Market volatility and supply uncertainties brewing as a result of the Russia-Ukraine conflict are driving up spot liquefied natural gas (LNG) prices in the Asian continent, particularly South and Southeast Asia. The increasingly high LNG prices may cripple demand expansion in Asia even as it is forecast to drive global demand growth, said author and analyst Damon Evans.
Many Asian nations have recently revised their long-term power development strategies to incorporate more gas into their energy transition, with low LNG prices seen over the past few years making it easier to justify new and heavier investments into LNG-related infrastructure from an economic standpoint, revealed analysts at Fitch Solutions (Fitch).
However, the firm was quick to warn that continued high LNG prices “potentially spells trouble in the more price-sensitive markets in [Asia], fuelling murmurs of the risks involved with becoming overly exposed to LNG.”
Fitch highlighted the difficult market conditions for Asia’s net LNG importing markets which rely on the fuel for power generation: “A short-term measure being adopted in some markets to navigate the current price upturn has been to use more coal, which even after its own recent price rally, remains a cheaper power source compared to gas.”
Price volatility in LNG markets will not go away for at least five years, but in turn create demand destruction in emerging markets, according to Sam Reynolds, an energy finance analyst with the Institute for Energy Economics and Financial Analysis (IEEFA). IEEFA focuses on the economic, financial, and climate risks associated with natural gas and LNG infrastructure developments in emerging Asia.
“By the time newly sanctioned LNG export projects arrive in the market, prospective customers may already have moved on,” Reynolds said. “As [price] volatility continues, mature and emerging LNG importers are seeking the nearest exit – if they take more permanent steps to limit LNG demand, exporters may find liquefaction assets increasingly unnecessary or unviable.”
Indeed, there is a real risk that demand expansion across some markets could stall or even trend downwards in the coming months, in response to higher prices. LNG delivery data cited by Fitch shows that berths for LNG import vessels at ports in Asia fell 7% during the first four months of 2022 compared to the same period in 2021 (spot LNG price average US$17.9/million British thermal units (Btu)), while the same indicator for Europe showed a 49% jump year-on-year.
Asian spot LNG prices averaged US$23.6/million Btu during the first two weeks of May 2022, slightly lower than the year-to-date average of US$29.9/million Btu.