IEEFA: Not the time for emerging Asian markets to build new LNG import terminals

The Institute for Energy Economics and Financial Analysis (IEEFA) says that the Ukrainian crisis impacts on energy markets may stop emerging markets in Asia from securing imported LNG supplies.

The Russian invasion of Ukraine can have longer-term impacts on already volatile energy markets. According to the new report from IEEFA, these impacts could prevent price-sensitive markets in Asia from securing imported LNG supplies.

Analyst Sam Reynolds, the author of the report, says that there are a number of reasons why the volatility of the prices may not be short-termed.

“Lasting volatility in LNG prices could mean that price-sensitive buyers in Asia are effectively locked out of the market for several years, unable to compete on price. Ultimately, LNG import assets—terminals, pipelines, and power plants—face a high risk of being underutilized and stranded due to a lack of affordable fuel.”

Yet, many countries in Asia are doubling down on LNG import infrastructure projects despite the financial risks; nearly 80 million tonnes of LNG regasification capacity to come online in Asia over the next two years.

Several countries, like Thailand, the Philippines, and Bangladesh, have increased the targeted share of LNG in their energy mixes despite declining domestic production. Prices of domestically produced gas in the region have typically ranged from $1-5 per million British thermal units (MMBtu); with the current LNG prices in Asia of $35-40/MMBtu.

But with rapidly declining domestic natural gas reserves, many countries have looked to LNG as a replacement.

“Rather than simply replacing one form of gas for another the shift to LNG will involve a steep, structural increase in fuel costs that may completely negate economic arguments for gas-fired power generation versus cleaner, domestically-sourced renewables.”

This volatility may continue to threaten price-sensitive buyers’ energy security.

Europe has committed to free itself from Russian gas by procuring more LNG. This suggests evolution from Europe’s role as a balancing buyer, which historically absorbed excess volumes, to a direct competitor with Asian customers.

Moreover, a significant new LNG supply will not be online until the middle of the decade. This means that Europe will have to pull cargoes from other regions. Meanwhile, unplanned outages at existing LNG export facilities have increased every year since 2017.

Any cuts to the Russian supply of gas to Europe could push Europe further into LNG markets, tightening the demand-supply balance and boosting prices further.

The backdrop to these volatile prices, the report says, is one of the most uncertain global macroeconomic environments in recent memory. Inflation was already at 40-year highs in many countries before the Russian invasion, and global debt skyrocketed in 2021 to its highest level ever.

“Such macroeconomic instability is likely to hinder countries’ ability to pay for higher-priced imported fuels and could mean longer-term volatility for LNG markets,” says Reynolds.

The report also notes that while long-term LNG purchase contracts may seem like a solution, there are important spillover impacts of fluctuating spot prices on term markets. High oil prices will also mean the cost of LNG under long-term, oil-linked contracts will rise.

The report finds that the pricing formulas of oil-linked contracts have tended to increase over the past two years of volatile LNG prices.

These prices can also create a greater risk of legal disputes between parties to a long-term LNG purchase contract.

“For price-sensitive LNG buyers, now is not the time to build new LNG import facilities in Asia,” concludes Reynolds.

He suggests that countries consider national energy priorities to go towards cheaper technologies that bolster energy sovereignty and self-sufficiency.

“Rather than doubling down on a bad hand, the goal should be to maximize renewable energy while minimizing the need for imported fossil fuels as a last resort.”