The LNG dilemma

May 28, 2023

Image credit: Gettyimages

By Paul Dempsey

Published Friday, May 12, 2023

Europe secured enough liquefied natural gas imports to see it through last winter, but at what cost?

It might not have felt like it looking at your bills, but Europe dodged an even bigger energy crunch last winter as Russia curtailed or stopped supplies of gas, coal and oil. But even that was more down to luck and brute force than judgement. There were consequences elsewhere and many persist. They point to potentially severe outcomes for climate change goals and regional stability, particularly in the Global South.

Europe avoided recurring power cuts thanks to the combination of a milder-than-expected winter, consumers cutting down on consumption, reduced demand from China, accelerated renewables installations and the continent's financial muscle.

That last factor was most obvious to the public in the shape of mechanisms like the UK's Energy Price Guarantee. On the world stage, however, the continent's more impactful use of cold hard cash came most visibly in the form of a dive into the market for liquified natural gas (LNG), a commodity consequently transformed from carbon-emissions stopgap to geopolitical bellwether.

Europe's voracity drove LNG's spot price to $38/mmBtu [million British thermal units] in mid-December. This was down from the $44/mmBtu it reached immediately after Russia's invasion of Ukraine in February 2022, but still several times higher than LNG markets had seen in recent years. The hike upended global energy markets and what might once have been seen as the masterplan for global energy security.

Europe had previously been a ‘balance’ in the LNG market rather than a major player, with demand led by three of Asia's most developed industrial economies – Japan, China and South Korea. They were followed by emerging countries, where LNG has been promoted as enabling the transition away from coal-fired generation towards lower-carbon and ultimately net-zero economies, while enabling continuing broader growth.

But in 2022, Europe's LNG imports shot up 63 per cent, says the International Energy Agency, rising in volume from 105bcm [billion cubic metres] the year before to 171bcm. Something had to give.

Hardest hit were Pakistan and Bangladesh. LNG suppliers even cancelled some contracted deliveries, diverting carriers to Europe. They were willing to pay resulting penalties because these were less than the profits available as European countries paid mushrooming spot prices.

The impact on both countries was and continues to be acute, forcing their domestic generators to resort to frequent power cuts, or load shedding.

In Bangladesh, problems with the national grid led to a blackout for nearly 80 per cent of the population in October but rolling regional cuts were already commonplace, happening on 85 days in August-October.

Bangladesh blackout

Image credit: Alamy

LNG accounts for 13 per cent of the country's gas needs, according to the local Centre for Policy Dialogue. This can sound comparatively small, until you learn that Bangladesh only became an LNG importer in 2018 because of falling local output amid increasing industrial activity. Nasrul Hamid, the country's energy minister, has warned that it is struggling to secure new contracted supply that can begin before 2026, leaving his country vulnerable to continued fluctuations in spot prices and further load shedding.

Pakistan has problems with an ageing power grid and inefficiencies in generation of up to 25 per cent, according to the World Bank. But shortages of LNG have cut deep following at least nine delivery cancellations – most recently in January – and the need to resort to more expensive spot buys.

The country's energy minister Khurram Dastgir Khan said in February that "LNG is no longer part of the long-term plan". Instead, Pakistan plans to increase coal-fired generation from 2.3GW to 10GW, with some increase in renewables.

Domestic unrest linked to power cuts is becoming more common. In March, people in Mohmand, a prominent Pashtun tribal district, took to the streets over frequent load shedding in rural areas that they claimed lasted up to 23 hours a day. Local leaders were able to prevent angrier protestors from storming a power station, but frustrations are mounting.

Global prices for LNG fell back to around $12.50/mmBtu in April 2023. But this is now not much help to countries like Pakistan and Bangladesh.

The resulting economic disruption has seen their currencies fall against the US dollar: the Pakistani rupee by 4 per cent and the Bangladeshi taka by an alarming 25 per cent.

Meanwhile, higher costs for imported energy have played a large role in depleting Pakistan's currency reserves. These fell by two-thirds in the year to February 2023 following Russia's invasion to just under $9bn, according to the State Bank. The country has also experienced funding delays from groups like the IMF.

Pakistan and Bangladesh suffered the worst of 2022's LNG crunch, but their experiences have been noted by Asian neighbours to the extent that LNG is getting a bad rap generally.

"High prices and supply disruptions have consequences. In many Asian nations, LNG has now acquired a reputation as a costly and unreliable fuel," notes the latest Global LNG Outlook 2023-27 from the Institute for Energy Economics and Financial Analysis (IEEFA).

"Proposed LNG import projects in the region now face increased delay and cancellation risks, while governments in key LNG growth markets have announced new policies designed to limit dependence on global gas imports. This has clouded prospects for long-term demand in the regions that the global LNG industry had been counting on for robust growth."

Thailand has been one of South-East Asia's larger LNG importers, using it to offset reduced natural gas output from the domestic Erawan field and the need to avoid supply from Myanmar because of sanctions. It nevertheless progressively withdrew from the LNG spot market during 2022.

"Instead, the government has increased purchases of other liquid fuels, delayed decommissioning of coal plants, and obtained more renewable energy from small power producers," says the IEEFA. "The government has also resumed negotiations with Cambodia over upstream developments in the Overlapping Claims Area [a disputed region between the two countries], which is expected to contain large oil and gas reserves."

Vietnam and the Philippines have LNG regasification terminal projects but had not booked any delivery contracts by the end of 2022, with start dates, again, offered from 2026. They are widely considered mothballed.

Key LNG suppliers then want customers to sign long-term deals, sometimes up to 20 years. There is reluctance to do so particularly among those who have already seen deliveries cancelled. Suppliers, for their part, worry about the longer-term viability of new facilities if consumers, particularly Europe, see renewables as the game in future.

