From volatility to stability: Why Europe needs price-secured long-term contracts now
Europe has diversified its gas supply since 2022, but a considerable share of demand is indexed to short-term gas prices and often still not secured by long-term contracts. As existing agreements expire and global energy markets remain volatile, questions about future stability persist. At the same time, Asian importers are building resilience through long-term LNG deals. How could similar strategies shape Europe’s approach to balancing security, affordability, and competitiveness?
Europe weathered the 2022 gas crisis largely by chance: Chinese industrial LNG demand was unusually low (30-40% lower than expected) and a mild winter in Europe, combined with political gas saving measures and weak industrial demand due to the high gas prices, further helped to reduce gas demand. However, luck won’t do the job twice and challenges in the European gas supply remain.
Gas supply diversification as effective first countermeasure, including the replacement of a large share of Russian imports mainly through LNG from the US and Qatar, has increased the resilience of the European gas market. However, Europe still suffers from comparably high gas prices – and future gas price shock scenarios of 60 €/MWh or more are not inconceivable. For example, the recent threat of a closure of the Strait of Hormuz by Iran, which luckily never materialized, could have caused price hikes to 70-100 €/MWh. In times of diverse global tensions, this is a serious risk. High and volatile gas prices represent a major drag on European industrial competitiveness and energy-intensive industry players are already falling behind Chinese or American peers who have access to cheaper input factors including energy. In Germany for example, one-fifth of industrial value creation is at risk, which is largely driven by high energy costs. Furthermore, a gas price of 60 €/MWh would result in substantial margin decrease or even losses for large parts of the German industry, accounting for ~3 million jobs.
Moreover, today more than a quarter of Europe’s gas demand is still not secured by long-term contracts, and a major part of existing import contracts (~20% of yearly demand) expires by 2030. This contrasts with Asian LNG importers, who on average have more than 90% of their gas demand secured in contracts (as of 2024) – 20 percentage-points more than in Europe. Additionally, substantial parts of existing long-term contracts in Europe are indexed to short-term gas prices, which increases volatility instead of creating resilience against fast-changing gas prices. Countries that put more emphasis on long-term gas contracts benefit also from higher overall affordability and secure physical supply of gas.
A chicken-egg problem involving gas importers and industrial offtakers currently hinders solving this issue and, thus, stronger price stability in Europe: Importers cannot commit to long-term supply contracts with binding prices as they face too high risk without secure downstream offtake. Industrial offtakers often lack sufficient creditworthiness to enter into such agreements or deliberately avoid long-term commitments in order to preserve their flexibility and safeguard against supplier defaults as well as regulatory risks.
As natural gas remains critical in its transitional role to back up renewables and hard-to-electrify processes on a path to net zero, our paper explores how Europe can tackle this chicken-egg challenge by enacting a new gas procurement paradigm. Our paper outlines how long-term LNG supply contracts with stable prices of 25-30 €/MWh can contribute to a secure and affordable energy supply, help to protect Europe’s Industrial Future, and support the energy transition. As most new liquefaction capacity is set to come online within the next three years, this paper calls on importers, offtakers, and policymakers to seize the moment and secure long-term LNG volumes for Europe.