The seismic shift in global gas trade flows has given traders and banks a dilemma. Market volatility has proven highly lucrative, and in Europe, the strategic importance of gas imports has attracted significant state support. However, with the clock ticking on the energy transition, climate campaigners are accelerating action against those that continue to finance fossil gas. John Basquill reports.


Russia’s aggression in Ukraine has had far-reaching impacts on the world’s natural gas market. Prior to the invasion in February 2022, the European Union sourced around half of all natural gas supply from Russia. But by the end of the year, the share of Russian-origin gas in the bloc’s imports had dwindled to just 10%.

In 2021, around 85% of Russian gas exports to Europe were by pipeline, but those flows slowed dramatically during the course of 2022. The result has been a cascade of supply chain shifts, creating fresh opportunities for traders and banks, but also changing climate risks as gas grows in strategic importance.

Initially, in April, Russian state-owned energy company Gazprom announced it would no longer use the Yamal-Europe pipeline to transport gas to Poland or Bulgaria, as the two countries refused to pay for supply in roubles – a demand by Moscow issued after the introduction of sanctions affecting dollar and euro-denominated payments.

Russia also gradually reduced flows through the Nord Stream pipelines, which link the country to Germany via the Baltic Sea. Nord Stream network data shows flows dropped to zero by the start of September, and just weeks later, the pipelines suffered serious damage in an apparent act of sabotage that, as of press time, remains unexplained.

By October, only three pipeline routes – one via Ukraine, and two to Turkey – remained in use.

A report from the International Energy Agency (IEA) finds the supply of pipeline gas to European OECD countries was 70% lower in Q4 2022 compared to the same period the year before.

Part of the shortfall has been made up by importing gas through alternative pipelines. The IEA says flows from Norway to the European Union increased by 9% last year, while gas supplies from Azerbaijan soared by 40% via the Trans Adriatic pipeline.

More significant, however, was a 63% surge in European imports of liquified natural gas (LNG). In volume terms, Europe imported nearly 170 billion cubic metres of LNG last year, the highest level on record.

Around two-thirds of this total was supplied by the US (though the IEA notes that Angola, Egypt, Norway, Qatar and Trinidad and Tobago also increased exports). The ready availability of US gas proved a double-edged sword for Europe; it had a market eager to more than double its LNG exports at short notice, but at significant cost.

Kpler data shows that for the first 11 months of 2022, the volume of LNG shipped to Europe increased by around 140% year-on-year – but export revenues rose more than fourfold, from around US$8bn to an eye-watering US$35bn.


Banks and traders thrive

Against that backdrop of surging prices, shifting trade corridors and an unpredictable market, large commodity traders and their bank partners were able to enjoy a record-breaking year in terms of financial success.

Gross margins from commodity trading hit an estimated US$115bn in 2022, up from US$72bn the year before and more than triple the total for 2018, according to a report published in March this year by consultancy Oliver Wyman.

Revenue from LNG trading grew around 40% year-on-year, while the equivalent figure for power, gas and emissions was close to 90%, it estimates. Growth in earnings from other commodities was similarly explosive, at between 45% and 55% for agricultural goods, metals and oil.

2022 was also a bumper year for traders at the larger end of the market. Glencore’s net income more than tripled to US$17.3bn, while Trafigura’s profits more than doubled to US$7bn – its third consecutive record-breaking year. British oil major BP announced profits of US$28bn, and rival Shell reported adjusted earnings of nearly US$40bn, both annual records.

Large, sophisticated traders proved best placed to benefit from supply chain shifts and volatile prices, as they can redirect cargoes and source new markets while managing growing demand for liquidity, the Oliver Wyman report finds. Their access to financial products such as hedging and currency swaps also provides opportunities to boost earnings.

This trend is also proving good news for the financial sector. The Oliver Wyman report declares that “banks are back… after years of retraction” from the commodities market, noting that lenders and hedge funds earned around 27% of all trading revenue last year – double the figure from five years earlier.

Banks are also being lured to the commodity finance market – and in particular, to large-scale gas transactions – by the growing involvement of state actors. In December, Trafigura clinched a landmark US$3bn Deutsche Bank loan to support the supply of “substantial volumes” of LNG to Germany.

The agreement sees Trafigura provide gas to Securing Energy for Europe, a former Gazprom entity that is now under the long-term administration of the German government, and benefit from a partial guarantee from German export credit agency Euler Hermes Aktiengesellschaft.

“Would you have imagined in your wildest dreams a state like Germany guaranteeing Trafigura’s signature for these kinds of amounts, and this kind of duration?” said trade expert Jean-François Lambert, founder and managing partner of Lambert Commodities, at the time.

“My anticipation is that banks in Europe are going to follow the governments and go back in a big way to commodities, and that’s already taking shape.”

Germany remains at the forefront of such transactions. The government has also struck a deal with state-owned QatarEnergy to supply 2 million tonnes of LNG per year starting in 2026, with a subsidiary of US trader ConocoPhillips acting as the buyer.

However, Netherlands export credit agency Atradius DSB said in February 2022 it was considering 10 applications for fossil fuel projects, including two related to LNG infrastructure, and had already provided cover for three LNG sales transactions.

