Asian LNG demand cannot be taken for granted
There couldn’t have been a more compelling reason to head to Europe last week than to join the global gas and LNG industry converging in droves in Milan for the annual Gastech conference.
The Kremlin’s weaponization of gas – combined with the EU’s momentous decision to turn its back on Russian gas as soon as possible – has left Europe scrambling to fill the void. Cue a procession of energy ministers taking the stage in Milan to sing the praises of LNG. For northern European politicians in particular, LNG is suddenly a force for good. At least for now.
However, growing European LNG demand is hitting Asian buyers hard. Asian LNG spot prices are trading broadly at par with DES LNG prices in NW Europe, but despite the steep discount to European spot prices, few Asian buyers can compete for spot cargoes at this year’s prices. And while European market momentum has improved recently with storage levels at record highs, the worst could be yet to come if cold weather and lower Russian gas pipeline flows further push European LNG demand to the rise.
We expect Europe to continue to throw in the towel on securing LNG supply – whatever the price – over the next few years, which means that a new demand response from Asia seems almost certain, given the limited growth in LNG supply. But where in Asia is demand most at risk, can suppliers still count on the recovery of Asian LNG demand, and what do Asian buyers really expect from suppliers in the context of the current crisis?
I had the pleasure of moderating a Gastech session in Milan where these critical issues were discussed with executives from major LNG buyers in Asia as well as LNG suppliers, traders and infrastructure players.
Assessing the impact on Asia as the global LNG industry pivots to Europe
Energy security and accessibility have been catapulted to the top of Europe’s political agenda, displacing LNG trade flows and effectively diverting supply from Asia. As a result, Asian LNG demand has already fallen by 7% since the start of the year in the face of soaring European demand and prices.
But that figure only tells part of the story: the biggest declines were in Asia’s most important growth markets, with demand from China and India down 20% and 18% respectively. Other markets are also hurting as higher electricity prices have led to blackouts and curtailments for industrial users. In extreme cases, soaring LNG prices have contributed to political and social unrest in countries like Pakistan and Bangladesh.
Asian buyers in Milan have made it clear that this may continue for some time. Many have spoken of the need for additional demand response in the first half of this decade until new LNG supply relieves the market from 2026.
Which Asian markets are the most vulnerable?
Of course, Asian buyers are buying much of their LNG on long-term contracts, usually oil-indexed and much cheaper than current spot LNG prices. Thus, it is really uncontracted spot demand in Asia that is threatened in the current crisis, particularly from consumers with lower purchasing power.
Given that China and India have high spot exposure and availability of alternative fuels, this helps explain their sharp decline in LNG spot purchases as consumers shift to coal and fuel oil. Bangladesh, Pakistan and Thailand are also on the high-risk end of the scale. At the other extreme are markets with low point exposure and limited fuel switching alternatives, including Singapore, Japan and South Korea.
Asia remains the engine of long-term LNG demand growth…
How and when Asian LNG demand recovers were unsurprisingly key questions for LNG suppliers in Milan. While US LNG, for example, will play a vital role in replacing Russian gas exports to Europe over the next few years, it is future Asian demand that will dictate the profitability of new supply from the US coast of the Gulf (as well as large-scale conventional LNG projects). Europe may be the flavor of the month right now, but it’s looking to get away from gas as soon as possible. Vendors know that these molecules must find refuge in Asia in the not too distant future.
As suppliers brace for an unprecedented wave of investment as Europe scrambles for more gas, Asian buyers recognize the potential for an LNG glut and even a possible price crash after 2026 as that new volumes arrive on the market. This anticipated drop in prices, combined with the widespread belief that replacing coal with gas – and green LNG in particular – in the electricity sector must be at the heart of decarbonization objectives, reinforces confidence in a strong rebound in gas demand. It is no coincidence that Asian orders for new combined cycle gas turbines are at their highest level in a decade.
…but buyers want more from suppliers
This optimism comes with caveats. Government policies towards coal in several Asian countries remain ambiguous at best. Furthermore, restoring confidence in LNG demand may not automatically translate into a new wave of long-term contracts. Buyers across Asia, particularly China which have contracted heavily over the past two years, have been keen to stress that they cannot always commit to 20-year contracts. The flexibility and optionality of contracts in agreements is essential for those looking to manage a less certain demand outlook. In mature markets, buyers want to continue building trade portfolios and investing in developing economies to offset the expected drop in domestic demand.
And while even the most price-sensitive Asian markets now recognize that they can no longer simply ask for “cheap” LNG, they are asking sellers to recognize that their national energy regulation and pricing systems cannot just not yet face high prices and inflexible prices. contracts. Without the right contractual, financial and infrastructural support, these economies risk deepening their dependence on coal and derailing their energy transition.
Source: Wood Mackenzie