An overwhelming appetite from Europe for liquefied natural gas to replace Russian pipeline exports is leaving developing countries starved of gas and creating a market for traders to profit from a rush to secure supplies.
China, India, Brazil, Pakistan and Bangladesh will have the highest rate of decline in demand for liquefied natural gas this year, down 34.5mn tonnes compared to last year’s forecast, according to data from the commodity analytics firm ICIS, compiled for the Financial Times. That equates to roughly 9 per cent of global LNG supplies in 2021.
Increasingly, they are being outbid for expensive LNG by richer countries trying to fill the hole left by Russia curbing its energy exports. Demand in Europe, Japan, South Korea, Taiwan and Thailand is expected to increase by a total of 46.6mn tonnes this year. Europe, including the UK, accounts for 85 per cent of the increase in demand, according to ICIS.
That imbalance not only threatens to push many emerging economies into energy crises that may prolong their reliance on dirtier forms of fuel. LNG traders are also looking to profit from differences in prices on global markets, because these countries often use the spot market to buy the commodity.
Countries like Pakistan and Bangladesh “have been hanging on and been paying as much as they can in this bidding war, mainly with Europe, on spot cargoes,” said Alex Siow, lead Asia gas analyst at ICIS. “We still hear them going out trying to bid at lower prices, and sometimes they do get that odd cargo here and there. Unfortunately, it is not enough for all.”
With the level of LNG demand increase outstripping the declines destroyed, “it is safe to say that [the LNG market] will continue to be tight until 2025-2026 when some of the bigger LNG supply plants come online,” Siow added.
That squeeze has lifted the average price for the Asian benchmark spot, or cash, market this year nearly 140 per cent higher than last year.
Some traders spot an opportunity in the market. Long term contracts that had been signed years ago are linked to benchmark prices that are far lower than the current prices.
Even if LNG traders pay penalties to skip a contracted delivery, they can make a hefty profit by selling in the spot market where prices are much higher.
The spotlight recently fell on a former Singapore-based unit of Gazprom, which had an obligation to supply Gail, India’s state-run gas distributor, for 20 years under a deal signed in 2012.
In its earnings call in early August, Gail revealed that it had not been receiving the contracted amount of LNG from the former Gazprom unit — now called SEFE Marketing & Trading after Germany took control of its parent — since May, with LNG traders suspecting it is selling the cargoes meant 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 is managing its LNG stocks as it “is currently without a considerable part of its gas supplies” after what it called “Russian sanctions” on the group. “With European markets getting even tighter, [the Singapore-unit] is using the contractual mechanisms in its agreements to manage the situation,” it said.
One LNG trader said that since the summer of last year, when gas prices started to rise in both Asia and Europe, he has seen “several instances” of industry players cancelling their long term contracts and selling the cargoes on the spot market at a higher margin despite “risk of completely destroying trust.”
Toby Copson, global head of trading and advisory at Trident LNG, a gas trading company, said if traders can make more profit by cancelling the cargoes and selling it on to someone else at a hefty uptick, “they are going to do that every time.”
“The provisos in the contract do allow for this . . . It is nothing new. If you are on the other end of that trade it is frustrating, and with the market being so tight now, it will have disastrous consequences,” he added.
The developing countries that have not been able to secure LNG are increasingly turning to dirtier forms of fuel.
Consultancy Wood Mackenzie said small industries in India are switching to fuel oil and liquefied petroleum gas for heating, while oil-fired power generation has surged fivefold in Pakistan and 45 per cent in Bangladesh.
The high prices of LNG and other fuel sources have been particularly painful for countries in South Asia, which are heavily dependent on imported natural gas for electricity generation. Both Pakistan and Bangladesh, for example, have experienced widespread power outages in recent months.
In Pakistan, the fuel shortages have prompted a surge in demand for alternatives like coal from neighbouring Afghanistan, where the Taliban has promoted exports to its energy starved neighbour. Some researchers estimate that Afghanistan’s coal exports to Pakistan have doubled this year.
“European and Japanese storage is filling up significantly, but there are questions about how long that’s going to last,” said Sam Reynolds, energy finance analyst at Institute for Energy Economics and Financial Analysis.
If Europe does not cut gas consumption, “come March of next year, we could be at the exact same place where it has to be soaking up more LNG. And so countries in emerging Asia are going to grasp at any opportunity they can to keep the lights on, and that may mean dirtier fuels, that maybe greater imports from nearby countries.”