with Russia were also less flexible.

Third, in the past few years, Europe has relied on substantial growth in LNG production. The sharp slowdown in investment means that global LNG growth will be very limited by 2025, which is consistent with increasing demand in Asia.

The result of all this is that Europe will rely more on Russia’s flexibility and supplies.

Can Europe build more flexibility in this system? 

Russia will argue that Nord Stream 2 will bring the required flexibility. But Russia also hopes to transfer natural gas from Ukraine, so Russia's overall production capacity may not change much.

More LNG will be part of the solution. Since the price is more than twice the delivery cost of US$10 per million British thermal unit (/mmbtu) in Europe (assuming US$5.30/mmbtu Henry Hub), US developers will scramble to accelerate the development of new projects.

But this will not happen overnight-even a brownfield development project in the United States may take up to three years to be put into production for the first time, and the current price does not reflect the long-term economic benefits of the project.

More storage capacity will help, but there are also major challenges here. Where will it be located, who will build it, what are the ways in other countries, and can it make money in the rare cold winter? Any new, large-scale storage development must obtain a standardized return.

Alternatively, the government itself can establish strategic storage and release of natural gas during times of crisis. The European Union has hinted that it will study options in its December natural gas plan.

Will this crisis change the way buyers buy natural gas? 

Yes. Over the past decade, the surplus of natural gas and the emergence of LNG in the United States have led to a buyer’s market. Contracts have become shorter, the oil index has fallen from 16% in recent years to close to 11% of oil parity, and buyers’ portfolios account for a higher proportion of spot LNG. It is likely that these trends will move in the opposite direction to some extent.

The instinct will be to look for supply security-just as Chinese buyers have just signed long-term contracts at higher prices. Buyers may also look for more LNG pricing from non-natural gas centers, including contracts based on the Henry Center in the United States.

But things will not be that simple, because there are many short-term and long-term uncertainties in the natural gas market, and the needs of every country and every buyer are changing rapidly.

Most buyers want to maintain a certain degree of portfolio flexibility, including spot trading. The spot market has proven its value, indicating that more supply is needed. Extreme price changes indicate that the market is still developing and needs more liquidity.

Is the producer a big winner? 

For oil and gas producers, the increase in spot natural gas sales revenue is the icing on the cake, with Brent crude oil's cash flow exceeding US$80 per barrel. A single spot cargo that sold for US$20 million a year ago is worth US$250 million in today's market.

There will also be considerable anxiety. In a low-carbon world, competition for energy supply is becoming increasingly fierce. Most oil and gas producers tend to use natural gas because natural gas is more sustainable than oil in the energy transition process.

The current ultra-high prices and extreme volatility will not help-the industry needs to ensure production capacity and supply are in place to meet demand. The future of natural gas depends on reliable and value-for-money cleaning products.