Behind all this, there is an undercurrent of anger towards not just Europe but also key LNG exporters such as the US, Qatar and Australia as parts of a developed world that has shifted its priorities with little regard for the Global South. There, LNG is also important to food security because of its use in the production of ammonium nitrate and urea as fertiliser components.

US President Joe Biden and president of the European Commission Ursula von der Leyen

Image credit: eyevine

A further source of that is a gradual increase in US LNG export delivery and later capacity being fostered by the Biden Administration where European supplies have been prioritised.

In November, the US and EU extended their post-invasion agreement on LNG to up to 147bcm of exports during 2023. In December, US President Joe Biden and UK Prime Minister Rishi Sunak unveiled the UK-US Energy Security and Affordability Partnership, which guarantees exports of at least 9-10bcm this year.

All this is happening as the US ramps up to become the world's largest exporter of LNG. It currently has seven large-scale gas liquefaction facilities, after the return to operation of the Freeport LNG plant near Houston, which needed repair and recertification after an explosion in June 2022. According to the Centre for Strategic and International Studies, another five have been approved, three of which are already under construction.

"Under planned expansions, the US will increase its export capacity by 17 per cent by the end of 2025 and will increase further by 43 per cent before 2028, surpassing both Australia and Qatar," added CSIS energy specialists Leslie Palti-Guzman and Joseph Majkut.

But many Asian countries are asking themselves, cui bono? And several pertinent questions beyond that. Because the short-term outlook remains uncertain.

For 2023, the LNG market remains tight. Liquefaction plants can take several years to build while special ships, floating storage regasification units (FSRUs), can be secured more quickly to receive and process imports. For example, Germany has already chartered at least five FSRUs.

Analysts at Bloomberg NEF forecast that global LNG demand this year will reach 401 million tons against supply of 415 million tons. The IEA also says that the numbers are narrow and further highlights several unknowns that could throw current forecasts wildly off, even push prices back to 2022 levels.

There are some mitigating trends. After Europe's dash for gas in 2022, the IEA notes that: "EU storage sites closed 2022 with inventory levels standing 20 per cent above their five-year average in January 2023, keeping storage sites 72 per cent full by 1 February, well above the intermediary EU target of 45 per cent." Coupled with yet more renewables and continued consumer energy-saving through the RePowerEU programme, that could reduce European LNG purchases in the year ahead and keep prices lower.

On top of that, there was also the resumption of the Freeport liquefaction facility (which represents around 10 per cent of current US export capacity) and the opening of three new sites worldwide, with four more expected to become operational during 2023. However, all are modest except for the Calcasieu Pass terminal now open in Louisiana. Things really start to move on this side in 2026.

For the IEA, one potential factor beyond a more brutal winter or any kind of Freeport-like accident that could disrupt the market is China. Its LNG imports fell by 22 per cent in 2022, largely because of slower industrial activity due to its strict zero-Covid policy. That policy ended abruptly late last year.

Based on a "bearish" assumption, the IEA says that Chinese LNG intake could drop by another 12 per cent (10bcm) but, "a confluence of moderately bullish conditions could boost China's LNG intake by 35 per cent (30bcm) to well above the previous peak in 2021".

These variables are profound. "The total uncertainty range is about 40bcm, with China's net imports reaching 75bcm at the low end and 115bcm at the high end," the IEA continues. "This range is greater than the uncertainty associated with the potential loss of all remaining pipeline flows into Europe from Russia."

Against this backdrop of economic and energy Tetris come the increasing accusations of hypocrisy aimed by the Global South at Europe and the US.

In an article for the usually phlegmatic journal Foreign Policy, Vijaya Ramachandran, director for energy and development at the Breakthrough Institute, and Jacob Kincer, senior policy analyst at the Energy for Growth Hub, captured the tone.

"Europe's rush to secure its own energy security lays bare a hypocrisy that hasn't gone unnoticed by leaders in Africa, South Asia, and elsewhere," they wrote.

"The bottom line of this hypocrisy should be clear: EU countries continue to push an insidious form of green colonialism that imposes strict restrictions on the financial support that might help poor countries increase vital energy supplies to bring their populations out of poverty and misery while giving themselves maximum flexibility to use fossil fuels for their own energy security."

Then, there is a growing fear in Asia that it has already had a deadly preview of what will happen if climate goals are not met. Most notably, Pakistan's LNG crunch coincided with devastating flooding across one-third of its landmass last August. Meanwhile, other countries are being forced to slow down exits from coal while seeing that as self-harm.

Inevitably, Russia is seeking a role as an alternative source for LNG in Asia. Pakistan's then ambassador to Moscow confirmed his country's LNG discussions with the Kremlin in an interview with the TASS news agency last year. A further proposal emerged during a bilateral meeting with Bangladeshi diplomats this March.

Current Russian LNG capacity is modest, but China has also noted an opportunity that it could fill with subsidised deals for neighbours in solar and wind installations. It is the largest manufacturer of both.

Alarm bells are not yet ringing loudly in Washington DC, but there is some recognition that the energy security dominos may tumble if a better strategy addressing the needs of Europe and much of the rest of the world is not found quickly – particularly if winter 2023 is more aggressive.

On one side, the Biden Administration is looking to build its position in Asia as a counterbalance to China through both the Quad alliance (US, Australia, India, Japan) and the more recent Aukus submarines-to-AI alliance with the UK and Australia. These may cover the region's bigger powers – though India too suffered industrial disruption due to LNG shortages – but other states on both the subcontinent and around the South China Sea are increasingly concerned that the US overwhelmingly favours Europe.

And towards European countries themselves, they are not even that generous.

LNG is not the only factor in this geopolitical puzzle, but it is a significant one and provides clues as to dangers that lie ahead. Hoping for good weather definitely looks like a non-starter.

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