This is despite the Dutch government committing to ending public support for unabated fossil fuel projects except in limited circumstances that safeguard Europe’s energy supply.


Climate targets at risk

The growing importance of gas, in terms of both bank and trader portfolios and European governments’ energy strategies, has sparked concerns among climate change campaign groups.

One issue is that attitudes towards the environmental damage done by burning natural gas are softening in response to policy pressure and soaring profits. Gas is around 30% less polluting than petroleum, according to US government estimates, but still produces around 53kg of carbon dioxide per million thermal units.

And although gas is often touted as a transitional fuel, smoothing the way from heavier pollutants to renewable sources, it is now almost two years since the IEA called for an immediate halt to all new fossil fuel projects.

In an alarming paper published in May 2021, the agency said the industry must focus solely on output and reducing emissions from existing assets in order to have any chance of keeping global warming below 1.5°C.

In a February statement, campaign group Oil Change International accused the fossil fuel industry of being “opportunistic” in seeking lucrative long-term gas contracts in the wake of the Russian invasion.

“Russia’s invasion of Ukraine one year ago is a wake-up call to stop dependence on unstable and war-driven fossil fuels, and instead transition to reliable renewable energy,” it said. “Oil companies are both fuelling and profiting from this crisis, while the rest of the world has suffered dire consequences.”

Europe’s efforts to import gas from outside Russia have also had an indirect effect on carbon emissions. The IEA says soaring prices caused by rising demand meant gas importers in Asia were at a competitive disadvantage, prompting a shift from gas to coal and causing greater pollution overall.

“The increase in emissions from coal more than offset the 1.6% decline in emissions from natural gas as supply continued to tighten following Russia’s invasion of Ukraine and as European businesses and citizens responded with efforts to cut their gas use,” it says in its review of carbon emissions in 2022.

Zorka Milin, a senior legal advisor at influential NGO Global Witness, says continuing to explore for future gas production “is just not compatible with net-zero scenarios”.

“I can see the situation in Europe is difficult in the immediate or short term,” she tells GTR. “But we have to ask ourselves, beyond the next year or two, whether there is any role for gas. That really puts the financial institutions that have their own net-zero targets in a bind, and frankly I don’t see how they can justify investing in new gas projects given what we know.”

There are already signs that attitudes towards eradicating fossil fuels have softened over the past year. BP announced in February it was scaling back its phasing-out of oil and gas, telling investors it planned to retain certain assets longer than previously envisaged.

Citing a need to maximise BP’s “contribution to energy security and affordability”, chief executive Bernard Looney said it expects its oil and gas production to be 2.3 million barrels of oil equivalent a day in 2025, and 2 million a day in 2030.

Although equivalent to a 25% drop in production from 2019 levels, BP had previously said it would cut production by 40%. Emissions are now expected to fall by 20%-30%, rather than 35-40%, it adds.

Bruce Duguid, head of stewardship at Federated Hermes, an investment management company that has negotiated with BP over its energy transition, said investors “will be concerned at such a material change to BP’s 2030 absolute emissions reduction target”, Reuters reported at the time.

Angela Quiroga, an environmental, social and governance analyst at Union Investment, a shareholder in BP, described the decision as “regrettable” given the earlier targets had been approved by investors at the company’s previous annual general meeting.


Campaigners turn up the heat

Financial institutions continue to face growing pressure from campaigners. In February this year, campaign group ShareAction co-ordinated 30 investors representing US$1.5tn in assets under management to write to several major banks calling for a halt to the financing of new oil and gas fields by the end of 2023.

The action followed a ShareAction survey of European banks which concluded that “only timid action has been taken… to cease new oil and gas activities and the corporate level”.

“Concerningly, most targets are intensity-based – including 20% of oil and gas targets set – despite the need to cut absolute emissions,” the group says. “Furthermore, only one bank covers capital markets activities in their targets, despite these representing the bulk of European banks’ financing of top oil and gas expanders.”

An emerging trend, however, is NGOs seeking to expose companies that draw an equivalence between natural gas and renewable energy sources.

In February this year, Global Witness submitted a formal complaint to the US Securities and Exchange Commission (SEC) accusing Shell of “materially misstat[ing] its financial commitment to renewable sources of energy”.

The complaint notes that natural gas is included under its “renewables and energy solutions” reporting segment, and says a “significant portion” of Shell’s spending on such solutions is directed towards marketing natural gas and gas-generated power.

“Shell has also made potentially misleading claims about reducing its reliance on fossil fuels, for instance announcing that its oil production peaked in 2019 and is expected to decline by 1-2% per year through 2030,” it adds.

“A decrease of 1-2% per year is in fact less than the natural production decline of existing fields, which is around 5% per year. Even as Shell claims to be reducing its oil production, it is planning to grow its gas business by more than 20% over the next few years.”

Global Witness calls on the SEC to investigate whether such activities have been reported in keeping with relevant accounting standards.

A spokesperson for Shell tells GTR: “We’re confident Shell’s financial disclosures are fully compliant with all SEC and other reporting requirements.”