An overwhelming appetite from Europe for liquefied natural gas meant to replace Russian pipeline exports is leaving developing countries starving for gas and creating a market for traders to profit from a rush to secure supplies.
China, India, Brazil, Pakistan and Bangladesh will see the highest rate of decline in liquefied natural gas demand this year, down 34.5 million tonnes from forecast for the year latest, according to data from commodity analysis firm ICIS, compiled for the Financial Times. This equates to around 9% of global LNG supplies in 2021.
Increasingly, they are being outbid on expensive LNG by wealthier countries trying to fill the hole left by Russia holding back its energy exports. Demand in Europe, Japan, South Korea, Taiwan and Thailand is expected to increase by a total of 46.6 million tonnes this year. Europe, including the UK, accounts for 85% of the increase in demand, according to ICIS.
This imbalance not only threatens to push many emerging economies into energy crises that could prolong their reliance on dirtier forms of fuel. LNG traders are also looking to take advantage of price differences in global markets, as these countries often use the spot market to buy the raw material.
Countries like Pakistan and Bangladesh “hooked in and paid as much as they could in this bidding war, mostly with Europe, on spot cargoes,” said senior gas analyst Alex Siow. for Asia at ICIS. “We still hear them trying to underbid, and sometimes they get this weird cargo here and there. Unfortunately, this is not enough for everyone.
With the level of increase in LNG demand exceeding the declines destroyed, “it is safe to say that [the LNG market] will continue to be tight until 2025-2026, when some of the largest LNG supply plants come online,” added Siow.
This compression pushed the average Asian spot, or cash, price up nearly 140% higher than a year ago.
Some traders spot an opportunity in the market. Long-term contracts signed years ago are tied to reference prices well below current prices.
Even though LNG traders pay penalties for skipping a contractual delivery, they can make a big profit selling in the spot market where prices are much higher.
The spotlight recently fell on a former unit of Gazprom based in Singapore, which had an obligation to supply Gail, India’s state-owned gas distributor, for 20 years under a deal signed in 2012.
In her earnings call in early August, Gail revealed she had not received the contracted quantity of LNG from Gazprom’s former unit – now called SEFE Marketing & Trading after Germany took control of her company. mother – since May, with LNG traders suspecting he is selling cargo destined for Gail on the spot market.
SEFE, which stands for Securing Energy For Europe, said in a statement to the Financial Times that this was because it was managing its LNG stocks as it “is currently deprived of a considerable part of its gas supplies” after what he called the “Russian sanctions”. on the group. “With European markets still tightening, [the Singapore-unit] uses the contractual mechanisms of its agreements to manage the situation,” he said.
An LNG trader said that since the summer of last year, when gas prices started to rise in Asia and Europe, he has seen “several cases” of industry players canceling their contracts at term and sell the cargoes on the spot market at a higher price. margin despite “the risk of completely destroying trust”.
Toby Copson, global head of trading and consulting at Trident LNG, a gas trading company, said if traders could make more profit by canceling cargoes and reselling them to someone else at a high rise, “they’ll do it every time”. .”
“The terms of the contract allow it. . . It’s not new. If you are on the other end of this trade it is frustrating, and with the market so tight now it will have dire consequences,” he added.
Developing countries that have been unable to supply themselves with LNG are increasingly turning to more polluting fuels.
Consultancy Wood Mackenzie said small industries in India are turning to fuel oil and liquefied petroleum gas for heating, while oil-fired power generation has increased fivefold in Pakistan and 45% in Bangladesh.
High prices for LNG and other fuel sources have been particularly painful for countries in South Asia, which rely heavily on imported natural gas for power generation. Pakistan and Bangladesh, for example, have experienced widespread power outages in recent months.
In Pakistan, fuel shortages have caused a surge in demand for alternatives like coal from neighboring Afghanistan, where the Taliban has encouraged exports to its energy-starved neighbor. Some researchers estimate that Afghanistan’s coal exports to Pakistan have doubled this year.
“European and Japanese storage are filling up significantly, but one wonders how long that will last,” said Sam Reynolds, energy finance analyst at the Institute for Energy Economics and Financial Analysis.
If Europe does not reduce its gas consumption, “in March of next year, we could be in the exact same place where it needs to absorb more LNG. And so countries in emerging Asia are going to take every opportunity they can to keep the lights on, and that may mean dirtier fuels, which may be more imports from neighboring countries.